Framework library · M&A and corporate strategy
Joint ventures and strategic alliances
Partnering is a choice of structure as well as of partner. A contract is quick to set up and easy to leave but gives little control; a joint venture shares control and investment but is hard to unwind; an acquisition gives full control at full cost. Scoring the structures against what the partnership must achieve stops the structure being set by whichever term sheet arrived first. The charter then sets down the objectives, contributions, governance, value sharing and exit.
Use it when
- You have found a partner and need to decide whether a contract, a minority stake, a jointly owned company or an acquisition is the right way to work together.
- Two companies will build or share an asset, such as a fibre network or a portfolio of sites, that neither wants to fund alone.
- A partner has proposed a structure and you want to test it against the alternatives before negotiating terms.
- An existing alliance is not working and you need to decide whether to deepen it, restructure it or leave it.
Avoid it when
- You have not yet decided to work with anyone. Use build, buy or partner first.
- You are deciding whether to sign one partnership on the terms offered. Use the partnership go / no-go decision record.
- The relationship is a routine supply contract. Procurement and a service agreement are enough, and a charter adds nothing.
How to run it
State what the partnership must achieve
The outcome, what each side brings, and the date by which it should show results. The criteria follow from this.
Score the four structures
Rate a contractual alliance, an equity alliance, a joint venture and an acquisition on control, capital required, speed, ease of exit, fit with the partner's interests and your experience of running each.
Check the winner for what the score hides
A structure you have never run, such as a joint venture with its own board and staff, carries more risk than its score shows. Note it before choosing.
Write the charter for the chosen structure
Objectives, what each side contributes, governance and decision rights, how value is shared, and how the partnership ends.
Agree the exit terms before signing
Triggers, the valuation method, who may buy out whom, and what happens to shared assets and customers. Exit terms written during a dispute are worse for both sides.
Review the partnership every year
Against the objectives in the charter. The structure can change as trust and results build, from a contract to equity or back again.
Work through it
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Mistakes to avoid
- Choosing a joint venture for control and then giving it no authority, so that every decision goes back to both parents.
- Fifty-fifty ownership with no deadlock mechanism. When the parents disagree, nothing happens.
- Valuing contributions in kind, such as sites, ducts or customers, loosely at the start. It becomes a dispute as soon as the venture makes money.
- No exit terms, so a partnership that has stopped working carries on because leaving costs more.
Where it comes from
Jeffrey Dyer, Prashant Kale and Harbir Singh argued that the choice between alliances and acquisitions should turn on three sets of factors: the resources and synergies sought, the market (its uncertainty and its competition), and the company's own competence at collaborating ("When to Ally and When to Acquire", Harvard Business Review, July to August 2004). The alliance charter in the second part is common practice rather than any one author's. Source.
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