Companies may have to innovate their capital deployment procedures to stay ahead of the present-day enormous marketplace and economic disruptions. But those capabilities cannot always be scaled in-property or resolved through traditional mergers and acquisitions.
CFOs are increasingly using joint ventures to grow their companies while sharing risk and benefiting from optionality. Companies frequently use joint ventures to limit hazard publicity when they buy new belongings or enter new marketplaces. A recent EY survey of C-suite executives showed that forty three% of businesses are contemplating joint ventures as an alternative form of investment decision.
Even though businesses frequently change to classic M&A to spur growth and innovation over and over natural and organic choices, M&A can be tough in the present-day surroundings: potentially large money outlays with a limited line-of-sight on return, inconsistent marketplace development assumptions, or merely a increased threshold to apparent for the business enterprise scenario.
Companies may need to have to weigh the trade-offs between managing disruption and risk as they take into account pursuing a joint venture or alliance, specifically, (i) how disruption will facilitate differentiated development and (ii) the risk inherent in capital deployment when there is uncertainty in the marketplace. The responses to these concerns will assist inform the route forward (proven in the following graphic).
Balancing Current market Disruption with Uncertainty
Analyzing a JV
Agree on the transaction rationale and perimeter. A lack of alignment concerning joint venture associates about strategic objectives, aims, and governance structure may impact not only deal economics but also business enterprise effectiveness. No matter whether the hole is relevant to the definition of relative contribution calculations or each partner’s decision legal rights, addressing the issues early in the offer process can help achieve deal objectives.
Start due diligence early and with urgency. Do not undervalue the time and effort and hard work essential to get ready and exchange appropriate information with which your team is comfy. Plan for thanks diligence, as perfectly as likely reverse thanks diligence, to include not only financial and commercial components but also purposeful diligence aspects, such as human resources and information technology.
Define the exit strategy before exiting. While partners could exit joint ventures based on the accomplishment of a milestone or thanks to unexpected instances, the best exit opportunity should be predetermined prior to forming the composition. Reactive disagreements, arbitration, or litigation threats over the mechanisms of JV dissolution and asset valuation can result in not only economic but unnecessary reputational decline.
Launching the JV
Once both companies have navigated the worries of diligence, the significant lifting begins with standing up the entity. The CFO, critical in structuring the business’s economics, can also help ensure a successful close and realization of early-year objectives. Key areas of concentration involve:
Defining the route to worth generation. In joint ventures, value generation can come from reaching revenue growth and reducing costs through combining capabilities. Building alignment and commitment within just the organization and parent companies to realize the growth plan may be critical. Businesses that are unsuccessful to create value frequently do so because they (i) insufficiently plan, (ii) lose focus after deal close, or (iii) establish poor governance relevant to accountability and monitoring.
Developing the working model. A joint venture needs an operating model that combines the best capabilities of the partners while maintaining the agile nature of a startup. The combination can be tough to execute in a market that could have incumbent players with no incentive to encourage innovation or disruption. Companies often don’t invest enough time planning for three significant and relevant components: (i) defining how and where the venture will operate, (ii) the market, and (iii) the venture’s sell abilities. They should be synthesized into an working model and governance composition that complement each other.
Preserving the tradition flexible. A joint venture culture that adheres to historical affiliations with possibly or both dad and mom can inhibit how fast the business enterprise will accomplish development objectives, primarily in customer engagement and go-to-marketplace collaboration. Responding quickly to marketplace requirements and developing customer commitments require executives to rethink the optimal tradition for joint ventures versus how matters have ordinarily been carried out in the past.
An EY team recently helped an industrial producer and an oil and gasoline servicer form a joint venture that shared operational abilities from both parent companies to sell innovative, end-to-close alternatives to shoppers. The joint venture was also considered to have an early-mover advantage to disrupt an untapped and unsophisticated marketplace.
Just one company had the domain skills, and both businesses experienced a element of a new marketplace supplying. It would have taken each company more time to develop this marketplace supplying by itself. Each company’s objective was to strike a balance concerning managing the risk of going it alone with pinpointing a partner with a capacity that it did not possess.
By coming collectively, the companies were in a position to enter new shopper marketplaces, deploy new products strains, explore new R&D capabilities, and leverage a resource pool from the parent businesses. The joint venture also allowed for greater innovation, given the shared operations and complementary suite of solutions that would not have been accessible to possibly parent company without important investment decision or hazard.
The joint venture was in a position to function as a lean startup when leveraging two multibillion-dollar parent companies’ resources and expertise and reducing hazard for both parent companies to carry innovative solutions to the marketplace.
CFOs can participate in a significant position in assisting their companies pursue a joint venture, vet joint venture associates, and then act as an knowledgeable stakeholder across stand-up and realization activities. With continued financial and marketplace uncertainty, it may be especially critical for CFOs to identify options like joint ventures that can assist companies stay ahead of disruption, spur innovation, and manage risk.
Sonal Bhatia, is principal and Neil S. Desai a running director at EY-Parthenon, Ernst & Younger LLP. Special contributors to this write-up were Ramkumar Jayaraman a senior director at EY-Parthenon, Ernst & Young LLP, and Caroline Faller, director at EY-Parthenon, Ernst & Young LLP.
The views expressed by the authors are not automatically individuals of Ernst & Younger LLP or other associates of the international EY organization.