Joint Ventures: Driving Innovation While Limiting Risk

Companies may have to innovate their capital deployment approaches to stay ahead of the present massive current market and economic disruptions. But those capabilities cannot always be scaled in-property or dealt with through traditional mergers and acquisitions.

CFOs are ever more using joint ventures to grow their organizations while sharing risk and benefiting from optionality. Companies frequently use joint ventures to limit chance exposure when they buy new property or enter new markets. A the latest EY survey of C-suite executives showed that forty three% of corporations are considering joint ventures as an different form of investment decision.

Though corporations generally transform to conventional M&A to spur growth and innovation around and above natural and organic options, M&A can be challenging in the present surroundings: potentially large money outlays with a limited line-of-sight on return, inconsistent current market expansion assumptions, or merely a higher threshold to distinct for the business situation.

Balancing Trade-offs

Companies may need to weigh the trade-offs between managing disruption and risk as they consider pursuing a joint undertaking or alliance, specifically, (i) how disruption will facilitate differentiated expansion and (ii) the risk inherent in capital deployment when there is uncertainty in the current market. The solutions to these issues will assist inform the route forward (demonstrated in the following graphic).

  Balancing Current market Disruption with Uncertainty 

Assessing a JV

Concur on the transaction rationale and perimeter. A lack of alignment amongst joint undertaking partners regarding strategic aims, ambitions, and governance structure may impact not only deal economics but also business efficiency. Irrespective of whether the hole is associated 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 aims.

Sonal Bhatia, EY-Parthenon

Get started due diligence early and with urgency. Do not undervalue the time and hard work demanded to prepare and exchange appropriate information with which your team is comfy. Plan for owing diligence, as very well as prospective reverse owing diligence, to include not only financial and commercial components but also useful diligence aspects, such as human resources and information technological innovation.

Define the exit strategy before exiting. While partners may perhaps exit joint ventures based on the accomplishment of a milestone or owing to unforeseen situation, the suitable 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 final result in not only economic but unnecessary reputational decline.

Launching the JV

Once both companies have navigated the problems of diligence, the weighty 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 aim involve:

Defining the route to price generation. In joint ventures, value generation can come from reaching earnings growth and reducing costs through combining capabilities. Developing alignment and commitment in the business and dad or mum companies to understand the growth plan may be critical. Businesses that fall short to create value generally do so because they (i) insufficiently plan, (ii) lose focus after deal close, or (iii) establish poor governance associated to accountability and monitoring.

Developing the running design. 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 gamers with no incentive to encourage innovation or disruption. Companies often don’t invest enough time planning for 3 vital and associated factors:  (i) defining how and where the undertaking 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

Preserving the lifestyle adaptable. A joint undertaking culture that adheres to historical affiliations with both or both equally moms and dads can inhibit how speedy the business will reach expansion aims, in particular in customer engagement and go-to-current market collaboration. Responding rapidly to current market requires and developing customer commitments require executives to rethink the optimal lifestyle for joint ventures versus how issues have generally been completed in the earlier.

Circumstance Study

An EY team recently helped an industrial maker and an oil and gas servicer form a joint venture that shared operational capabilities from both equally parent companies to sell innovative, end-to-conclusion options to clients. The joint venture was also considered to have an early-mover gain to disrupt an untapped and unsophisticated current market.

One company had the domain skills, and both corporations had a part of a new current market presenting. It would have taken each company more time to develop this current market presenting by itself. Each company’s objective was to strike a equilibrium amongst managing the risk of going it alone with identifying a partner with a capacity that it did not have.

By coming collectively, the companies were being in a position to enter new buyer markets, deploy new merchandise traces, explore new R&D capabilities, and leverage a resource pool from the dad or mum corporations. The joint venture also allowed for increased innovation, given the shared functions and complementary suite of solutions that would not have been offered to both dad or mum company without important investment decision or chance.

The joint venture was in a position to function as a lean startup while leveraging two multibillion-greenback parent companies’ assets and expertise and minimizing chance for both parent companies to bring innovative solutions to the current market.

CFOs can perform a vital position in aiding their companies pursue a joint undertaking, vet joint undertaking partners, and then act as an knowledgeable stakeholder across stand-up and realization activities. With ongoing economic and current market 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. Exclusive contributors to this post were being 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 individuals of Ernst & Younger LLP or other associates of the worldwide EY business.

E&Y, EY-Parthenon, Joint Ventures, JV