Seeing a fuller picture of the ongoing flow of contributions from the parents to inform key deal terms, negotiations, and launch planning
THE DESIGN AND SUCCESS of many joint ventures is based on the ongoing flow of expertise, technology, services, market relationships, and other contributions from the parent companies. These flows may be provided under formal fee-for-service or other commercial agreements, or on a non-commercial basis as part of a parent’s implicit contributions to the joint enterprise. The North American Coffee Partnership, a multi-billion dollar JV between Starbucks and PepsiCo in ready-to-drink beverages, depends on its parent companies for coffee beans, bottling, and distribution services – and their know-how in quality control, formulations, product design, and retailing. Similarly, in CFM International, the commercial aircraft engine JV between General Electric and SNECMA of France that is one of the most successful joint ventures in history, the parent companies conduct engineering, design, production, assembly, and marketing activities on the venture’s behalf.
JV deal documents seek to define these flows in different ways and forms – for instance within the contributions section of a term sheet and shareholders’ agreement, and in master service and other ancillary agreements. But these depictions fail to provide an easily digestible and integrated picture of what these flows are across the venture’s business system, or how these flows will be managed and coordinated. And they are often done too late.
The purpose of this note is to illustrate a complementary tool – what we refer to as a JV Value Chain Map – which can provide a more accessible and scalable picture of parent company contributions to, and interactions with, the JV.
DRAWING A JV VALUE CHAIN MAP
The Traditional Approach and Its Flaws. JV business cases and plans, partner pitch decks, term sheets, definitive agreements and related schedules, ancillary agreements, and launch plans capture – in various places, at varying levels of depth, and at different times – the raw material streams, shared assets and systems, functional and administrative services, and other ongoing contributions by the parent companies, in addition to the capital and one-time ownership contributions.
It can be a complicated picture of the ownership and financial flows. To illustrate, we created a classic ownership and financial flows diagram for Solazyme Bunge Produtos Renovaveis, a renewable oils production JV between Solazyme and Bunge, based on our analysis of publicly-available information (Exhibit 1). It is not uncommon for such a picture to appear as a schedule to a JV term sheet.
*Now TerraVia; **Subsequently amended to allow royalty payments to Solazyme on some products
Source: SEC filings; Water Street Partners’ analysis
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While such a diagram has its value, it is visually complicated, inadequate in defining how the venture will work at a practical level, and is not scalable in deepening one’s understanding of the organizational touch points. It does not show any practical relationship between contributions and the JV organization or business system – that is, the set of functions required to develop, manufacture, and sell the products of the business in which the JV is involved. Nor does it identify the activities within each function that the JV will perform for itself, versus those that one of the parent companies will perform for the JV. Additionally, this picture is progressively lost as the final agreements are developed, with the JVA merely referencing various agreements with the parent companies, each detailed in a separate ancillary contract.
The Expanded Approach and Its Merits. In our work with clients, we often develop a JV Value Chain Map during early stages of dealmaking in parallel to drafting a term sheet. In its simplest form, the Value Chain Map plots the main functions of the JV’s business system along one axis and then distributes core activities within each function among three entities: the JV, Parent A, and Parent B.
To illustrate, we have done this for the Solazyme-Bunge JV (Exhibit 2). Such a top-level Value Chain Map shows how key activities within core functions like R&D, procurement, production, marketing and distribution are divided between the JV, Solazyme, and Bunge. Under the production function, for example, it shows the JV is responsible for constructing, commissioning, and operating the plant. Solazyme is expected to provide its technology platform and technical services. Bunge is expected to provide a set of utility and operating services, and its processing capabilities.
Source: SEC filings; Water Street Partners’ analysis
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This is merely the first level of what could become a rich, multi-layered Value Chain Map with added layers on each function and key activities within each function. As the deal progresses, it often makes sense to create function-specific value chain maps.
HOW AND WHERE TO USE
Once developed, the JV Value Chain Map is a compelling picture of the expected ongoing contributions of each parent company across the venture’s business system, of how specific activities – and ultimately responsibility – are divided between the JV and parent companies, and of how the JV and parent company will manage operational interfaces and coordination needs around those activities. Here are some of the ways it can be used:
- Refer to it during deal negotiations to determine how to lock-in specific contributions from the parent companies (e.g., formal agreements for explicit contributions, skills delivery contracts and commitments for know-how / implicit contributions)
- Insert it as an Appendix or Exhibit to the Term Sheet and JVA to give it legal standing, and formalize the allocation of responsibility between the parent companies and JV management
- Use it to draw up a launch plan, addressing implications for operational interface points and coordination requirements between the JV and parent companies
- Maintain it as a dynamic, rather than a static / point-in-time picture by indicating, through annotations and commentary, how the division of specific activities is expected to change as the venture evolves. For example, parent-provided contributions that will migrate to the JV over time. Use this as the basis to develop migration plans and transitionary services agreements
- Insert it into onboarding material for new JV Management employees and Board members to help them quickly understand what is done “in” the JV and “inside” the parent companies on behalf of the JV
- Use it as the basis to track the venture’s operational performance across the business system, and objectively pin-point responsibility for specific performance failures
The issue with many JV term sheets and agreements is not that there isn’t enough written down. It is that there is too much – and scattered in various places. And all that detail does not adequately address how the various responsibilities requiring significant coordination between the JV and parent companies will be managed in practice. Forming a solid understanding of the JV’s business system and the responsibilities of the JV and parent companies solely from these documents requires the skills and constitution of a ferret. The JV Value Chain Map, in presenting this information in a clear, concise, visually appealing manner, makes this task easier.
1 The JV was a 50.1:49.9 Brazil-based venture between Solazyme and Bunge to produce renewable oils from cane sugar for human food, animal nutrition, and other applications, for sale into the global market. Solazyme subsequently changed its name to TerraVia, which was then acquired by Corbion. Corbion and Bunge recently signed an interim agreement regarding the potential acquisition by Corbion of Bunge’s stake in the joint venture.