THERE ARE MORE THAN 2,000 JVs with significant profitability, strong management, and over $500 million in assets. Many of these could comfortably exceed the initial minimum listing requirements of various stock exchanges. For instance, the NASDAQ Global Market has initial minimum listing requirements of $11 million in pre-tax income in the last fiscal year or two of last three fiscal years, $55 million in stockholders’ equity and $45 million in market value of publicly held shares. As balance sheets get squeezed, and as JVs mature, more corporate parents are beginning to think about the IPO option for their joint ventures.
IPOs of JVs can be a phenomenalway to unlock value for owners – both as a means to monetize earlier investments and, potentially more important, to drive improved performance in the future through a more independent, market-oriented, and less complex operating structure. Moreover, by creating publicly-traded stock, an IPO can also create a “currency” to attract and retain top talent – something that has proven quite difficult in traditional joint venture environments. Among the many prominent IPOs of JVs are VISA, Genencor, Vodacom, Orbitz, and LG Philips (Exhibit 1).
Despite the attractiveness of an IPO, however, fewer than 5% of JVs have pursued this path. While the IPO option is not always the right approach – as we explain below – we think that the paucity of JV IPOs also represents some missed opportunities: owners not appreciating the potential, deal makers not building in appropriate terms at the outset, and JV directors not migrating the operating model to make an IPO a more feasible option down the road.
The purpose of this insight is to provide shareholders, directors, and JV CEOs with a set of practical guidelines for when – and when not – to IPO a JV. In a subsequent Part 2, we will share how to prepare a JV for an IPO, if desired.
In developing this article, we researched IPOs of joint ventures since 1990. We assembled a dataset of more than 200 JVs that conducted a full public listing, a partial public listing (i.e., less than 100% of common equity), and those where the corporate parents seriously considered, but did not execute an IPO. Our assessment included JVs across a range of industries (from chemicals and media to telecom, financial services, and consumer goods) and regions (from Asia and North America, to Europe, the Middle East, and beyond).
Exhibit 1: Prominent JVs that IPO’d
Cross-Industry Sample of JVs that IPO’d
REASONS TO PURSUE AN IPO
Cash to the parent companies is an obvious motivator. In the JV IPOs in our dataset, the amount raised by the IPO ranged from less than $100 million to more than $19 billion.
Indeed, Visa’s IPO of $19.1 billion still ranks as one of the largest IPOs in American history. And there are many JVs like EADS, Nyrstar, and Elpida, whose IPOs revealed multi-billion dollar market capitalizations.
Unlocking market value and cash, though, is not the only – or even the dominant – reason to IPO a JV (Exhibit 2). Instead, other financial and non-financial factors were primary drivers in more than half of the IPOs in our dataset. On the financial side, executing an IPO of a JV can enable a parent to deconsolidate the results of a JV from its corporate financial statements, which can be especially attractive in cases where the JV is in startup phase with lower margins. For example, AMD was able to report the profit or loss from its loss-making venture Spansion as a minority investment line item, avoiding the need to consolidate it. An IPO can also enable access to capital markets by the JV, allowing a JV to self-fund an ambitious capital expenditure, as was the case in the IPO of the Petro Rabigh refining company by parent companies Saudi Aramco and Sumitomo. More generally, partially divesting a JV that is not a core business can be attractive to investors in the parent company. For example, an IPO of the LG Philips LCD manufacturing JV allowed Philips to progressively reduce its exposure in a business that was increasingly considered non-core by its shareholders.
Exhibit 2: Reasons to Take a JV Public
Case Examples of IPO’d JVs – and Planned but Not Executed IPOs – Illustrating Key Rationale for Decision
Sometimes, non-financial reasons trigger the decision to pursue an IPO. Regulatory and antitrust issues are often important. For example, the IPOs of MasterCard and Visa were helpful in creating a degree of separation and independence from their bank owners, responding to concerns expressed by regulators and antitrust authorities. Several governments use IPOs to bolster emerging capital markets – for example, India and Saudi Arabia have pursued partial IPO of JVs between state-owned enterprises and private companies. Finally, the desire to “create space” from corporate parents for a new business that is non-core, and requires a different management style and culture, is often in play. For example, the solar-producing JV Sovello, between Q-Cells and others, had stated it was considering an IPO to support its rapid growth and enable it to operate more independently from its parents.
WHEN NOT TO PURSUE AN IPO
Even when some of the motivations above are in play, there are three powerful reasons not to pursue an IPO of a JV (Exhibit 3).
Exhibit 3: Reasons Not to Take a JV Public
Case Examples of IPO’d JVs – and Planned but Not Executed IPOs – Illustrating Challenges that Make Successful IPOs Challenging
- The JV’s value to its parents is greater as a “captive” than as a fully independent entity. For example, a healthcare informatics JV in the U.S. that has access to a large volume of retail pharmacy transaction information and data on patient compliance with medication regimes, has a solid P&L, strong management team, and could be a very attractive IPO candidate as electronic medical records and cost-control become more important. But the JV’s indirect P&L benefit to the owners – by tailoring certain types of data collection that allow the owners to dramatically reduce costs in their core business – far outweighs the potential direct P&L benefits of the JV. An IPO carries the real risk that these indirect benefits will be de-prioritized. As a result, the owners have taken a decision to keep the business under their wings as a joint venture.
- The JV is too integrated with the parent companies to be separated, or too important to other parent businesses to be made independent. Many JVs are set up with partial value chains. Examples include large single-site manufacturing entities such as the Atlantic LNG JV that supplies much of the LNG needs of the U.S. East Coast; and marketing and sales JVs that sell parent products, such as Maxxium, a joint venture that distributes and sells spirits outside the U.S. for Edrington and Jim Beam. In these cases, IPOs may not be attractive to outside investors, because of the JV’s dependence on parent companies, and because the desire for control on the part of the parents is greater than could be obtained with public shareholders.
- There’s an easier, faster, better or more certain way to achieve the same objective. Taking a venture public introduces complexity and risks – and there are often better ways for the operating partners to achieve the desired objective. For instance, if a full exit is what is desired, it is often easier and faster to sell the venture outright to a third party, as Bechtel and Royal Dutch Shell did with their power utility JV Intergen. Likewise, if a potential IPO is seen as a way to raise capital to fund growth, expansion or restructuring, third party or parent borrowing may prove far easier. And if the primary motivation is to create long-term incentives for management, there are various approaches to create equity-like incentives, such as phantom equity, multi-year payouts, and so forth.
In many of these situations, especially where the JV has more value as a captive, or is highly integrated with parent company activities, the best buyer – if the JV is to be sold – is usually one of the parent companies (and not the public) – which fits with the historical pattern that 80% of JVs that terminate end in an acquisition by one of the parent companies.
We don’t think IPOs are suitable in all cases – but our analysis indicates that successful JV IPOs will be the result of decisive actions on strategy, operations, and governance by their Boards. Based on our assessment of JVs that successfully pursued IPOs, Boards and corporate parents that wish to create the option for a JV to go public, should put five building blocks in place that we will discuss in a later installment.
Read Part 2: How to Take a Joint Venture Public >>