Fiona Clutterbuck warns that although partnerships can be supportive and enduring, companies must be aware of the potential for failure through factors such as incompatibility, lack of planning and weak leadership.

As consolidation through acquisition becomes more difficult for banks, joint ventures and partnership agreements are increasingly being considered as a viable alternative. Joint ventures are inherently complex arrangements and a proper understanding of the key risks is vital.

A joint venture can mean many different things, but typically it involves a shareholding structure under which two entities hold a 50% interest in a company. Combining with a partner that has complementary ideas or resources – and a similar goal – may not only accelerate revenue growth and expand the business, but if the partner firm is in a different region it can provide extremely effective distribution and commercial benefits.

Not only does a joint venture provide support, with the sharing of economic risk, it also allows leveraging of the partner firm’s existing client base. Such a venture may be appropriate if the vendor wishes to retain a meaningful shareholding but is not able to solely finance the ongoing capital commitments of the business. Joint ventures also work well when each party brings a different skills base.

ABN AMRO has employed the joint venture or partnership approach in a number of its own businesses around the world. For example, in Brazil, through the disposal of its life and general insurance operations into a joint venture; through ABN AMRO Rothschild in the Netherlands in its joint venture with Aviva and in the global custody business with Mellon Financial.

Combining strengths

In each situation, a joint venture has been more appropriate than either straightforward disposal or acquisition because it allowed the partners to bring to the combined operations their own specific talents and skills. In the bancassurance joint ventures in which ABN AMRO has participated, the joint venture benefited from ABN AMRO’s distribution capability and the partners’ manufacturing strength.

Although there are many benefits to joint ventures, it can be difficult to implement them, as all businesses differ and matters such as work division and management can become discouragingly complex, making expert advice critical.

Pitfalls to avoid

Choosing the right partner to work with entails not only complementary competitive advantage but also finding a business whose culture and aims are compatible with those of your own. It is also essential to have a realistic and achievable business plan with a clear and appropriate structure, and a list of aims to clarify what needs to be achieved throughout the venture.

Many joint ventures have fallen apart because of cultural differences and a poor integration process, although weak leadership and lack of commitment as well as a lack of planning are just as common. Also crucial is the need to define the partners’ end game – what is the exit strategy? Joint ventures are typically medium-term solutions and not always an end in themselves.

As a result of these difficulties, many joint ventures have ended in disappointment. One such example was the venture in 2001 involving HSBC and Merrill Lynch, which merged the private banking capabilities of both businesses to form MLHSBC (where each had a 50% stake). Although the venture began promisingly, it fell apart quickly due to the impact of unstable markets, threats of recession and the events of September 11. Following the end of the bull market and disappointing financial performance, Merrill Lynch scaled down its involvement and eventually HSBC took it over completely.

Despite the pitfalls there are many good reasons to consider a joint venture. However, if a joint venture is a possibility, it is worth dedicating significant time and resources to the planning process at the outset, as history shows it is only too easy for it to fall apart.

Fiona Clutterbuck, Managing Director, Financial Institutions, ABN AMRO. fiona.clutterbuck@uk.abnamro.com

Additional writing: Mark Cleary

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