What is a joint venture?

What is a joint venture?

A joint venture is a business arrangement where two or more companies come together to form a new company or partnership to pursue a specific business objective. In a joint venture, each company contributes assets and resources to the new entity and shares the risks, costs, profits, and losses associated with the venture.

Companies often form joint ventures to enter new markets, access new technologies or resources, share intellectual property and knowledge, or reduce costs and risks associated with a particular project. They can be structured in various ways, from a simple contractual arrangement to a formal legal entity with its own management and governance structure.

Joint ventures can offer many benefits, such as increased economies of scale, reduced costs, and shared risk. However, they also require careful planning and management to ensure the parties involved share a common vision and goals. 

A joint venture agreement can ensure the venture is structured effectively to achieve its objectives.

What are the 2 types of joint ventures in Australia?

Joint ventures in Australia may be incorporated or unincorporated. 

• Incorporated joint ventures are structured as separate limited liability legal entities, usually in the form of a company registered with the Australian Securities and Investments Commission (ASIC). The venture partners become shareholders in the company and share in its profits and losses according to their shareholding percentage.
• Unincorporated joint ventures are not separate legal entities and do not have to be registered with ASIC. Instead, the venture partners enter into a contractual agreement that governs their relationship and outlines their rights and obligations. The partners share profits and losses according to their agreed-upon percentage, and each partner is responsible for their share of the venture’s liabilities.

The main advantage of an incorporated joint venture is that it provides limited liability protection for the partners. This means that the venture entity, rather than the individual partners, is liable for any debts or legal liabilities incurred. In contrast, in an unincorporated joint venture, each partner is personally liable for the venture’s debts and liabilities.

The choice between an incorporated or unincorporated joint venture will depend on the specific goals and circumstances of the venture partners. 

Incorporated joint ventures may suit large, complex projects with significant financial risks. Unincorporated joint ventures may be more appropriate for smaller, more straightforward projects where the partners are comfortable with sharing liability.

Why do companies enter this arrangement?

Companies enter joint venture arrangements for a variety of reasons, including:

• Access to new markets: Joint ventures can enable companies to enter new markets, develop new businesses, and expand their customer base. By partnering with a local company, a foreign company can gain valuable insights into the local market and benefit from the local partner’s established network and relationships.
• Sharing of knowledge and resources: Joint ventures can enable companies to combine their strengths and expertise to achieve common goals. Companies can reduce costs and increase efficiency by sharing resources such as technology, distribution networks, or manufacturing facilities.
• Risk sharing: Joint ventures can help companies share the risks and costs of a particular project or venture. Companies can take on larger projects by pooling resources and sharing the financial burden. For example, they can boost purchasing power and negotiate better terms with suppliers. 
• Diversification: Joint ventures can enable companies to diversify their business and reduce dependence on a single product, market, or region. Companies can spread their risk by entering a joint venture in a different industry or market, creating new growth opportunities.
• Access to new technology: Joint ventures can provide companies access to new technologies or research and development capabilities. Companies can accelerate their innovation and development efforts by partnering with another that has complementary technology or expertise.

Overall, joint ventures can be a powerful tool for companies looking to achieve their strategic objectives and create new opportunities for growth and innovation. However, joint ventures also involve risks and require careful planning and execution to ensure success.

Examples of joint ventures in Australia

Many well-known companies in Australia have entered joint ventures at various times. 

They include Telstra Group Ltd (ASX: TLS), which formed a joint venture with Ericsson in 2018 to develop and test 5G mobile technology in Australia. The partnership aimed to accelerate the rollout of 5G technology and improve network performance.

In 2020, Woolworths Group Ltd (ASX: WOW) and TerraCycle formed a joint venture to launch Loop, a zero-waste shopping platform that delivers groceries in reusable packaging. 

In 2021, BHP Group Ltd (ASX: BHP) announced a joint venture with Japan’s Itochu Corporation to work on electrification solutions for mining trucks and reduce greenhouse gas emissions in the mining sector.

These are just a few examples of the many joint ventures established in Australia over the years. Joint ventures can be a valuable way for companies to collaborate, share expertise, and achieve common goals.

Are there risks involved?

There can be significant risks to consider before a company enters a joint venture. Joint ventures can require legal advice to negotiate complex agreements that define each party’s rights and obligations. They can also require a significant upfront investment. If the venture is not successful, both parties can lose money.

Joint ventures require both parties to share control and decision-making power. 

This can be challenging if they have different ideas about the direction of the venture. Disagreements can delay progress and create tension. Differences in business cultures between joint venturers can also mean different expectations, communication and business styles, creating conflict.

Effective dispute-resolution mechanisms must be in place to allow joint venture partners to work through disagreements.

What’s the difference between joint venture and partnership agreements?

A joint venture and a partnership are both business arrangements where two or more parties work together towards a common goal. However, there are some critical differences between the two. 

For one, joint ventures are typically formed for a specific project or purpose, while a partnership is a long-term arrangement where the parties work together in an ongoing business. Joint ventures are often created for a particular period, while partnerships can be indefinite.

In a joint venture, each party retains control over its own assets, with the venture controlled jointly. In a partnership, the parties share control of the business and decision-making equally. 

At the same time, in a joint venture, each party is responsible for its own liabilities. In a partnership, the partners are jointly and severally liable for the debts and obligations of the business.

What has it got to do with stock market investing?

Joint ventures are relevant to stock market investing in a few ways. For example, if a publicly traded company is involved in a joint venture, its stock price will be impacted by the venture’s success or failure. 

Investors may want to research the joint venture and consider how it could affect the company’s financial performance.

Sometimes, two publicly traded companies will form a joint venture together. This will be significant to investors because the venture’s success or failure will likely impact both companies’ stock prices. 

In other cases, companies may form a joint venture as an investment opportunity for third-party investors. In this situation, investors can invest directly in the joint venture or one of the companies involved.