Essay: Joint Ventures / Pioneer Food and Heinz Food South Africa

Introduction
In this dissertation the concept of Joint Ventures will be discussed, as well as the establishment the two companies: Pioneer Food (Pty) Ltd and Heinz Food South Africa (Pty) Ltd. In 2017 Pioneer foods and Heinz foods South Africa, issued a joint venture, the Joint Venture was approved in 2018. In this dissertation there will also be information about the companies, when they were established, what happened in the companies, changes the under went, mergers they experienced.
Another part of the dissertation will include the successfulness, critical success of the leadership, the motivation in the business as well as the influence of cultural diversity.
Joint Ventures
A joint venture (also referred to as JV) is a business arrangement where two or more parties; it can also be between two or more people (persons) that agree to combined their resources (the resources can be goods, services or even capital) in order to achieve a certain set of tasks. Such tasks can be any business activities or even new projects. In the Joint Venture each party in the JV has a responsibility in the profit, losses and costs that go along with it.
The parties that are responsible for the JV are separate entities from the joint venture itself.
Which means that the parties can not be held responsible for any legal problems from the joint venture.
In simple terms a Joint Venture is when two or more business parties merge for the advantages it has in the long run for both of the parties; thus the parties merge to become one bigger party, meaning that all of the parties will profit from the merger, mergers can made for specific reasons and for a specific time period, after the specific time period the merger can disintegrate.
Breaking down what exactly a Joint Venture is:
In a colloquial sense you might say that a Joint Venture is a partnership, it can also take on any legal structure. To form a JV, Limited Liability Companies (LLCs), partnerships, corporations and any other organization entities can be used. Although JV’s are mostly developed for production or research purposes, they can also be formed for an on going purpose.
A Joint Venture is when smaller and larger companies merge to take on several bigger or smaller deals and projects.
Table 1. Comparison of Contractual Joint Venture, Equity Joint Venture and Wholly Owned Subsidiary
Contractual Joint Venture
Equity Joint Venture
Wholly Owned Subsidiary
Structure
The entities have a contract that is drown up between them specially for the JV.
Jointly owned by foreign entity and local entity with JV as a separate legal entity.
The entity is owned by just the foreign investor it a separate legal entity.
Entry into market
Faster, the foreign party benefits from the local parties part, because there is already a customer base and business knowledge.
Faster, the foreign party benefits from the local parties part, because there is already a customer base and business knowledge.
Slower, the foreign investors have to build up the business from the ground.
Start-up costs
Lower
Lower to moderate.
The costs of establishing and maintaining of a joint venture can be shared.
Higher.
The costs for establishing and maintaining corporate entities are carried by the foreign investors.
Resource Commitment
Lower
The licensee/purchaser has to pay royalties/cash.
Foreign entities contribute intellectual properties or supplying of goods.
Lower to moderate.
Foreign entities contribute management experience, intellectual properties and know-how. Local entities contribute employees, pant and facilities as well as customers.
Higher.
Foreign investors must hire local staff/employees and/or transfer their experience, ans purchase raw material.
Intellectual Property Risk
Higher.
There is potential to share or give away IP to an other entity.
Higher.
There is potential of giving or sharing IP with other local parties.
Lower.
The IP is less exposed to the companies competitors, this is because subsidiary is owned wholly.
Ownership of the joint ventures
One has to understand that the members of the joint venture are still in control of the owners of there assets and every other piece of equipment, machinery, goods, property or land that they have contributed into the joint venture. It is also very important that the assets and every thing that the entities have contributed to the joint venture have to be listed and has to be enclosed in the joint venture agreement as well as the joint venture contract; each entity should then get a copy of the listing of items contributed and from whom.
Why is a joint venture a good idea
Referring to a study done by Deloitte. in 2010, they found three reason why companies merge
in order to form a JV, the three reasons are:
Pooling resources
A lower company risk
There is access to funds
The market share is increased
Entering new markets
Geographical entrance
Product type
The risk awareness and constrains of capital
As a merger and acquisition replacement
There is thus an access to assets that are not-for-sale
Pseudo due diligence
Part-sale and staged sale
The Joint Venture agreement
The most important document in the Joint Venture is the agreement, that specify the partners’ obligations and rights in the venture.
Objectives of the Joint Venture is the contributions from the partners, the rights to the profit and/or the responsibility for losses as well as the daily operations are all clearly stated in the document (JV agreement).
To avoid legal actions it has to be drafted with care, and every part should be well stipulated, indicating who is responsible for what and who contributed what to the merger/ joint venture
Key elements of a Joint Venture
Some of the most common elements of a Joint Venture can be identified as the following (but are not completely limited to):
1. Number of the involved parties in the joint venture (namely who is the primary acquiring  firm and who is the primary target firm, within the joint venture),
 
2. Scope where the JV will be employed in (in what market the merger will be)
(geographic location, the type of product or service ant the type of technology),
 
3.  The structure of the JV (this includes the organogram as well as any other structure in the merger)
 
4.  What each party will contribute and how much
 
5.  Staffing of the Joint Ventures (the formulating of an organogram is a great idea when it comes to the preparation on staffing, because the organogram is a type of diagram that shows, who is working in which department, their responsibilities and who works under who -authority-)
 
6. The management of the JV as well as the control within the JV (the type of management that will be used within the business, for example) :
 

• Autocratic management: when one-sided decision are made within a business, without any input for any subordinate input. 
• Consultative management: in the consultative form of management the leader/boss/manager within the business consults with the employees in the business to get their opinions, however the final say is still in the hands of the manager. 
   
• Persuasive management: in this type of management the manager makes decisions based on the encouragement of the employees. 
•  Democratic management: this management, allow the employees to have a meaningful input with the decision-making process. 
  7. The splitting of ownership and the initial contributions of each party,
   
  8. The specific arrangement that has to be made when the deal is complete (what will happen to the joint venture after the goal of the project has been achieved)
   
  Figure 1. An example of an organogram within a business. The organogram, detailed graph that shows who is the first in command, and who works under them as well as their duties.
  The process of a joint ventures
  The process of a joint venture is made out of a series of step:
  Table 2. Steps in the process of joint ventures
  Step
  Explanation
  1
  All of the strategies in the business should be defined
  2
  The screening of all the options for parties to merge with.
  3
  Analyse the joint venture and evaluate it is the right vehicle to use for the business/project. This requires the comparison of a joint venture with with the option of an acquisition.
  4
  Developing the concept of the joint venture.
  5
  The details of the terms and conditions of negotiation.
  6
  The planning and launching process of the JV as well as all the evolving  of the jv or the termination of the JV
  The selection process of a suitable partner for a joint venture
  When it comes the selection of a suitable candidate to merge with the acquiring firm has to do it’s research on the candidates that they are thinking of merging with to create the joint venture.
  In the analysing process the following is very important aspects to focus on:
  Table 3. The analysing process for a joint venture.
   
• The screening of all the anticipated entities considered for the merger. 
• Repairing a short list for the entities that are strong candidates to merge with, the use of a ranking system can help, to emphasize the strongest candidates. 
• Analysing the candidates achievements and success. 
• The amount of depreciate and availability of appreciated  property that will be contributed to the joint venture. 
• Evaluate the best structure for the business. 
• Analyse if the is a chance that foreign investors, will want to invest in the business.The methods to bring a JV about
  A joint venture can brought up in different ways each way focusing on another aspect, the following is ways JV can be established:
  1 Foreign investors can invest in the business (buy shares).
  2 Local acquiring firms looking for foreign firms to invest in them.
  3 Foreign and local entrepreneurs, merge together to for a new firm.
  4 With the help of bank loans or the capital contributions from the entities involved with the merger.
   
  Referring to point 1 in the methods of bring a JV about:
  With the investment or buying of shares there has to be a Shareholders’ agreement, in place for the share holder.  A Shareholders’ agreement is a contract that is set up to protect the shareholders of a company, from any unexpected legal cases or any unexpected situations that can chose them damage. It is a way to build up a relationship between the investors/shareholder and the way the company is managed. This agreement stipulates all the right the shareholders have as well as all the responsibilities of the shareholders.
  Issues in the Shareholders’ agreement
   
• The controlling of the entity, it can be either by the amount of directors or the financing. 
   
• The making of decisions, meaning who makes the decisions in the company either board manages or a founder/s. 
   
• The transferability of shares in the company, assigning duties and right of the founder/s to other members of the company. 
   
• Policies that affect the dividends, like the percentage of profit that is declared whenever there is a profit made.Dissolution of a JV
  Because of the fact that a JV is not a permanent structure, it can dissolve at any moment, a JV can dissolve in the following instances:
   
• Because of the legal and the financial issues of the joint venture. 
• The agreed time, the JV is to be operational; meaning that the contract will expire after a specific time period. 
• When one or both of the entities involved in the JV do not agree with the aims of the joint ventures any more. 
• Whenever one of the entities that is part of the JV develop new goals for the Joint venture or for themselves as an entity. 
  Paying taxes on a JV
  The most common thing that two parties can do is to for a Joint Venture- a new entity. The JV is not recognized by the (IRS) Internal Revenue Service the form of the business between the two parties helps to determine how taxes will be paid. When the Joint Venture is an unrelated institution, it will pay taxes like any other corporation or business. If the JV functions as a LLC, then the LLC will be held accountable for the payment of the taxes. If the venture is profitable the amount of profit will be distributed according to the percentage contribution towards the venture.  The Joint Venture agreement will stipulate how the losses or profits will be taxed. When the agreement is just a contractual agreement between the parties involved, then the agreement will regulate how the taxes will be split. Each entity is responsible for the payment of their own income Tax.
  Within a joint venture one element that plays a relatively big role is Capitalization.
  Capitalization entails the following:
   
• binding costs 
• the initial capital contributions (type and value) 
• additional capital contribution (schedule) 
• capital calls 
• third party financingExpenses when it comes to joint ventures
  When two entities enter a merger to form one entity, each of the entities are still held accountable for the expenses the separate entity had to pay before the merger, the joint venture is thus held accountable for it’s own expenses, meaning the new entity will pay its own expenses. The expenses are divided between the amount of the percentage contribution, each entity contributed.
  For example:
  Lets say that entity X is formed from entity A and entity B.
  Entity A contributed 60% to the merger and entity B contributed 40%. The total amount of expenses for one month is R50 000.00.
  Entity A is thus going to have to cover more of the payment then entity B.
  Table 4. an illustration of how the joint ventures, expenses will be devided.
  Entity A
  R50 000.00 X 60%
  = R30 000.00
  Entity B
  R50 000.00 X 40%
  = R20 000.00
  Joint Venture and Partnerships
  There is a difference between a Partnership and a Joint Venture, a partnership is when two or more persons form a single business entities, JV’s  are when two or more business entities join to form one business entity. Consortium is a common term used to describe a Joint Venture.
   
• Consortium: is a looser agreement between businesses, instead of starting a new business.Joint Ventures used to enter the foreign sector
  A common use of a JV is to merge with a local organisation to penetrate the foreign sector. Companies that want to expand into the international sector can enter into JV agreements to apply to a local business, can reap the rewards of an existing  dealing network. Some counties are against foreign businesses entering their markets, thus making JV the only way the local organisation can enter the country.
  Before becoming part of a Joint Venture, in a foreign sector, several things have to be researched and determined before the Joint Venture can start functioning. Like for example: are there any political implications when moving into the foreign sector? What are the tax association of moving into the foreign sector? What is the type of investment  that has to be made and the size of the investment? Are there any laws and legislations that has to be met when moving to the specific foreign sector?
  The winding up of Joint Ventures
  When a JV has met the objectives that were set, the JV can be liquidated and put on the market just like any other organisation and sold.
  Table 5. Advantages and Disadvantages of Joint Ventures.
  Advantages
  Disadvantages
   
• Business costs are shared. 
• There is a lack of experience in newly made areas. 
• There are no control issues and clashes of culture. 
• Attractiveness to finance providers are smaller. 
• The JV can be set up in anyway. 
• There maybe organic entry barriers. 
• It makes it possible to get government grants. 
• Development may be to slow. 
• Termination is easier. 
• Needed skills and knowledge are not available, because there is experience. 
• The development of the JV is slow      (meaning there is little risk).
   
• Management may be spread to thinly throw the Joint Venture.Just like any other organisation/business Joint Ventures can also fail, there are many reasons why they can fail, but five of the well known reasons why Joint ventures fail:
  1. Because of the lack of the agreement in the joint venture. The Joint venture agreement is one of the most important factors that have to be included in the Joint Venture. Make sure that the correct and needed paperwork is in place.
   
  2. Financial problems, if one of the parties have a lack in finances it can cause the JV to struggle and can even lead to the downfall of the JV. Thus the struggling entity in the JV will drain the JV, thus keeping it from building up any capital for struggling times that may be waiting in the future.
  3. In a relationship there has to be a leader or the decision maker as well as the followers. In a Joint Venture the same rules apply. There has to be someone that is managing the JV and makes sure there is control within the JV.
   
  4. Compatibility, sometimes when two businesses/organisations merge together to for a Joint Venture there can be a difference in values and ethics. This is a big problem, because as a business you have worked hard in making a name for yourself and maintaining a good reputation, thus the difference in values and ethics can be a very big problem for the Joint Venture. So it’s really important to make sure that the two entities(businesses) is as compatible.
   
  5. Unrealistic expectations, make sure that all the role players of the JV are all focused on the success of the JV. The Joint Venture should have clear indicators that indicate
  the chances of the JV winning a tender as well as all the necessary information about the tender. All of the entities involved in the tender have to be briefed on the expected profit that is expected, to prevent any unrealistic expectations from any of the parties involved.
  The difference between JV’s and a Private Company
  When two businesses/organisations come together to do business as one entity it’s called a Joint Venture, however when the parties in the Joint Venture go and register a formal private business/company, then it’s no longer seen as a Joint Venture
  Political and business risks
  Most of the time when a joint venture is formed one of the entities in the joint venture is entering a market that may be unfamiliar for the entity. This is especially true when the joint venture penetrates an emerging market.
  The difference between Joint ventures and Partnerships
  Joint Ventures often sound like a lot like a partnership but the biggest difference is that the members/entities of the joint venture came together to for a ‘new’ business from two separate businesses. It can be for a specific tender or a request for a proposal. A partnership is formed by two or more people to run a business for a time period that is not specified.
  Table 6. Risks faced by joint ventures, examples of risks and possible solution/-s.
  Risk
  Issue
  Possible solution/s
  Reputation
  Does the possible merger entity have a good reputation in the local or global community?
  If one of the entities is worried about the others reputation, the entity can find information by looking at press releases and discussions and interviews with business partners. Use of a private investigation company can provide extra information.
  Foreign investment laws
  Does the foreign investor have to get approval from a government authority?
  Can a foreign person own the majority of shares in the company, according to the local law?
  Early on consider if foreign investment filing is required.
  A minority foreign investment require law approval.
  Currency risk
  Is there a convertible local currency?
  Is the currency stable?
  Acquire immunity as a term for investment.
  Establish the joint venture when the currency is stable and in a good position.
  Accounts within a Joint Venture
  Within the Joint Venture it’s important to open a separate bank account for the JV, in order to keep your funds and the funds of the JV separate.  As well as any other account so the transactions of the JV and the private accounts don’t get mixed and to keep the transactions of every entity separate.
  Joint venture development strategies
  When formulating a development strategy, businesses have to look at the specific market they are penetrating as well as the way the they will be competing within that specific market.
  The businesses will also have to look at the following when considering any form or method of expanding the business:
   
• If a 100% ownership is wanted in the organisation/business/Joint Venture, then the choice is between organic growth or acquisitions. 
• Another option is to undertake some form of joint development strategies.Types of Joint ventures
  After distinguishing between the different types of Mergers and Acquisitions, lets see what are the different types of Joint Ventures:
  Table 8. Examples of different joint ventures with explanations.
  Type of Joint Venture
  Explanation
   
• Short-term collaborationsMost joint ventures are short term, a short-term collaboration is when a joint venture is needed for a certain project.
   
• Limited-function Joint VenturesThe power of this type of Joint venture lies largely in the co-operation or the co-ordination of the entities involved in the Joint Venture, instead of the complete merger of the entities.
   
• Full-function Joint VenturesThis type of Joint venture is created on a bigger scale then the limited-function joint ventures, with the intent to combined the entities involved to form an autonomous economical entity, also referred to as a new company, in exchange for shares.
   
• Full-scale worldwide mergersThis is joint ventures on a larger scale usually international, this ventures also involve international companies.
  Distinguishing between organic growth and acquisitions
  Organic growth: The strategy of maximizing the growth of the business from the inside, companies will often use revenue and earnings, on a yearly or quarterly basis, to gauge the growth of the performance metrically. To pursuing of organic growth in sales often need new promoting strategies, improvement of the customer service practical as well as new product lines or development of the existing product line. This is very important when it comes to investors, they want proof that the business/organisation is fully capable of earning more then it made the year before.
  In industries, like the retail industry; organic growth can be measured as comps or comparable growth.
  Acquisition: This is when a company purchases most of another companies shares or in other cases all of the company’s shares in order for them to take control of the business/organisation. The acquisition in a business/organisation happens when the buying company obtains more then 50% of the ownership within the targeted business/organisation.
  As part of the buying process the company/business that is acquisitioning the targeted organisation/business, also have to take over the targeted organisations stock as well as the assets.
  This also allows the acquisitioning company/business to make decisions regarding the assets that have been acquired recently to make decisions on the target company’s shareholders.
  Table 7. Advantages and disadvantages of organic growth and growth by acquisition.
  Advantages of Organic Growth
  (Disadvantages of Growth by Acquisition)
  Advantages of Growth by Acquisition
  (Disadvantages of Organic Growth)
   
• Allows planning of the strategic growth directly with the specific underlined objectives. 
• Easiest and quickest way to enter a new geographic or product market. 
• Not as risky as Growth by Acquisition, because it’s done over time. 
• The risk for excessive competition and over-supplying is reduces. 
• The Organic Growth costs are much higher then the costs of Growth by Acquisition – significant acquisition premiums. 
• The amount of competitors are much fewer. 
• Avoid the problems associated with the integrating of new acquisition businesses – the integration process can be long and difficult because of the cultural differences in the businesses. 
• Market power is increased in order to exercise the same control over prices of the product. 
• Places immediate pressure on the management resources to learn the ways to manage the new business. 
• The target business/organisation staff have to be highly trained – gives the organisation/business a competitive edge.Acquisitions and Mergers
  A merger is the pooling of interests of the two companies/businesses that results in common ownership.  An acquisition usually involves two entities, namely a predator (a larger company) and a target (a smaller company).
  Different types of mergers
   
• Horizontal merger – Companies that are in direct competition with one another and share the exact same product markets and product lines. 
   
• Vertical merger – A merger that can be between a supplier and a company or a customer and a company. 
   
• Marker-extension merger – Two or more companies/businesses that distribute the same product/s in different markets. 
   
• Product-extension merger – Companies/businesses that sell completely different but products that are related in the same market. 
   
• Conglomeration – Companies that don’t have any common areas.There are two mergers that one can distinguish between by the way the mergers are financed, each of them has certain implications for the investors and the companies involved:
   
• Purchase Merger – This merger is when one company buys another company, the purchase can be made using cash or with the use of some kind of debt instrument, this sale of the company is taxable. There are Tax benefits thus this type of merger is preferred by acquiring companies. The acquired assets can also be written-up to the actual purchase price, the difference between the book value and the actual purchase price of the assets can depreciate annually, thus reducing the taxes paid by the acquiring company 
   
• Consolidation Merger –  A brand new company is formed and both of the other companies are bought and merged under the new entity. The tax terms for this merger is exactly the same as those of the purchase merger.Different type of acquisitions
  Acquisition is when a company takes control by buying another company, thus also buying the companies assets or the shares of the company.