Joint Ventures: Driving Innovation While Limiting Risk
Companies may have to innovate their capital deployment methods to remain ahead of the current significant industry and economic disruptions. But those capabilities cannot always be scaled in-residence or resolved through traditional mergers and acquisitions.
CFOs are significantly using joint ventures to grow their companies while sharing risk and benefiting from optionality. Companies frequently use joint ventures to limit risk publicity when they buy new property or enter new markets. A current EY survey of C-suite executives showed that forty three% of companies are contemplating joint ventures as an substitute variety of expense.
When companies typically flip to traditional M&A to spur growth and innovation over and previously mentioned natural possibilities, M&A can be difficult in the current environment: potentially large capital outlays with a limited line-of-sight on return, inconsistent industry progress assumptions, or merely a greater threshold to obvious for the small business circumstance.
Balancing Trade-offs
Companies may will need to weigh the trade-offs between managing disruption and risk as they look at pursuing a joint enterprise or alliance, specifically, (i) how disruption will facilitate differentiated progress and (ii) the risk inherent in capital deployment when there is uncertainty in the industry. The solutions to these concerns will aid inform the route forward (demonstrated in the following graphic).
Balancing Marketplace Disruption with Uncertainty
Analyzing a JV
Agree on the transaction rationale and perimeter. A lack of alignment amongst joint enterprise partners relating to strategic targets, ambitions, and governance structure may impact not only deal economics but also small business performance. Regardless of 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 targets.
Sonal Bhatia, EY-Parthenon
Start due diligence early and with urgency. Do not underestimate the time and effort demanded to get ready and exchange appropriate information with which your team is snug. Plan for due diligence, as properly as probable reverse due diligence, to include not only financial and commercial components but also functional diligence aspects, such as human resources and information technology.
Define the exit strategy before exiting. While partners may perhaps exit joint ventures based on the accomplishment of a milestone or due to unforeseen situations, the best exit opportunity should be predetermined prior to forming the framework. Reactive disagreements, arbitration, or litigation threats over the mechanisms of JV dissolution and asset valuation can result in not only economic but unnecessary reputational reduction.
Launching the JV
Once both companies have navigated the worries of diligence, the hefty 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 target consist of:
Defining the route to price development. In joint ventures, value development can come from accomplishing income growth and reducing costs through combining capabilities. Building alignment and commitment in just the firm and guardian companies to know the growth plan may be critical. Providers that are unsuccessful to create value typically 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 running model. A joint venture needs an operating model that brings together 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 gamers with no incentive to encourage innovation or disruption. Companies often don’t invest enough time planning for three important and relevant elements: (i) defining how and in which the enterprise will operate, (ii) the market, and (iii) the venture’s sell capabilities. They should be synthesized into an running model and governance framework that complement each other.
Neil Desai, EY-Parthenon
Trying to keep the lifestyle flexible. A joint enterprise culture that adheres to historical affiliations with possibly or both of those mom and dad can inhibit how quickly the small business will obtain progress targets, specifically in customer engagement and go-to-industry collaboration. Responding promptly to industry desires and developing customer commitments require executives to rethink the optimal lifestyle for joint ventures versus how factors have ordinarily been completed in the previous.
Scenario Analyze
An EY team recently helped an industrial manufacturer and an oil and fuel servicer form a joint venture that shared operational capabilities from both of those parent companies to sell innovative, end-to-finish remedies to consumers. The joint venture was also considered to have an early-mover advantage to disrupt an untapped and unsophisticated industry.
1 company had the domain know-how, and both companies had a element of a new industry presenting. It would have taken each company more time to develop this industry presenting by itself. Each company’s objective was to strike a stability amongst managing the risk of going it alone with figuring out a partner with a functionality that it did not have.
By coming jointly, the companies ended up equipped to enter new customer markets, deploy new product traces, explore new R&D capabilities, and leverage a resource pool from the guardian companies. The joint venture also allowed for increased innovation, given the shared operations and complementary suite of solutions that would not have been readily available to possibly guardian company without important expense or risk.
The joint venture was equipped to function as a lean startup even though leveraging two multibillion-greenback parent companies’ resources and expertise and reducing risk for both parent companies to convey ground breaking solutions to the industry.
CFOs can engage in a important part in aiding their companies pursue a joint enterprise, vet joint enterprise partners, and then act as an knowledgeable stakeholder across stand-up and realization activities. With continued economic and industry uncertainty, it may be especially critical for CFOs to identify options like joint ventures that can aid companies stay ahead of disruption, spur innovation, and manage risk.
Sonal Bhatia, is principal and Neil S. Desai a handling director at EY-Parthenon, Ernst & Young LLP. Distinctive contributors to this report ended up Ramkumar Jayaraman a senior director at EY-Parthenon, Ernst & Young LLP, and Caroline Faller, director at EY-Parthenon, Ernst & Young LLP.
The sights expressed by the authors are not necessarily those people of Ernst & Young LLP or other users of the global EY firm.