- 1500 “billion-dollar” JVs globally, and more than 25,000 JVs among public companies
- For many companies, JVs represent 10-20% of their overall asset, revenue or income base - and sometimes far more, especially in energy, basic materials, and industrial sectors
- JVs are a key source of innovation and growth – e.g., as a means to enter new markets or access new technologies
- The most successful companies are able to use JVs – as well as acquisitions – as a strategic vehicle
- Many reasons to form JVs — to enter overseas or regulated markets, consolidate sub–scale businesses, share risk or capital investments, gain access to complementary skills and resources, improve industry structure, enhance parent balance sheets, prepare the way for an eventual sale, etc. etc.
- Almost countless ways to structure joint ventures — ownership, control, economic arrangements, nature of exclusivity, scope of what activities are "in the JV" versus "in the parents"
- Most industries have a handful of different joint venture types, e.g.,
— Oil and Gas – Upstream operator ⁄ non-operator JVs, production sharing JVs, new technology development and commercialization JVs, pipeline JVs, JVs with NOCs
— Financial services – Shared utilities, cross border co selling JVs, emerging market entry JVs
- Some 50% of JVs significantly underperform relative to the financial and strategic expectations of the parent companies
- Despite differences in structure, scope and industry context, JVs tend to confront similar issues due to their joint ownership structure:
— Strategy and scope: Maintaining alignment on strategy, especially regarding investment decisions, evolving the scope, and doing so in a way that is viable but does not threaten or cannibalize the parent businesses
— Governance: Making decisions efficiently, ensuring compliance without over-burdening the venture
— Financial arrangements: Ensuring fair and transparent transfer pricing on service or asset inputs purchased from or sold to – the parents
— Organization and talent – e.g., attracting top talent from the parents (who are required to leave their normal career tracks for a new, often-risky business); creating compelling incentives for outside hires given the limited headroom in JVs lack of stock incentives, etc.
- These added challenges drive the historic underperformance of JVs as an asset class: 4.4% ROA vs. 6.6% for wholly-owned businesses
- 10-30% increase in median annual JV profitability when JVs restructure to manage these shareholder issues well or resolve problems
- For many large companies – especially in energy, basic materials and industrial sectors – this represents >$1BN in added earnings
- Improvements in underlying practices also opportunity to significantly reduce parent company risk exposure through better compliance
- Our personal experience in 400+ deal situations, and research over last 20 years – combined with a meta analysis of work of others – indicate that there are 100 + key best practices that should be in place – which drive success / failure against performance targets
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Implementation of these practices – across venture strategy and scope,
governance, org and financial arrangements – dramatically increase odds of sustained outcome performance - However, JV Boards and CEOs not actively managing – or calibrating performance relative to other large joint ventures – against these best practices or attributes of good venture health
- Water Street Partners combines a depth of professional experience, proprietary database of JV practices and performance data to help JV CEOs, Board Directors, and management teams optimize the performance of their joint ventures