BECAUSE 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).
DEALMAKERS LOVE using simple analogies to explain complex transactions. A favorite we hear is that joint ventures are like marriages. True, a strong marriage has shared decision- making and a common bank account (though we suspect modern marriages lack service agreements). But where this analogy falls flat is that while marriages are covenants intended to last forever – only 5% have prenuptial agreements – joint venture legal agreements have the terms of exit defined at the outset in 95% of the deals we see.
Unfortunately, these terms are often problematic, with critical flaws that go unaddressed by dealmakers concerned that over-engineering the exit is inviting it to happen. As one dealmaker recently told us, “I want to signal that this is a long-term partnership, not something with 10 different ways to declare it a failure and get out – which, by the way, also sounds like we don’t trust them.”
PSST. WANNA KNOW a seemingly innocuous joint venture deal term that packs a mighty punch? Consider this clause:
Unless otherwise and expressly agreed in a provision of this Agreement, or as otherwise required by applicable law, all decisions and actions shall require Majority Approval of the Shareholders.
Sounds harmless enough – especially when tucked at the end of the voting section of a joint venture agreement, following a list of several dozen matters explicitly labelled as unanimous, supermajority, or simple majority decisions. But that simple provision – in effect, a “default setting” for shareholder voting rights – can carry profound implications, both positive and negative, both today and in the future.Read More
IT IS CERTAINLY possible to negotiate a Joint Venture Agreement without dwelling intensely on the future. Indeed, dealmakers have some very good reasons not to over-prescribe the future. After all, defining the future takes time, draws attention away from getting the deal done, and adds to non-closure risk. Defining the future can also introduce potential liabilities and limit future flexibility, as it may lock the company into commitments that do not make sense down the road. One dealmaker summed it up this way:
"I’m a dealmaker, not a soothsayer. It is dangerous to predict the future – and far wiser to let our executives overseeing the business address events and issues as they arise."
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Healthcare companies, facing new and unprecedented pressures from regulators, competitors, and consumers, continue to turn to dealmaking – by way of M&A, joint ventures, and other forms of partnership – as a means to survive in the industry’s new world order. Previously, we’ve profiled the drivers and models of deals among payers, providers, and pharmacy companies, though we have yet to touch upon an adjacent segment – medical technology – where dealmaking is unfolding in a distinct but interrelated manner.
Recently, Water Street sat down with Rick Anderson, Managing Director of PTV Healthcare Capital, a late-stage venture and expansion capital firm based in Austin, TX, and Greg Davis, CEO of MedCelerate, a consulting group that supports the growth of medical device companies through manufacturing and commercial ramp-ups, and Adjunct Professor at the Fuqua School of Business at Duke University. We discussed highlights of dealmaking trends among medtech companies today and talked about how companies in this sector are leveraging particular types of deals to propel innovation.
A CLIENT ONCE ASKED if we could make selecting transaction structures as easy as choosing the right tires for his car. He was inspired by the auto parts website TireRack.com, which offered a decision tool to narrow down all 5,000 different tire options to five choices that he could research and explore based on his unique needs. The TireRack.com tool works like this: A potential customer answers a few basic questions about vehicle make and model, local road and weather conditions, driving style and driver habits, and cost sensitivities – and based on this input, the website’s algorithm generates a short set of tire options for further consideration.
We think companies can – and many should – consider building a slightly less automated tool that identifies and narrows potential transaction structures, and in the process, radically enhances the front end of the deal process.
