With joint ventures and partnerships exploding in the last two years, many companies wonder what they can expect when it comes to timelines. We analyzed closing timelines to offer some fact-based guidance on this topic.
DECEMBER 2022 — Joint ventures and partnerships have exploded in the last two years, up almost 200% from historic norms. There are many reasons why corporate collaboration is having a moment. The biggest relate to pressures to innovate and reinvent business models to become more sustainable or digital.
In industries as diverse as automotive, chemicals, consumer, energy, and financial services, such transformations are often best enabled through partnerships between firms with complementary technologies and capabilities. The Siemens-AES joint venture in energy storage is one prominent example. So too is the Sony-Honda joint venture to create a new brand of electric vehicles and mobility services. The raft of offshore wind, green hydrogen, and carbon capture joint ventures offer other examples. Full acquisitions or organic growth are more expensive or slower.
"*" indicates required fields
Against this backdrop, companies often wonder when to announce a new JV or partnership, and how long it will take to actually get the deal done. We looked at 394 material JVs announced globally between 2018-2020, analyzing their closing timelines to offer some fact-based guidance on this topic.
We found 77% of JV transactions were announced only once partners had a signed binding agreement, while 23% heralded more preliminary JV discussions or interim agreements (Exhibit 1).
© Ankura. All Rights Reserved.
While not surprising that most companies announce a JV once they have a binding agreement in hand, there are often good reasons why firms may wish to announce earlier. These include providing deal momentum, cementing partner commitment, or signaling progress to investors or other external stakeholders. Recently, we have also seen a flurry of early-stage deal announcements as companies rush to demonstrate commitment to environmental, social, and governance (ESG) issues through sustainability-related JVs.
Interestingly, when we look at how stock markets react to JV announcements of public companies, we find no significant difference in abnormal share price returns between binding and preliminary agreements. This suggests that markets don’t assign sufficient probability to preliminary deals not reaching the finish line. Or it might mean that when companies announce preliminary partnership discussions or non-binding agreements, they are more likely to do so when these potential partnerships are in hot new market segments or herald business model transformation – and thus the stock market’s disproportionate enthusiasm counterbalances the risk of non-closing.
Nonetheless, companies should tread carefully when announcing at this earlier stage. The percentage of JVs failing to close following announcement of a preliminary stage deal increases to 33% compared to 20% for JVs announced later at the signing of binding agreements. JVs announced earlier fail to close due to a range of factors. These include late discoveries of partner incompatibility, competing views of how to access the opportunity, and shifts in the regulatory or political environment. JVs announced later typically derail due to fundamental shifts in the market environment. For instance, in October 2019, Ford signed agreements to set up a JV with Mahindra that would develop low-cost SUVs in India. Unexpectedly, significant changes to the global business environment caused by the COVID-19 pandemic forced the companies to call off the deal in early 2021.
JV closing timelines are materially longer than those of traditional M&A, which take an average of 38 days to finalize post-announcement, according to research firm Gartner. The median number of days from announcement of a signed binding JV agreement to closing was 232 days and 363 days from the announcement of a Memorandum of Understanding (MoU) or equivalent to closing. Many factors may drive this “slow motion close.” One is a tendency to conduct integration planning after concluding due diligence and deal structuring – rather than in parallel, as is typical in M&A. Another is a lack of an investment bank to drive a transaction process infused with competitive tension and pre-agreed milestones. JV transactions also suffer from episodic attention from corporate boards and leadership teams in ways not found in M&A once deals are signed.
Also, unlike dedicated M&A teams that develop negotiating skills over multiple deals, JV teams tend to change from deal to deal, creating little institutional memory around key processes.
Companies wanting to accelerate the JV and partnership transaction timeline should establish clear negotiating “red lines.” They should also ensure the deal team is well-resourced, has a clear mandate and business sponsorship on both sides, and is working against clear approval gates and milestones. Companies should also “go slow to go fast” – spending time upfront to agree upon overarching principles and evaluating alternative deal concepts, rather than diving straight to the drafting of detailed legal agreements, which paradoxically slows down the process, as such a rush often lacks needed alignment among the counterparties.
~~~
While companies are often eager to announce and close JV transactions, our data shows it’s not that simple or quick. Knowing this can help companies set more realistic timelines. But more importantly, knowing the risks of a slow meandering close can help companies bring more sustained executive focus, resources, and discipline to JV transactions to make the process go faster.
We understand that succeeding in joint ventures and partnerships requires a blend of hard facts and analysis, with an ability to align partners around a common vision and practical solutions that reflect their different interests and constraints. Our team is composed of strategy consultants, transaction attorneys, and investment bankers with significant experience on joint ventures and partnerships – reflecting the unique skillset required to design and evolve these ventures. We also bring an unrivaled database of deal terms and governance practices in joint ventures and partnerships, as well as proprietary standards, which allow us to benchmark transaction structures and existing ventures, and thus better identify and build alignment around gaps and potential solutions. Contact us to learn more about how we can help you.
