Leighton Holding’s joint venture headache

Leighton Holding’s joint venture headache

Ahead of tomorrow’s annual general meeting, Leighton Holdings’ chairman Stephen Jones has told the Australian Financial Review the construction giant’s middle-east joint venture has become “a long-term problem”.

“With hindsight… we should never have gone into it,” he told the newspaper.

Since Al Habtoor Leighton was formed in 2007 to give Leighton exposure to the then-booming Dubai property market, Leighton has written down almost two-thirds of its value. The Dubai property market has faced a protracted post-GFC glut. The joint venture with the Emirati Al Habtoor group, of which Leighton owns 45%, is a significant factor in Leighton’s $254 profit downgrade in March.

Joint ventures are one of the most common ways companies look to expand overseas, says Vikas Kumar, an associate professor of international business and strategy at the University of Sydney Business School. By giving a company the ability to create a new entity with a local partner, joint ventures can offer a convenient way to tap into local networks and brand equity, as well as provide the Western partner with invaluable local knowledge.

However, the research suggests most joint ventures fail.

“In the international context the biggest risk is the clash of different cultural backgrounds leading to bad outcomes,” Kumar says. “In the short-term, there are appropriation risks, risks of knowledge leakage and the risk of developing a future competitor.”

Andre Sammartino, a senior lecturer in international business at the University of Melbourne, tells LeadingCompany that such risks – “many of which”, he says “mirror those of mergers and acquisitions” – can be compounded by the fact that a lot of joint ventures are “forced”.

“A lot are forced because of ownership requirements, especially with infrastructure projects,” he says, especially relevant in the Leighton case.

Joint ventures can also grant a false sense of security, which may have been a case in Leighton’s disastrous middle-east excursion.

“There could be instances where a partner thinks that just because they have a local joint venture partner they’re not as exposed to the same level of risk,” Kumar says.

“But in certain situations, irrespective of the nature of configuration of the international entity, everyone is affected.”

Sammartino believes the severe downturn in the Dubai property market was likely the main factor in Leighton’s troubles, meaning the joint venture structure likely played only a small part in the disaster.

However, it is possible that the joint venture may have removed the company’s flexibility to get out of the market. “But without knowing the contractual arrangements involved, it’s hard to know for sure,” he cautions.

For a more flexible entrance into emerging markets, strategic alliances can be one way to tap into local knowledge while retaining the flexibility to quickly exit if necessary. Sammartino says such alliances are more common than many people presume, and can be as simple as a petrol station having a relationship with a motor oil company to only use their oil on cars serviced.

Recently, law firm Arthur Robinson announced an alliance with British firm Linklaters. The alliance is hoped to help them break into new markets in Asia.

“[Al Habtoor Leighton] has probably burnt Leighton’s view of joint ventures – firms who get it wrong tend to look for alternatives for awhile,” Sammartino concludes.

But given Leighton is a construction company, an industry often required by regulation to enter into joint ventures to access overseas markets, they may not have a choice.


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