JANUARY 2022 — No one thinks twice about asking for detailed due diligence before spending vast sums to acquire existing assets or an entire business. After all, investors and corporate board directors alike tend to frown upon management teams that pay a premium in return for inflated sales projections, questionable accounting practices, dysfunctional teams and cultures, and surprise exposure to financial, legal, and reputational risk.
Strange, then, that in our experience some joint ventures (JVs) – which can rival mergers and acquisitions (M&As) in terms of value at stake and potential corporate risk exposure – do not seem to merit the same focus on due diligence. Many companies approach due diligence on potential JV partners as a perfunctory exercise at best, while others seem keen to avoid it altogether – as if partial ownership somehow insulates a company from things going sideways.
It does not.
If anything, we believe due diligence is almost more important in a JV context. Due diligence on a full acquisition is a relatively straightforward process centered on “should we do this deal” and “at what price,” and companies making a mistake in the process have the post-close control to salvage the value of their investment through wholesale change.ge.
Meanwhile, companies that find themselves trapped in a JV with misbehaving partners have limited options beyond exiting, if exiting is even an option. Regulators have made clear ignorance is no excuse and will hold JV partners accountable for bad behavior that appropriate due diligence should have discovered. Good JV due diligence does not just answer whether to do the deal – it helps dealmakers decide how to do the deal in ways that reflect partner strengths and JV weaknesses in governance and operating model design.
This should drive JV dealmakers to place a premium on making sure they know their partner(s) inside and out before saying yes, especially if a partner will be in control.
HOW ANKURA CAN HELP
Our philosophy on JV due diligence is to give JV dealmakers the actionable insight they need to structure the right deal with the right partner. We bring distinctive experience in anti-money laundering, anti-bribery and corruption, financial auditing, cybersecurity, and deep background investigations, backed by experience structuring thousands of JVs across geographies, industries, and partner types, to help you understand what to do with what you find.
Our approach is to go beyond basic questions and document review in search of the real on-the-ground truth, leveraging proprietary databases, extensive experience screening public records and lesser-known sources, and access to discreet local sources in the Our approach goes beyond basic questions and document review in search of the real on-the-ground truth, leveraging proprietary databases, extensive experience screening public records and lesser-known sources, and access to discreet local sources in the partner, its community, and relevant subject-matter experts. We do this in ways that exceed traditional M&A due diligence, including (Exhibit 1):
- Strategic Partner Due Diligence: We help you to truly know your partner(s) from the inside and understand how they are perceived by others, providing a deep understanding of their strategy, interests, and objectives, experience as a partner in other ventures, and reputation with key stakeholders. We also help you build a complete picture of the ownership, control, and connections of the partner and key employees – ensuring full visibility into the presence of sanctioned individuals, politically exposed individuals, and others with risky backgrounds – before they end up as directors on your JV board or officers on your JV management team.
- Financial Due Diligence: We provide insight into the financial opportunities, challenges, and risks associated with a potential partner, covering the accuracy of historical financial statements, the quality of financial and accounting functions, and the ownership and history of key assets targeted for inclusion in the JV. We also provide you with confidence the partner has the overall financial health to meet current and future capital obligations to the JV without violating existing debt covenants or contractual limitations.
- Technical and Operational Due Diligence: Our data, technology, and operational experts help you understand the potential partner’s digital and technological capabilities, the quality of key business functions, and the resulting ability of the partner to deliver promised people, services, and other support to the venture.
- Cultural Due Diligence: Our team of experts helps our clients assess the business culture, values, and ethics of a potential partner to ensure the cultural integrity of any JV remains intact – and to understand differences that must be bridged in talent management, career development, internal communications, and other key corporate interfaces.
- Environmental, Social, and Governance (ESG) Due Diligence: We help you understand the ground truth in how your partner manages health, safety, environmental, and community risks – and whether they pay lip service to the issues or truly manage issues, such as anti-bribery and corruption or human rights, in ways that are both effective and aligned with documented procedures. As part of this review, we will help you understand the current regulatory environment and legal exposure / actions against your potential partner, whether there are any antitrust or anti-competition issues and whether they have both regulatory and social licenses and permits to operate.
Exhibit 1: JV Diligence Focus and Differences from M&A
 Strategic Partner Due Diligence |
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 Financial Due Diligence |
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 Technical and Operational Due Diligence |
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 Cultural Due Diligence |
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 ESG Due Diligence |
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Our JV due diligence approach also calibrates the areas of focus and levels of depth for the kind of JV under consideration (Exhibit 2). For example, consolidation JVs combining existing assets need financial due diligence comparable to an M&A transaction, requiring confidence with the valuation of the assets and the underlying financial statements. By contrast, greenfield JVs, launching a new business from the ground up, require less focus on partner financial statements and more effort on understanding the quality of partner contributions and the relative capability of each partner to provide key functions and services to the JV.
Exhibit 2: Different Due Diligence for Different JVs
Consolidation JVs |
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Description:
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Buy-In JVs |
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Greenfield Start-Up JVs |
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Description:
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Non-Equity Partnerships |
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Description:
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© Ankura. All Rights Reserved.
Companies interested in raising their game on JV due diligence can leverage our capabilities in a variety of ways:
- End-to-End Process: We can run an entire JV due diligence process, leveraging our proprietary capabilities and experience to give you an outside, independent view on your potential partner’s strengths and areas of concern – and what that means for how you structure your JV.
- Targeted Support: If you have an area of concern when dealing with an unfamiliar partner type, industry, or geography, we can amplify your existing JV due diligence process with targeted support using a subset of our skills (e.g., a forensic audit or a cybersecurity assessment).
- Capability Building: We can leverage our experience to help you design a bespoke internal JV due diligence capability, whether for a single material transaction or as part of a broader corporate process that can be tailored and scaled for different scenarios.
To talk more about the right due diligence for your JVs, contact James Bamford or Josh Kwicinski.
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