Legal commentary: Why would Balfour Beatty and Skanska form a joint venture?

In today’s rapidly expanding global economy, we are surrounded by organisations whose chosen route to market is the joint venture (JV). But what is the reality behind the brand, how can a JV be used, and when should it be avoided?

Defined by the European Commission as “undertakings which are jointly controlled by two or more other undertakings”, you’d be forgiven if ‘joint venture’ is a term that leaves you more than a little confused. So what is the truth behind partnerships such as Balfour Beatty Skanska, and Sony Ericsson?

Put simply, a JV is a commercial undertaking entered into by two or more parties, often by setting up a separate JV company in which all parties have shares.

By agreeing to contribute equity, this in essence allows each individual party to share in revenue, expenses and control of the enterprise, as well as benefit from the skills and resources available.The venture can be for one specific project, or a continuing business relationship such as Sony Ericsson. But if you’re thinking that a JV is simply a strategic alliance, you’d be wrong.

While a strategic alliance requires no equity stake by participants, and is overall a much less rigid agreement, by contrast, a JV encompasses a broad range of operations from merger-like set-ups to co-operation for particular functions, such as research and development, production, or distribution.
The focus is generally upon the purpose of the entity and not the type of entity, meaning that a JV may be a corporation, a limited liability company, a partnership, or other legal structure depending on a number of constraints such as tax and tort liability.

So you’re clear on the basics, but are JVs of any commercial benefit?

The more industry-centric of you may be surprised to hear that JVs are not restricted to the construction industry, but are now common in many market sectors, especially the oil and gas industry. Often collaborations between a local and a foreign company are seen as a viable business alternative in this sector, allowing companies to complement their skill sets while simultaneously offering their foreign counterparts a geographic presence.

The advantages of this approach are clear. Internally, the undertaking allows you to build on your company’s strengths, spreading cost and risk, improving access to financial resources, and new technologies and customers, while ultimately generating economies of scale. There is a competitive element to this too, with JVs often pre-empting the competition by creating stronger competitive units that offer greater agility and speed to market, and are invariably influencing the structural evolution of industry.

But it’s not all a bed of roses. The Osborn study of 2003 showed a JV failure rate of 30% to 61%. Of those undertakings listed, 60% ceased to exist within five years, or simply failed to start at all. JVs involving government partners are seen as particularly risky, showing a higher incidence of failure than their private sector counterparts, and overall,  any JV faced with a situation of highly volatile demand or rapid change has a very low chance of success.

However, with any new venture comes a certain element of risk. But, if properly managed and entered into with a degree of caution, JVs have the potential to offer major strategic benefits including: business synergies; transfer of technology and skills; and true diversification – and when they succeed, they really succeed.

Just be clear on your obligations, risks and liabilities.