Negotiating and Structuring a Joint Venture in the Communications and Technology Industry

Profession:McDermott Will & Emery
 
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Article by Stephanie Liston and Hamid Rashidmanesh

  1. Introduction

Joint ventures have, in the communications and technology industry (just as with other industries), become an increasingly important medium through which companies undertake significant business activities and projects. This article examines the crucial role that lawyers are required to play in the negotiation and structuring of joint ventures to ensure that they are successful and long-lasting. Although the title refers to the creation of "Solutions to Guarantee a Win-Win Situation" this is somewhat misleading. There is no way to guarantee a win-win situation. The statistics show that only 50% of all joint ventures succeed, the average life of a joint venture is about seven years, and most face serious management or financial problems in their first two years.1 Accordingly, when advising on a joint venture, the role of a lawyer is to help create a joint venture that is more likely to succeed than not by advising on the mechanisms required to run the business and deal with conflicts and, where conflicts cannot be resolved, the mechanisms for terminating the joint venture and determining who gets what.

2. Goals For and Impetus Behind Joint Ventures

Before examining the negotiation process step by step, it is helpful by way of background to look at the aims and ambitions of parties entering into joint ventures in general and in the communications and technology industry in particular. To achieve a win-win situation, corporate counsel will need to know what are the aims and ambitions of the joint venture partners. What is more, he will need to know the particular market and the prospective business of the joint venture so that he can understand how the joint venture itself can win from the collaboration. Indeed, to create a successful joint venture, it is insufficient to just create a win-win situation for the joint venture partners. The joint venture itself must also win from the collaboration. Counsel must therefore create a win-win-win situation.

2.1 General Aims

Although the ultimate aims of joint ventures vary from case to case, the general aims of most joint ventures tend to be similar. These general aims are evident in joint ventures created in all industries, and not just the communications and technology industry. These are essentially threefold.

The first is the ability to combine expertise and resources. This enables transactions to happen which otherwise might not. Take Symbian - the joint venture between Ericsson-Nokia-Psion - as an example. Symbian was established for the purpose of developing an operating system for use in wireless information devices (a combined palm top computer and mobile phone) and then licensing it to manufacturers. To achieve this what Symbian required was Ericsson's and Nokia's expertise in mobile phones and Psion's expertise in palm top computers.

The second is the ability to deal with the escalating size of transactions and projects. This is more than just the need to combine resources, as a company may have the resources to carry through a big project, but it may be reluctant to do so because of the risks and costs associated with it. The advantage of joint ventures with the bigger transactions is that it allows the risks, costs and resources relating to a project to be shared. In the communications industry, for example, this has been demonstrated in connection with 3G. First we saw joint ventures (such as SpectrumCo Limited in the UK)2 being formed to participate in the licensing process and then subsequently we saw collaboration between the winners of 3G licences in relation to the roll out of the networks required for 3G services.

The third general aim is the desire to enter into new markets and emerging economies. The driving factor behind this is the globalisation of world markets. All major companies around the world now look beyond their domestic markets for opportunities to improve returns, protect against downturns in local economies or simply remain competitive. An example of this in relation to the communications industry is France Telecom and its relatively recent joint ventures to acquire 3G licences outside of France; combining with MobilCom AG in Germany to create MobilCom MultiMedia GmbH, and NTL in the UK to create NTL Mobile Limited. The former was successful in winning a 3G licence, the latter was not.

2.2 Industry Specific Factors

Whilst the general aims behind joint ventures discussed above apply equally to the communications and technology industry (as demonstrated by the examples cited above), there are further industry specific factors at play in the communications and technology industry. These industry specific factors explain why joint ventures have now become commonplace in the industry.

2.2.1 Liberalisation of Regulations

In the past few years there has been a liberalisation of domestic, European Union and other regulations in the communications and technology industry - laws barring entry have been removed, pro-competitive regulations have been promulgated, there has been a drive towards harmonisation of laws, and a more lenient approach has been taken by competition authorities to joint ventures. Each of these changes has acted as an impetus for joint ventures, but in different ways. The removal of barriers and the introduction of pro-competitive measures has created opportunities to enter new markets in the global economy and new business opportunities. The harmonisation of laws and the more lenient approach to joint ventures has created more legal certainty and this, in turn, has encouraged joint ventures where the previous complicated and unpredictable clearance process had acted as a deterrent because delays result in mounting costs and a threat to first mover advantage.

2.2.2 Mergers and Acquisitions

In recent years we have seen a period of consolidation in the communications and technology industry as demonstrated by the Vodafone/AirTouch merger, the Vodafone/Mannesmann merger, the France Telecom/Orange merger and the AOL/Time Warner merger. This trend is likely to continue in the foreseeable future as the general decline in tech stock has made it possible to acquire targets at a relatively good price, and has increased the pressure on companies to merge to achieve cost reductions and diversify their markets. These very goals can also be achieved through joint ventures, but without some of the consequential disadvantages. Compared to mergers and acquisitions, joint ventures have the following advantages: a joint venture does not usually involve the same amount of expense and debt that will be required to finance an acquisition; a joint venture will allow the parties to cherry pick the resources required for a project...

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