When a JV Must Do an (Uneven) Deal with its Parent Companies

   

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GettyImages-879574316_smallBECAUSE MANY JVs are closely related to – or even directly connected with – parent company businesses, opportunities often emerge for the JV to create value by working with the parents in new and uneven ways. This might mean developing new products, functionality, or technologies favored by one parent. It might mean allowing the JV to enter markets where one parent company already has a competitive presence. It might mean having the JV consolidate certain functions or
assets with one parent company in order to reduce costs or avoid future capital investments (Exhibit 1).


Exhibit 1: The Uneven Deal in Action – Some Different Structural Looks

The Uneven Deal in Action – Some Different Structural Looks

Source: Water Street Partners. © All rights reserved  
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Such opportunities can deliver compelling value to the JV – while delivering disproportionate benefits to one parent company. Doing an uneven deal with one parent might sound like a dangerous place for a JV. Usually, delivering asymmetric benefits is a path to venture imbalance, resentment and, over time, demise.

But not always. In cases where the growth opportunity is compelling for the venture, albeit with the costs, risks, and benefits shared disproportionately among its owners, some creative dealmaking can leave all parties better off.

Creative “JV-to-Parent” deals can be seen in many of the world’s most successful and dynamic joint ventures – from Fuji Xerox and SkyTeam, to SEMATECH and many large upstream oil and gas JVs. In some cases, growth was enabled by initial deal terms that anticipated such scenarios. But in most cases, JV-to-Parent deals are done “on-the-go” by JV CEOs and parent executives. The purpose of this memo is to outline how three JVs have done JV-to-Parent deals.

PROFILES IN CREATIVE JV-PARENT DEALMAKING

To understand what we’re talking about, consider three highly successful JVs that were able to grow through deals with parent company:

Fuji Xerox: Formed in the 1960s, Fuji Xerox was established as a vehicle for Xerox to manufacture and sell its copiers in Japan. As Fuji Xerox grew, it developed a series of specialized skills – including those related to the design and manufacturing of low-end copiers and printers. The initial JV agreements granted Fuji Xerox license to operate in Japan, but required that sale of any products outside its market would be through Xerox or its affiliates. But by the late 1980s, as markets globalized, Fuji Xerox management began to argue that those constraints should be lifted – and that it should have direct access to the worldwide market for low-end products. In particular, it wanted to interact directly with the US-based OEM customers like Apple, Dell, and Compaq who would buy Fuji Xerox printer engines. The JV also wanted to manufacture in China – a country that was central to Fuji Xerox’s low-cost strategy but was Xerox territory.

To grow, Fuji Xerox needed to do a deal with its parent.

Solution: Form JVs with the JV. Over the course of a year, a joint team composed of executives from Xerox and Fuji Xerox outlined different deal options (Exhibit 2), looking at different ways to approach sales, manufacturing, as well as research and development.


Exhibit 2: Xerox and Fuji Xerox - Defining Ways to Restructure Their Relationship

Xerox and Fuji Xerox Defining ways to restructure their relationship

Source: Harvard Business School Xerox-Fuji Xerox Case and Case Update; Alliance Analyst; Water Street analysis. 
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PROFILES IN CREATIVE JV-PARENT DEALMAKING 

To understand what we’re talking about, consider three highly successful JVs that were able to grow through deals with parent company:

Fuji Xerox: Formed in the 1960s, Fuji Xerox was established as a vehicle for Xerox to manufacture and sell its copiers in Japan. As Fuji Xerox grew, it developed a series of specialized skills – including those related to the design and manufacturing of low-end copiers and printers. The initial JV agreements granted Fuji Xerox license to operate
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