UK: JOINT VENTURES CAN MAKE FOR VULNERABLE PARENTS. - A few short years ago the air reverberated with talk of joint ventures. Strategic alliances which combined the subsidiaries of different corporations seemed, to many, to point a route towards the mult

Last Updated: 31 Aug 2010

A few short years ago the air reverberated with talk of joint ventures. Strategic alliances which combined the subsidiaries of different corporations seemed, to many, to point a route towards the multinational millennium. Did one business possess a profound knowledge of a particular market but lag a little in technology? The answer was to tuck it into bed with some technological wizard lacking its market strengths. Was another floundering in a highly competitive sector? Put it together with a similar sufferer. Let them join forces, cut costs and move forward in confidence. If possible.

Joint venturing is still a favoured solution. How else is a company to break into China, say, or Japan? British Telecom currently reckons that its best chance of competing with Deutsche Telekom in Germany lies in taking a German partner or two. TI Group, having swept Dowty into its net a couple of years ago, decided that the way to grow the acquisition's landing-gear business - in a sluggish aerospace market - was to set up a 50:50 venture with the equivalent SNECMA subsidiary. Messier-Dowty rolled out on 1 January. But enthusiasm for joint ventures is less widespread than it was. The formula has been in general use long enough for judgments to be made about its validity - and the success rate, according to one British academic, is 'very similar to that of acquisitions'.

Joint ventures may fail on straightforward commercial grounds, or because the personal chemistry is wrong (the managers running the operation may be recruited from both parents, but they are seldom the ones who signed the agreement). But even assuming a close understanding - and common interests - at the outset, it's almost inevitable that these interests will diverge with the passage of time.

Writing in the Jan-Feb issue of Harvard Business Review (an article ominously entitled 'Is Your Strategic Alliance Really a Sale?'), two McKinsey consultants, Joel Bleeke and David Ernst, identify half-a-dozen types of alliance, only one of which, they suggest, has a strong chance of surviving much longer than the seven-year average of such ventures. Lord Weinstock might not like the authors' views on the durability of alliances between core businesses of major companies which would otherwise be competitors. GEC is in partnership with Alcatel Alsthom of France in power generation, with GE of the US in domestic appliances, and has an equally famous joint venture with Siemens in telecommunications. In the last case, GEC is a 60% majority shareholder in GPT (the other two are 50:50 ventures), but in all three the UK company is much the smaller of the parents, and could be at a disadvantage in the event of a divorce. 'Direct competitors with a high degree of overlap tend to be among the worst alliance partners,' comment Bleeke and Ernst.

Alliances of weak businesses rarely succeed, say the McKinsey pair: 'If you can't succeed on your own, an alliance with another weak company won't make things much better.' Which might strike a chord with Boots and W H Smith, owners of Do-It-All, the struggling DIY chain. But a weak business is just as unlikely to benefit by joining up with a strong player. The most promising combination is one of equally balanced companies with complementary strengths. Perhaps this is where GEC's ventures belong? GEC Alsthom, for one, has performed well so far. The UK parent's small turbine technology matched Alsthom's at the larger end and its position in 'the old empire' complemented French markets on the Continent.

GKN's Chep pallet pool business, a tie-up with the Australian Brambles group, clearly belongs in this approved category even though both partners have come to regard it as core. Brought to the UK 21 years ago, when GKN imported its partner's methods, the venture has since grown phenomenally and spread to Continental Europe, North America and elsewhere. Last year GKN reluctantly agreed to sell Brambles 20% of its holding in Chep UK, so creating a 50:50 split at home as in most other markets. 'There's no way we would have wanted to,' admits David Pulling, GKN's head of corporate planning. But the UK group had to think about maintaining good relations with its partner - and the importance of these to any further extension of the Chep formula in territories overseas.

Chep UK, like GEC Alsthom and Messier-Dowty, was conceived as an enduring relationship. So was Rank Xerox. But nothing is for ever: the transatlantic partnership was ultimately unsustainable as leadership passed progressively to Xerox which owned the technology, and as Rank became an ever more passive shareholder sleeping on an inspired investment. Yet Rank could not complain. Rank Xerox brought its British principal amazing riches over a period of nearly four decades.

Some alliances are meant for a limited life. The essential thing for any joint venturer is to be clear about his objectives; also about who gets what - and according to what price formula - if the venture breaks down. Most neglect these matters until the breach is imminent, say Bleeke and Ernst. In which case the weaker company will get less than fair value.

Find this article useful?

Get more great articles like this in your inbox every lunchtime


Get your essential reading delivered. Subscribe to Management Today