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
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
IT MAY BE AS DRY AS unbuttered toast but chew on this: Experienced JV CEOs use a variety of seemingly mundane pre-, post-, and within-Board meeting techniques to drive real, rather than perceived, alignment across their ventures. Our research has consistently shown that misalignment – whether among the owners, between the owners and management, or even within one owner company – is the single largest challenge facing joint ventures.
Every year, Water Street Partners hosts a JV CEO Roundtable in Washington DC. In our most recent roundtable, the discussion turned to how JV CEOs structure and manage Board conversations to foster alignment. That conversation unearthed three subtle practices that hold potentially broad relevance: the use of Board concurrence rather than approval, post-meeting memos, and the restructuring of JV Board agendas to drive alignment.
TENS OF MILLIONS of people are employed in joint venture companies around the world. In many cases, these ventures are partly-owned by large national and international companies. Today, Siemens, IBM, Royal Dutch Shell, General Motors, Airbus, and Nestle each have ownership interests in joint venture companies that employ tens of thousands of people. Typically, a tiny fraction of staff are seconded, or loaned, employees from one of the shareholders, while the vast majority are direct employees of the joint venture company.
Are shareholders doing enough to steward these employees – using their considerable scope, capabilities, networks, and development opportunities to enhance the level of engagement and employee value proposition of those directly employed by joint ventures?
In our experience, the answer is no.
ONE OF THE ENDURING tenets of good joint venture governance is the central importance of getting true decision makers from each shareholder in the same room, talking directly to each other. In many JVs, however, the actual decision makers are too senior, too busy, or otherwise unwilling to serve on the JV Board or equivalent body. As one European aerospace executive put it: “I don’t have the time – or the interest – to fly halfway around the world once per quarter to attend a day-long Board meeting spent reviewing budgets, plans, and operational performance.”
It’s a fair point.
But when the true decisions makers operate outside the governance structure, bad things can happen. Decisions are delayed. Misalignments fester. Issues are not raised, and management is surprised. And Board members feel disempowered and not accountable for outcomes. One JV Director summed up his governance context this way: “We operate
in an Oz-like environment, where our business unit president is the Wizard, making all our decisions from behind a curtain.”