What is a joint venture?

A joint venture (JV) is an arrangement between two or more organisations to work together on a particular aspect of their business. What does the joint venture mean? In a JV, the parties to the agreement combine their expertise and financial resources, usually to offer a product or service, sharing in the profits or losses it generates.

The activities of the JV are kept separate from the rest of their businesses, and in some cases, the JV is established as a distinct, third company with management executives from both companies.

Where have you heard of a joint venture?

As an investor, you will have likely seen announcements from companies you follow and invest in that they have formed a joint venture. Some joint ventures become well-known, such as Verizon Wireless, a telecom joint venture between UK-based Vodafone (VOD) and Verizon (VZ) in the US. Other joint venture examples include Google Earth, a JV between Google and NASA, and Vevo, a JV between Universal Music Group, Sony Music Entertainment and EMI.

When reading a company’s financial reports, you may see revenues, costs and profits recorded from its share of a joint venture.

What do you need to know about a joint venture?

Companies typically form joint ventures to combine their talent and expertise, benefit from economies of scale and combine complementary resources. One company might have an innovative technical design for a new product while another company has advanced manufacturing capabilities. Or companies might pool their assets to take on a dominant competitor.

Joint ventures tend to be most common in industries where new projects require specific knowledge and skills and large investment budgets.

A company might decide to form a joint venture with a local partner to enter a foreign market. In fact, some governments – for example China – require international companies to form JVs with local manufacturers to enter certain markets like the automotive industry.

Investment firms often form joint ventures to carry out projects where they can see an opportunity but do not directly operate in the industry, for example, building oil and gas infrastructure.

In terms of legal structure, as with any other business, there are several different types of joint venture: private company, limited partnership, or corporation. The JV could also operate as an unincorporated arrangement. If the JV is incorporated, the parties are able to use the most tax-efficient combination of shares, loans, debt and bonds to invest in its operations.

While the ownership of joint ventures is often split 50:50 when there are two founding organisations, that is not always the case and one can take a majority stake. When there are more than two companies involved, ownership does not need to be split evenly.

A joint venture can result in a merger between the organisations, or one company acquiring the other. For example, Sony and Ericsson formed a joint venture to make smartphones and other consumer devices before Sony acquired Ericsson’s share in the JV and renamed it Sony Mobile. Beer company Molson Coors acquired its MillerCoors JV with SABMiller, which was formed to challenge their competitor Anheuser-Busch.