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Digital transformation, green energy and e-mobility illustrate new strategic challenges that many business leaders face today. According to recent market surveys, one out of two companies plan for Joint Ventures or Alliances to master these challenges[1]. However, most deal-makers are not fit enough for alternative M&As.
That is because, since globalisation in the 1990s, Joint Ventures and Alliances have been primarily used only in a small number of specific industries, such as mining, gas and oil, aerospace and defence, or research-driven pharma. Outside these industries, the majority of today’s deal-makers have only very limited experience on how to master alternative M&As.
To ensure that Joint Ventures or Alliances can conduct their business as intended, deal-makers need to reach conclusive agreements not only on financial terms and conditions but also on the operational details of a partnership before closing. This is true regarding specific features of the partners‘ expected contributions, the required degree of their organisational integration as well as the termination of a partnership.
Different to traditional M&As, readjusting after closing is only possible when a unanimous consent of all partners can be reached. Alternative M&As, therefore, require an even higher level of operational detail and precision up-front than traditional M&As.
In determining the distribution of benefits, deal-makers need to analyse not only multiple value flows from a partnership to the partners (and vice versa) but also less transparent synergies that partners might realise. A thorough analysis of a partnering business case comparing it – if possible – to a stand-alone case needs to be done. In addition, deal-makers often cannot apply routine approaches to valuating the partners‘ contributions.
That is because, in many cases, the contributions to a partnership do not generate a distinctive stream of cash flows or have such unique characteristics that do not allow for market-based multiples. In alternative M&As, deal-makers, therefore, often need to know non-routine approaches and how to apply them.
The range of topics and the scope of tasks that deal-makers need to address in Joint Ventures and Alliances is much vaster than in traditional M&As. Besides mastering technical details, e.g. on voting, veto, nomination, and information rights, deal-makers often also need to moderate conflicting management styles and diverse corporate cultures in order to establish effective procedures for decision-making and appropriate mechanisms for conflict resolution. Tailoring the right structure for a partnership often requires deal-makers to complete the M&A mindset with a management perspective.
Partnering projects might appear similar to traditional M&A projects: both start when a preferred candidate is identified, and both end when a legally binding agreement is signed by the parties. However, in a partnering project, companies need to conduct additional tasks jointly developing the key elements of a partnership.
To conduct these joint key tasks successfully, companies typically need to be willing to make certain compromises in order to address potential concerns and sensitivities of a partner. Just following a standard corporate M&A process, therefore, cannot guarantee a successful partnering project. Only when deal-makers know how to master the specifics of alternative M&As can companies successfully apply Joint Ventures and Alliances to overcome the strategic challenges lying ahead.
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[1] For illustrative market studies, see:
Co-author
Jürgen Wippel
Lecturer
Jürgen Wippel has over 30 years of experience in finance, controlling and M&A. In his professional career at BASF, he has managed numerous M&A projects focusing on joint ventures and the carve-out of a division with international activities in the affected area. Jürgen Wippel studied business administration at the University of Mannheim and the University of Oregon, U.S.A. He is a tax consultant and worked for several years as a lecturer in M&A at Esslingen University of Applied Sciences.
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