(Charlotte, NC – November 13, 2018)
The current M&A environment of low interest rates, high leverage levels, and high multiples has increased competition between corporate and private equity buyers and, in some cases, caused corporate buyers to shy away from competitive processes altogether. While acquisitions can and should be an important tool to generate growth for any organization, considering alternative structures should also be a critical step when pursuing inorganic growth. Joint ventures are one example of a structure that can achieve positive results without doing a full acquisition, and without participating in a heated auction process.
Bain research on US deals found that joint ventures yield a 17% return on average (1). Joint ventures can be structured as vehicles that allow companies to achieve specific goals or results. One example could be access to certain markets that would not otherwise be accessible – e.g. emerging markets. Joint ventures could also have a scope goal, giving a partner company access to new customers, products, markets/channels, critical technology or capabilities. Increasing scale is also a common goal of joint ventures whereby two companies combine specific capabilities to generate capacity and/or synergies.
Successful joint ventures have the following characteristics:
- Strategic foundation and partnership. A successful joint venture is connected to the growth strategy for both partners. Significant market and competitor analysis and business planning is required to ensure there is an aligned path to value creation for each partner. Furthermore, the partner fit is as important to the JV’s success. Companies should consider their prospective partner’s strategic intent, decision-making style, risk approach and culture before entering into any agreement.
- Design and deal negotiation. Each partner should focus on their respective negotiation efforts on the operating model, governance, and flexibility during preliminary joint venture design and discussions. The structure should be one that aligns goals and incentives for each partner. It is especially important to overinvest in governance and organization design up front because it is much harder to change once the deal is signed.
- Creation and ramp-up. Once the JV has been agreed upon, the partners must focus on the initiatives that will deliver the most value. These are people issues, installation of leadership, and culture.
- For all the resolutions made during the structuring and creation of a joint venture, changing conditions are inevitable. For a joint venture to remain viable, it must be able to adapt to shifts in market conditions, capital requirements, and change in management at one of the partners. These risks can be mitigated through quarterly reviews among operations and annual reviews among key strategic players. Furthermore, exit strategies must be determined in advance.