Use of Joint Ventures to Ease the Pain of Restructuring

By Ashish Nanda & Peter J. Williamson

Article presented by: Group 7 Anupam Lav Vivek Rokade

Why the need for a JV?

Large corporations wish to refocus their portfolio

Downfall is to exit businesses that might be high potential but are underperforming They are deprived of regular & quality management as well as corporate cash Huge investments of time and money necessary to develop them are not justifiable

Such businesses are a non core activity of the corporations & hence

The solution cleverly undertaken by cos. Like Philips & Honeywell is to restructure

The Philips Whirlpool case

Philips, in the 1980s, identified that the $1.55 billion domestic appliances business was no longer essential to its future Problems associated were

Supporting 9 different brands

Uncoordinated Sales & Distribution between brands as well as countries Inefficient use of production capacity across 10 plants located in 5 countries

Going for an outright sale of the division would have fetched a fire sale price Management could still see both tangible & intangible assets in the business

Underutilized manufacturing capacity

World class design expertise

Pan European distribution network 2nd only to Electrolux

How to go about such a JV?

Look for a partner who is wanting to enter the field you intend to exit Coincidentally, Whirlpool was exploring options to enter the European market It felt that it could radically alter the cost structure of the business by

Sourcing components globally Coordinating production, sales & distribution across countries and product lines

Whirlpool was unsure of acquiring the domestic appliances division of Philips because

Concerns regarding the strength of the franchise Loyalty of stakeholders in light of the massive change Time and money needed to turnaround the business to a lean and focused one

The Solution

Whirlpool is offered a 53% stake in the Joint Venture at a cost of $381 million with the rest owned by Philips Whirlpool also has the option to buyout Philips 47% stake within 3 years Benefits for Whirlpool

Learn about the ground realities of the division Initiate improvement plans before taking over completely Philips management to be available as a sounding board Sharing of resources for e.g. Philips IT sytems Piggyback on a successful brand Branding products as Philips-Whirlpool intially A smooth exit on favorable terms and completing the sale at a higher value

Benefits for Philips

Benefits of Such Joint Ventures

Stakeholders stay engaged & committed

An announcement of sale could a stroke a wave of uncertainty in the organization Customers & Distributors worry about after sales services and support

Vendors could tighten credit terms and relax delivery and service standards
Investors go on a selling spree

The case of Ciba-Corning also shows how this was achieved Corning wanted to exit the pharmaceutical business and Ciba was seeking to enter the US market A 50-50 JV was formed in 1985 with Ciba paying up $75 million

Both partners worked towards making the JV successful and Ciba eventually bought the rest of the stake for $150 million in 1989

Benefits of Such Joint Ventures

The unknown becomes known

The buyer gains an understanding of the business which is inaccessible in case of a sale An assessment of the true value of the intangible assets like distribution networks, people and systems is made possible The possibility of landing with a lemon is reduced

Maytag Corp. , a US white goods manufacturer, bought Chicago Pacific Corp that owned Hoover Appliances in 1989 to enter the European market The management later realized that the two markets were vastly different . A lack of proper transition and information exchange proved costly as the company was disposed off bearing a $130 million loss in the process

Benefits of Such Joint Ventures

Buyer receives continued managerial and technical inputs from the seller

Outright purchases signify the umbilical cord from the parent is cut right away A JV allows access to the parents brand equity, assets, systems and processes

The restructurer tutors the buyer to better the performance of the JV so that when he exits the business the returns are higher
In case of a sale information asymmetry exists The seller withholds information lest it turns the deal sour and drive the buyer away!

In case of Ciba-Corning, Cornings staff was actively involved in introducing Ciba to all the stakeholders and make them comfortable with Ciba. Customers, distributors and vendors remained loyal to Ciba even after it Corning left.

Deciding When a JV makes Sense

The nature of Restructuring Problem

Disentangling a business from the systems and structures of parent is complex and slow In vertical integrations

Where businesses share facilities , systems,personnel , JV provides a smooth and gradual separation.
Example : Dresser-Komatsu JV in construction business.

When important assets are intangibles

Consumer franchises,Distribution relationship,human resources,systems Example : IBM-Siemens JV for Rolm System (PBX)

Deciding When a JV makes Sense

The Goals of the Buying Partner

JV requires attention , so asset stripes are not interested in JV. More relevant to buyer that plans to apply own assets and skills in nurturing the business as it learns about it.

Example Honeywell- Groupe Bull JV (mainframe computer business)

Minimizing the burden on Management

JV requires more management time and attention than single ownership

Communications often are duplicated Contradictory signals from the parties involved has to be resolved

Minimizing the Burden without reducing the effectiveness

Ensuring goal alignment Bridging cultural divide Selecting staff who can manage effectively without an elaborate org framework

Negotiating the Deal

Acknowledging the business's under-performance and estimating its potential

Seller should focus be on potential , what it could have achieved . Buyer should be skeptical of these hidden potential claims

Sharing financial stakes while shifting management control

Advantage is when ownership is equally shared with buying partner but management control is ceded immediately. Initial share % the buyer seeks signals it's long term intentions .

Planning for the termination of the venture

Termination triggers are often left with buyers. A smooth termination is better for both the parents.

Thank You !