JOINT VENTURE DEALMAKING presents unique challenges – and the importance of strategic partner due diligence is often overlooked. We recently conducted a broad-based research study on how companies perform across different aspects of JV dealmaking. The results have revealed fairly pedestrian performance, with critical gaps across key functions within core JV transaction workstreams. Notably, we found that when working on potential joint venture transactions, companies often overlook the importance of partner due diligence, and rate flawed partner selection as a top reason for underperforming JVs.
To help companies address the unique challenges in joint venture dealmaking, including those related to partner screening and due diligence, we have developed a set of best practices we call “JV Dealmaking Standards of Excellence.” This post addresses a notable gap in JV dealmaking – conducting strategic partner due diligence – and illustrates how companies can improve their approach.
As noted in our previous post How Due Diligence Differs for M&A and Joint Ventures, JV and M&A due diligence deviate in important ways, and the lack of ultimate control in a joint venture impacts each of the main domains of due diligence. These domains include strategic partner due diligence, financial and commercial due diligence, technical and operational due diligence, and legal and compliance due diligence. Our research and experience have shown that among these domains, companies are weakest when it comes to performing strategic partner due diligence – a critical component of which is evaluating the partner’s culture and compatibility. And while cultural fit is important in acquisitions, it takes on even greater importance in joint ventures where the counterparty will remain a separate entity and its management style, decision-making approach, and organizational contours will have sustained influence over the venture and working relationship.
What the standard says. Our standard provides that, to achieve excellence in joint venture dealmaking, a company “conducts strategic partner due diligence, including evaluating the counterparty’s corporate strategy, investment and risk appetite, track-record with other joint ventures, corporate culture, and potential misalignments and incompatibilities with the company – and uses this information to inform the deal negotiations, structure, and terms.”
Components within the standard. To fully meet this standard, a company has:
- Investigated the strategy and strategic drivers of the counterparty, and how it might change over time due to growth, market forces, leadership shifts, etc.
- Evaluated the counterparty’s appetite for risk, and implications for the JV.
- Conducted an assessment of the counterparty’s corporate culture, including its values, decision-making style, mindsets and beliefs, top management attributes – and the relative compatibility with the company.
- Evaluated the counterparty’s track record in other JVs and partnerships.
- Assessed the counterparty’s reputation with customers, regulators, labor, suppliers, and business partners.
- Identified potential misalignments between the company and the counterparty with regard to JV strategy, capital investments, venture evolution, and commercial and other issues.
The company has then used these analyses to inform its decision to proceed with the deal, and if so, its negotiating strategy, overall venture design, contractual terms, and launch plans.
What it looks like in a company. To illustrate, consider the case of one major European company that was considering entering the Indian market through a JV with a large family-owned business. Working with us, the European company conducted a set of interviews with advisors, industry experts, and former employees of the Indian company as part of cultural due diligence – a critical element of strategic partner due diligence (see below). Drawing on those discussions, and their own interactions with the counterparty’s management, the team mapped key aspects of the counterparty’s culture. This analysis showed some good things about the counterparty, and revealed other attributes that were different – but likely could be overcome to form a strong partnership. But is also unearthed some landmines.
For instance, in the course of the discovery process, it became clear that the counterparty had never had a successful and enduring collaborative relationship, the counterparty’s style was extremely hierarchical, and the counterparty had a history of acquiring its partners or exiting its JVs after a few years. Moreover, the main relationship was with the counterparty’s topmost executives who, while supportive, were unlikely to give a JV sufficient time after the deal, since the business was relatively small and noncore for the Indian counterparty. In addition, the Indian counterparty had a bit of a gunslinger culture – ready, fire, aim – while the European company was committed to adhering to business processes for important decisions. Those findings raised concerns about whether the counterparty would rigorously assess large Year 1 capital investment decisions. Ultimately, the European company selected another partner with similar business capabilities, but a much better fit and a history of successful partnering.
EXHIBIT: Cultural Assessment of Emerging Market Counterparty
In many ways, the European company was lucky: It could find another partner. In other situations, however, there is only one available partner – and this type of analysis might lead you to scrap the opportunity altogether, or to get a lot more creative in structuring scope, ownership, governance, control, organization, and exit provisions to manage these issues. Regardless, conducting strategic partner due diligence, including an examination of a potential partners’ cultural compatibility and fit, is one very important part of the process toward getting to a good “yes” or a quick “no.”