Key Observations on JV Launch Planning

   

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Key Observations on Joint Venture Launch Planning Featured Image.jpgA QUARTER CENTURY AGO, companies awoke to the fact that success in M&A hinged upon running a highly deliberate and well orchestrated post-merger integration process. Serial acquirers like ABB, General Electric, Lloyds TSB, Thomson Reuters, Tyco International, and Waste Management realized that there was a right way – and a wrong way – to integrate companies. They built detailed M&A integration processes, developed playbooks, captured learnings, and continuously improved their integration approach.

Launch is every bit as important in JVs.

Our research has shown that the trajectory of JV success is almost always established during launch planning and execution, and that mistakes made during this phase can easily erode up to 50% of venture value.1

COMMON ISSUES

Despite different types of joint ventures – from JV start-ups to consolidation-style JVs where the partners combine existing assets or businesses – JVs introduce a set of common launch issues (Exhibit 1). Certain issue categories or subtopics – such as designing joint governance systems, structuring service level agreements, or designing systems to recruit and manage secondees – are unique to joint ventures. Others – such as ensuring alignment on strategy, integrating different cultures, and developing a compelling employee value proposition – are present in other business contexts, but take unique twists and turns in joint ventures. Meanwhile, another set of issues – such as securing business permits and real estate, or conducting product prototyping and market testing – may be no different in a JV than in other business contexts. 

Exhibit 1: Common Joint Venture Launch Challenges

Exhibit 1 Common Joint Venture Launch Challenges.png
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THOUGHTS ON PLANNING JOINT VENTURE LAUNCH

Done well, a JV launch plan will pressure test the deal terms, prepare for day one, and identify and mitigate future risks. This memo shares a few key observations on launch planning.

Do it early: launch planning it informs the terms of the deal. Launch planning is critical to expose potential misalignments that a traditional deal process and legal agreements may never uncover. Consider a large Middle Eastern natural resources JV. A 50:50 venture, the legal agreements followed a fairly boilerplate structure, defining the authorized scope of the JV, the shareholder’s contributions, capital commitments, and ownership rights, and a set of standard governance, dispute, and exit provisions. What the legal agreements did not do – and what brought the venture to the brink of unwind 18 months later – was to adequately define the operating model. Would the JV be quasi-operated by the more experienced partner, running on that company’s systems, or would it be operated as a true 50:50 JV? Would the JV be a large operating asset that depended on one partner for critical corporate support, or would it be structured as a business, with its own finance, purchasing, technical support services, and sales and trading functions? Had the partners run launch planning in parallel with the deal discussions, these future misalignments would have been exposed early – and would have informed key terms in the deal, including the functional scope of the venture, Board approvals and voting thresholds, and delegations.

Therefore, rather than treating launch as an activity that can be pushed until after the agreements are signed, launch should be placed in a “staggered start” to the deal discussions (Exhibit 2). Specifically, the internal stage gate approval process that a JV will go through should include not just deal terms and agreements (e.g., term sheet, MOU, definitive agreement) but also elements of launch (e.g., business case, launch plan, Day 1 and Year 1 organizational snapshots, operating model blueprint).  

Exhibit 2: Common Joint Venture Launch Challenges

Exhibit 2 Parallel Paths — Deal Negotiations and Launch Planning.png


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Make sure you are ready. General shareholder alignment on basic JV objectives, terms, and conditions is required prior to entering the deal process in earnest – and also for appropriately detailed launch planning. For example, prior to drafting legal documents or commencing launch and integration planning, shareholders should have a solid understanding of:

  • JV purpose – e.g., special purpose vehicle vs. growth business
  • JV product market and scope
  • Preliminary business case
  • Estimated ownership stakes
  • Basic governance and control terms
  • JV evolution scenarios and desired endgame – e.g., buyout, IPO
  • Economic model – e.g., P&L entity vs. managed margin vs. utility
  • Key technology and supply agreement terms
Without understanding this, the JV launch team (and dealmakers) could find themselves in an undesirable position where their efforts are outpacing or being inconsistent with those of the future JV’s Senior Sponsors (senior shareholder-company executives tasked with overseeing transaction negotiations and venture launch, and accountable for the ultimate success of the JV). 

Agree on key design choices. The first step in the launch planning process is to agree with your partner(s) on how to run the process. We call these “key design choices” ... Continue reading the article by clicking below. 

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