It all started out so peacefully. Tiffany (NYSE:TIF) announced a joint venture with Swatch (NASDAQOTH:SWGAY) back in 2007, proclaiming the watch maker gave it "unparalleled distribution capabilities and experience in the luxury segment of the watch business." Tiffany's announcement was supposed to herald a return to the world of luxury watches, a segment that it had been losing out on for years. Then things went sour.

In 2011, Tiffany announced that the deal had fallen apart. Swatch, it claimed, had "failed to provide appropriate distribution for Tiffany & Co. brand watches." The products had failed to take off, and the forecast was for little to no growth in the line. The break led to legal issues, and yesterday, Tiffany announced that it is going to pay out $449 million to Swatch in a settlement. So what went wrong?

A joint venture is born
At the end of 2007, Tiffany was stumbling along. The company's holiday sales inched up only slightly in the U.S., with comparable-store sales -- sales at stores open for at least 12 months -- falling compared to 2006's holiday season. The company's stock hit a high point in 2007 that it wouldn't see again until 2010, as the brand dug itself out of a hole.

Part of the company's plan to solve its lagging sales problem was to get back into the watch game. At the time, more than 80% of the company's revenue came from jewelry, with the remainder made up of odds and ends, including watches. That gave the company some hope that watches could be a growth business.

On top of its potential for growth, Tiffany also had a history with watches and the line was a natural fit for the jeweler. Other businesses, like Fossil, were making a name for themselves and bringing in foot traffic that Tiffany would have killed for.

Swatch seemed to be the perfect fit. The company had started out as a maker of plastic, Swiss-crafted watches in the early 1980s, but quickly turned into something much more. By 2007, Swatch was an international leader in fashionable timepieces. It offered Tiffany Swiss craftsmanship, a history of success, and a brand name that the world loved.

The economy helps destroy a friendship
As it turns out, almost no amount of planning on Tiffany's part was going to help it succeed over the next few years. With the market crash, luxury goods took a hit just like everyone else. Fossil also saw a drop in 2008, mirroring the path that took down Tiffany. The watchmaker said in its annual conference call that sales had been hit, and that expansion plans were being scaled back due to the economic weakness.

By 2011, the wheels had fallen off. Swatch CEO Nick Hayek said that Tiffany had given up on watches, failing to display them in its largest stores. Tiffany countered, saying that Swatch wasn't pushing the distribution of the joint watches enough. Regardless of fault, in the face of overall weakness the deal fell apart.

Tiffany ordered to pay
The companies entered arbitration in The Netherlands, and yesterday, Tiffany announced the outcome. While the insights gained by the arbitrators are not public, it seems likely that the combination of Tiffany's failure to promote the watches and the allegation that Tiffany told Swatch watches weren't a priority in 2011 helped put the blame on Tiffany's shoulders.

The $449 million settlement effectively wipes Tiffany's 2012 out of the books -- it made just $416 million of income last year. It's not the end of the line for Tiffany, though, as the company had more than $500 million in cash and cash equivalents on its books at the end of its last quarter.

With this decision behind them, the two companies can now go on to bigger and better things. Swatch is wrapping up its 30th anniversary year, and Tiffany is planning to keep expanding its global footprint. For investors, the failure offers an important lesson in business. Even when everything makes sense, it doesn't mean that it's going to work out. Keep that in mind the next time two giants join forces.

Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Fossil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.