Joint Ventures: Are they a viable alternative to a full merger or acquisition?

Posted on Wednesday, 24 March 2010. Filed under: Commentary, Mergers |

Much of the research and reporting in M&A get done about the headline-grabbing large acquisitions and mergers.  However, the unsung hero of corporate alliances are joint ventures.  But we expect to see more of these, including some very big JVs.  Note the announcement on 1 February of a $12 billion joint venture between oil companies Shell and Cosan.  The Telegraph, one of London’s leading daily newspapers, noted in their Sunday paper (21 March 2010) the need to consider alliances and joint ventures instead of acquisitions — citing the recent announcement by Prudential to acquire AIG’s Asian business and whether Resolution should do the same when planning for the next year.  You can see this in the three paragraphs at the end of the article here.

Liam Vaughan, of Financial News, in an article on 23 March, also commented on the study and linked it to the above-mentioned Royal Dutch Shell joint venture with Brazilian counterpart Cosan, and then wrote that ‘Shell’s Brazilian JV follows high-profile joint ventures in the telecoms and natural resources sectors, announced in the second half of 2009. In Septembers Deutsche Telekom and France Telecom announced a joint venture between their UK operations T-Mobile and Orange; and in October Rio Tinto and BHP Billiton ditched merger plans in favour of a 50-50 iron ore joint venture.’  His article can be found here (although do note that access to that article is by subscription).

Cass Business School, through its M&A Research Centre (of which I’m the Director) recently completed what we understand to be the largest global study ever of joint ventures and strategic alliances.  Together with the sponsorship and support of the law firm Allen & Overy, investment bank Credit Suisse, accountancy and advisor Deloitte and the Financial Times / Mergermarket, the M&A Research Centre looked at over 122,000 deals over a 24-year period from January 1985 to May 2009.

The full report is entitled ‘Sharing Risk:  A Study of Corporate Alliances’ and can be ordered here.  Some of the key findings include:

  • Historically, joint venture activity is highest in the recovery period following a major economic downturn.  This is very significant, as we have (hopefully!) recently entered such a period and therefore, if history is any indication, should be seeing greater use of JVs over the next several quarters.  This increase is over 20% higher than average levels.
  • Joint venture deals reduce the participating company’s risk.  These firms see their beta decline by 3.9% as a result of the announced deals, and following a major crisis (such as we’ve recently had), the decrease is larger at 6.2%
  • Overall, joint venture deals create value for participants’ shareholders both in the short- and long-term.
  • Some joint ventures are listed companies themselves.  These do demonstrate year-on-year improvement in a number of financial factors, including return on equity over a five year period.
  • However, most JVs don’t last that long.  Contrary to conventional wisdom, the average JV lasts around three years.  Fortunately, when the termination of the venture is announced, the owners are rewarded with an improved stock market reaction.

We also noted some factors of note for companies considering such alliances.  For example, don’t do a JV with too close a competitor, look for a partner who is similar in size and consider a JV if you are entering a new geographic market.  JVs are an excellent precursor to an M&A deal, probably as an example of ‘dating before getting married’.

Details about all the above findings, as well as additional findings, are available in the full report.

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