Joint ventures and partnerships
Putting the pieces together from the start
Joint ventures (JVs) don’t have to be a puzzle. In many market situations, joint ventures and alternative transaction structures may be superior to traditional mergers and acquisitions (M&A). Access to otherwise unavailable markets, a limited upfront investment, and new paths to exit are a few reasons why. We have assembled seven decisions, that when combined early, are key to the success of a JV.
Seven decisions critical to the success of joint ventures
The success of joint ventures and alternative transaction structures (like alliances and consortiums) depend on making the following decisions from the beginning:
- Define clear objectives
- Select the right partner(s)
- Define the value of JV contributions
- Define the JV structure and operation model
- Appoint a strong, aligned executive team
- Establish performance management structure
- Plan for change and exit
Decision No.1: Define clear strategic objectives
Joint ventures can be used to achieve the same wide range of strategic objectives as acquisitions and divestitures, whether it be to shed non-core assets or to drive innovation. Defining the desired end result of a transaction enables each partner to assess the feasibility and strategic fit of the JV.
Most frequently observed drivers for JVs are:
- Access to resources—Additional funds, intellectual property, new capabilities
- Access to markets—Customer intimacy in foreign markets, regulatory approval to operate
- Risk mitigation—Maintain level of separation between JV and parents, limit investment
Case in point: Metal manufacturers partner for strategic risk mitigation
Two metal manufacturing companies formed a joint venture to build and operate an integrated mill together. Company A focused on converting ore and producing iron products, while Company B operated as an ore extractor. As a result of the JV, Company A obtained a guaranteed 20-year supply of ore and mitigated the risk of volatile ore prices. Company B received a guaranteed market and price for its ore while receiving high quality, lower cost iron products from Company A.
Takeaway: The JV was successful in large part because both partners defined and were aligned on complementary, strategic objectives up front.
Decision No.2: Select the right partner(s)
A partner can change the trajectory of a JV, therefore choosing the ideal partner is especially important after defining the strategy. In some cases, the right partner is defined by their ownership of a critical asset such as presence in a market or intellectual capital. For example, if one partner is looking to carve out assets for an eventual IPO or sale, then a financial partner with the resources and successful track record may be the right choice.
Cultural fit should not be disregarded. Significant differences in decision making structures or risk appetite can dramatically increase complexity of the JV. A culture clash should not necessarily stop a deal; however, knowing that it exists informs the need for more detailed, up-front negotiations and alignment on governance and performance monitoring. Material components should be negotiated before the deal is signed. In our experience, delaying these decisions will require more time and resources and often leave both parties feeling as if they were deceived.
Case in point: Global fast food company and local business conglomerate partnership
A large global fast food company entered into a JV with a local business conglomerate to expand its operations into China. The fast food chain brought industry leading practices and supply chain expertise and the local business conglomerate contributed its knowledge of the rapidly changing Chinese consumer and complex local regulations. As there was a clear delineation of each partner’s role in forming the JV, the JV was able to establish more than 150 fast food stores in China.
Takeaway: The fast food company defined the JV strategy ahead of time (i.e., China market entry) and selected the right partner that had the critical capability (local market expertise) to execute the JV strategy.
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