EARLY RESULTS OF OUR recent study on how companies perform across different aspects of the JV dealmaking process has revealed fairly pedestrian performance all around, with critical gaps across key functions within core JV transaction workstreams. With respect to financial modeling, for example, we find that companies struggle to create a dynamic model of what we call “Total Venture Economics.” And since a complete picture of Total Venture Economics is needed to dynamically and deeply inform negotiations regarding partner contributions, JV valuation, service pricing, and other economically driven deal terms, it is no surprise that the dealmakers we surveyed also reported dissatisfaction with their ability to structure those terms – especially those related to partner contributions to the JV (Exhibit 1).
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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
"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.
