SOMETHING BIG SEEMS TO BE happening at corporate lunch counters the world over. We’ve recently been involved in a series of client conversations involving the formation of new consolidation JVs – that is, ventures to combine mature businesses into a jointly-owned entity. The oil and gas industry, beset by low oil prices but unable to conclude as many mergers and asset sales as it would like, is looking in earnest at such structures for the first time in a generation.Read More
JOINT VENTURE AND M&A due diligence are superficially similar. Both follow the same basic process, starting when a preferred counterparty is identified and confidentiality agreements are signed, and usually concluding just prior to the signing of definitive agreements. Both use similar advisors to investigate similar topics: Accounting firms lead financial due diligence; industry specialty consultancies perform parts of technical and operational due diligence; law firms drive legal and compliance due diligence. And both serve the same core purposes: To confirm that the company is getting what it expects from the counterparty, and to more deeply understand the counterparty’s assets and capabilities to inform transaction choice and key deal terms.Read More
COMPANIES ROUTINELY FIND themselves in painful joint venture negotiations, reaching “walk-away points” and failing to close deals because of hard-to-value contributions, differences in key assumptions, or valuations that do not support the desired ownership or control split. Relief lies in a paradox: While JVs often introduce more complex valuation challenges than other transactions, the flexibility inherent in JVs simultaneously offers dealmakers a range of techniques “to take valuation issues off the table” or otherwise help the counterparties get to yes.Read More
IN MANY JOINT VENTURES – including those in semiconductors, financial services, media, healthcare, and natural resources – the owners are also the JV’s customers, channel, suppliers, users, or otherwise actively participate in the same markets as the venture (Exhibit 1).
Intel, Samsung, and AMD all own shares in semiconductor manufacturing joint ventures where, as owners, they are the JV’s major and sometimes only customers. Banks like JP Morgan Chase, HSBC, and Credit Suisse have all been part of joint ventures to develop and operate advanced technology and transaction processing platforms where success hinges upon owner adoption of the JV’s products or services. Mining companies like Rio Tinto and Anglo American routinely find themselves in JVs that are geographically proximate to their owners' wholly-owned infrastructure or operating assets, creating the potential synergies and conflicts. And oil companies like BP, Chevron, and ExxonMobil are all in JVs that are so financially material that they as shareholders have a fiduciary duty to deeply understand the venture’s strategy, market assumptions, performance, and financial controls.
EARLY RESULTS OF OUR recent study on how companies perform across different aspects of the JV dealmaking process has revealed fairly pedestrian performance all around, with critical gaps across key functions within core JV transaction workstreams. With respect to financial modeling, for example, we find that companies struggle to create a dynamic model of what we call “Total Venture Economics.” And since a complete picture of Total Venture Economics is needed to dynamically and deeply inform negotiations regarding partner contributions, JV valuation, service pricing, and other economically driven deal terms, it is no surprise that the dealmakers we surveyed also reported dissatisfaction with their ability to structure those terms – especially those related to partner contributions to the JV (Exhibit 1).Read More
Add to that list an emerging trend: Investors increasingly care about corporate social responsibility (CSR) issues in non-controlled JV portfolios, putting a company’s overall social license to operate – and stock price – at risk. As one client recently told us, investors and other lobby groups see his company name involved in a developing country partnership and simply assume they have some kind of responsibility or ability to intervene and should be held accountable when something goes wrong, regardless of their contractual obligations as a non-operator. Read More