8/18/2023 0 Comments Benefit of joint venture![]() A decade later, in 2001, we assessed the outcomes of more than 2,000 alliance announcements-and the success rate still hovered at just 53%, despite studies that have highlighted the well-known reasons for JV failure: wrong strategies, incompatible partners, inequitable or unrealistic deals, and weak management. In 1991, we assessed the performance of 49 joint ventures and alliances and found that only 51% were “successful”-that is, each partner had achieved returns greater than the cost of capital. What’s less clear to these companies is how to overcome the many challenges inherent in implementing joint ventures and alliances. So it’s become clear to many companies that alliances-both equity JVs (where the partners contribute resources to create a new company) and contractual alliances (where the partners collaborate without creating a new company)-can be ideal for managing risk in uncertain markets, sharing the cost of large-scale capital investments, and injecting newfound entrepreneurial spirit into maturing businesses. The largest 100 JVs currently represent more than $350 billion in combined annual revenues. More than 5,000 joint ventures, and many more contractual alliances, have been launched worldwide in the past five years. Using real-world examples, the authors offer their suggestions for meeting these challenges. And fourth, build a cohesive, high-performing organization (the JV or alliance)-not a simple task, since most managers come from, will want to return to, and may even hold simultaneous positions in the parent companies. Third, manage the economic interdependencies between the corporate parents and the JV. Second, create a shared governance system for the two parent companies. First, build and maintain strategic alignment across the separate corporate entities, each of which has its own goals, market pressures, and shareholders. Specifically, the launch team must tackle four basic challenges. During this period, it’s critical for the parents to convene a team dedicated to exposing inherent tensions early. ![]() ![]() ![]() The launch phase begins with the parent companies’ signing of a memorandum of understanding and continues through the first 100 days of the JV or alliance’s operation. As a result, the parent companies experience strategic conflicts, governance gridlock, and missed operational synergies. Most companies are highly disciplined about integrating the companies they target through M&A, but they rarely commit sufficient resources to launching similarly sized joint ventures or alliances. The authors, all McKinsey consultants, argue that JV success remains elusive for most companies because they don’t pay enough attention to launch planning and execution. The problem is, the success rate for JVs and alliances is on a par with that for mergers and acquisitions-which is to say not very good. Companies are realizing that JVs and alliances can be lucrative vehicles for developing new products, moving into new markets, and increasing revenues. The ability of the University to exercise sufficient control over the JV is thus of critical importance.Īll proposed joint ventures should be reviewed by the Legal Department for compliance with tax law and regulations before being entered into.More than 5,000 joint ventures, and many more contractual alliances, have been launched worldwide in the past five years. Tax-exempt entities like WFU that engage in joint activities with for-profit companies must meet two criteria for any income from the joint venture to be treated as exempt: 1) the joint venture must serve primarily to further WFU’s exempt purposes, and 2) the parties’ agreement must explicitly provide that the primary goal of the joint venture is the advancement of WFU’s tax-exempt mission and only incidentally for the benefit of the for-profit party. The University negotiates terms and safeguards to minimize income from the joint venture being classified as unrelated to its tax-exempt purpose (and thus subject to unrelated business income tax, or UBIT) and to protect its 501(c)3 tax-exempt status. dividends, interest, annuities, royalties, rents, and capital gains). A joint venture does not include arrangements intended primarily to generate income or the appreciation of property, if substantially all of the income generated by the arrangement consists of investment income (e.g. A joint venture is any joint ownership or contractual arrangement between the University and one or more parties that are not exempt from federal income taxation, through which there is an agreement to jointly undertake a specific business enterprise, investment, or exempt-purpose activity.
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