The use of joint ventures and other types of partnerships are increasing as companies try to reposition themselves for a digital-first and resource-constrained future, but if you don’t spell out upfront how to manage, restructure and exit the venture, you’re making problems for yourself down the road, partnership specialists say.
Established companies have been jumping into joint ventures at an increasing clip, driven in part by the increasing importance of what’s known as the circular economy – the forward-looking business environment built around reuse as a way to manage dwindling resources.
“The circular economy, it’s a real thing,” Kimberly Caccavaro, lead counsel for corporate development at GM, said in a webcast. “Everybody’s interested in that. Everyone wants to learn to reuse and recycle, and we’re facing the same thing in our industry.”
IP, resource access
To capitalize in this environment, established companies like GM and LyondellBasell, the chemical giant, are forming ventures with small, often early-stage companies, to tap into their intellectual property or important natural resources like car battery lithium if they control access to that.
“When you’re [managing through] big global changes like that, you like to partner with folks to share some of the expense,” said Caccavaro, “and you get better ideas coming out when two partners come together and you have a vested interest.”
Not only are they able to access the IP and natural resources quicker and at less cost and risk, they’re able to circumvent the stiff competition that characterizes the M&A market today.
“The multiples companies have to pay to expand through acquisitions [are] enormous,” said Gibson Dunn Partner Stephen Glover, whose clients have faced competitive offers from dozens of companies when they try to acquire some companies.
Venture surge
Against this backdrop, both new and restructured joint ventures have mushroomed, according to data by Ankura, a consultancy that helps companies enter into, restructure and exit joint ventures.
New transactions were up 173% last year from the year before and there’s been a similar rate of growth so far this year, the data shows, and restructurings of partnerships have increased at a similar rate.
French energy giant Total, for example, entered into 73 joint ventures and undertook 43 restructurings in recent years, according to the data, and Shell entered into 54 deals and restructured 56.
“The increase speaks to disruption in many industries,” said James Bamford, a senior managing director at Ankura.
Agreement structure
The rush into ventures comes with its own headaches if you don’t think through how to do it, said the specialists.
It was common 20 years ago to negotiate deals that left unanswered questions that you don’t want to leave unanswered today, like the scope of responsibility for each side, how to escalate conflicts to a resolution, when to undertake a restructuring and what would trigger, and how to manage, an exit.
“Not only do you want to know how you’re going to work together and what the expectations of each party are, you also want to know how to exit, because that can really freeze a business,” said Caccavaro.
LyondellBasell has a policy of looking at its joint ventures on a six-month or annual basis to see if changes in the agreement are needed to get the value they were hoping for.
“I’ve seen a lot of calories spent arguing, ‘You’re supposed to do that; no, you’re supposed to do that,’’' said Pat Rooney, director of strategic planning and transactions at LyondellBasell.
GM recently exited a 20-year joint venture that had little in the agreement for sorting out these kinds of questions.
“Essentially we were locked in a JV where the partner wasn’t really providing very much support anymore,” said Caccavaro. “We were really doing the work, but the partner was still entitled to its share of revenue and distributions.”
Getting out of the deal was harder than it otherwise would have been since nothing about exiting was spelled out. “Taking deep breaths and remaining calm tends to always win in the long run,” she said.
Multi-year process
It can easily take more than two years to exit a venture, from the time the decision is made until the separation agreement is signed, said Peter Daniel, a senior managing director at Ankura. That highlights the importance of building in restructuring and exit terms upfront.
“With a wholly owned business, you can usually just decide to go forward,” said Daniel. “But in a JV context, any change usually involves quite a bit of negotiation.”
“Wearing my lawyer’s hat, if you have a set of documents that provide a framework for how that discussion takes place, you’re in a much better position than you are if you got to reference the agreement that doesn’t address any of this, because 20 years ago they often didn’t,” said Glover. “That’s a much harder discussion, because there’s no framework that helps you figure out what the starting points are and what the rights of the parties are.”
