Joint Ventures & Partnering InSight

Transcription

1 Joint Ventures & Partnering InSight March 2017 joint ventures minority stakes strategic alliances consortia Key Topics Current Trends in Partnering AsiaPac Region has 50% of all Joint Venture transactions JVs and Partnerships in China Exciting Growth Possibilities, and Unusual Challenges New style flexible contract key to success Advancing Collaboration in Aerospace & Defense Local content requirement is key driver of Joint Ventures Q&A with Dr. Marc van Grondelle, Head of Lincoln s JV&P Advisory Team Brings 20+ years of experience operating Joint Ventures Current Trends in Partnering There is no sign of a slowdown when it comes to using joint ventures (JVs) and partnerships to accelerate the growth of businesses, with between 2,500 to 3,000 new JV transactions recorded each quarter from February 2016 February The opportunity for co-sharing risk and return continues to be popular, with some interesting trends emerging. Over the past year, the Asia Pacific region has accounted for around half of all classic JV transactions (fig.1). South Korea, India, Malaysia and Indonesia in particular are 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% seeing more JVs, as investors see attractive returns from entering these markets. Whereas in the past many of these markets were dominated by local conglomerates which preferred to do business with each other rather than with outsiders, the need for growth and technology modernisation is creating scope for foreign players, with more advanced technologies, products and platforms, to attract large local partners. Fig.1: Regional Split Of JV Transactions (Feb16 Feb17) 52% 50% 52% 51% 48% 30% 31% 30% 31% 32% 8% 9% 9% 9% 8% 5% 8% Q Q Q Q Q Asia / Pacific Europe United States and Canada Africa / Middle East Latin America and Caribbean Source: CapIQ data including (i) Acquisition of JV, (ii) Acquisition of JV interests, (iii) Acquisition of JV partner, and (iv) Creation of Joint Venture from February 2016 February 2017.

2 Lincoln International is pleased to launch its first issue of JV&P InSight. If you have any queries, feedbacks, or questions, please contact one of our JV&P professionals below: The recent poor performance, publically announced by Audi s Chinese JV with China FAW Group Corporation goes to show that a large budget does not necessarily mean success within the Chinese market, especially if you get architecture of the JV, and perhaps the local, cultural, dynamic wrong. Audi s plans to launch a second dealership network with the State Administration for Industry and Commerce (SAIC), outside of its existing JV with FAW, shocked FAW and its network of dealers, with the dealers claiming it would harm them. Negotiations are ongoing between Audi, FAW, and dealers. Fig.2: Q1 Classic JV Transactions by Industry (Dec16 Feb17) 8% 5% 3% 22% Consumer Staples and Discretionary Industrials TM T Financials 10% 12% 18% Materials Real Estate Healthcare Energy 17% Utilities Dr. Marc van Grondelle Managing Director MVanGrondelle@ Emma Blackley Director EBlackley@ Lauren Sharp Vice President LSharp@ Source: CapIQ data screening of (i) Acquisition of JV, (ii) Acquisition of JV interests, (iii) Acquisition of JV partner, and (iv) Creation of Joint Venture from December 2016 February JVs and Partnerships in China Exciting Growth Possibilities, and Unusual Challenges Our JV&P team is supporting various U.S. and European companies in China. This issue of our Joint Venture & Partnering (JV&P) InSight takes a deeper look at a newly forming technology JV in China. Here, a Western service company needed help in the negotiation and operational set-up of a technology JV with a major corporation in China. The client needed to overcome several challenges, common to those operating for the first time in the unfamiliar and very different Chinese market. Client Issues: Insufficient management bandwidth and experience Over-reliance on contracts Limited relationships with and knowledge of the Chinese partner senior executives and influencers Little focus and no joint working on the JV operating model, roles and contributions A strong desire to push forward swiftly to sign a deal, within a tight time frame Our Solution: Developed practical ways to ensure protection of IP, extraction of cash payments and a sufficiently detailed and controlled operating model Recommended a flexible contractual arrangement and accompanying implementation tactics, designed to play to the partner s likely objectives in the prevailing market and political context Persuaded the client s Board to invest more time and resources to plan and support implementation, including using Lincoln s specialist JV&P advisors to save time and money in getting to a successful launch Result: The new-style contract was accepted in principle The implementation details are being quickly and efficiently created by the Joint Implementation Committee we recommended The JV is proceeding towards completion Joint Ventures & Partnering InSight 2

3 Advancing Collaboration In A&D Many leading A&D companies use JVs 85 A&D JVs announced changes in the last year However, many A&D JVs are not publicly announced Now we will take a closer look at collaboration in the Aerospace & Defense (A&D) industry, and why it seems to be moving beyond traditional JVs and towards a range of new, and more innovative, collaboration arrangements. Recent examples include a non-exclusive licensing arrangement between GE and SKF to grow the market for active magnetic bearing technology, and a strategic agreement between UTC Aerospace Systems and VAS Aero Services to increase the overall quality of their combined service offerings. Many of our A&D clients are facing the need to develop new, less traditional, business models to accelerate growth and remain competitive on a lower cost base, as Fig.3 (overleaf) shows. There are several reasons for this, including: 1. Tighter military budgets in traditional markets, leading defense contractors to seek customers in new markets Growth markets for defense companies and their suppliers include countries such as Saudi Arabia, India, South Korea and Japan, where we are seeing more collaborations between international firms as they seek to compete effectively and secure demanding contracts. The newly elected U.S. administration s declared aim of strengthening the nation s military will be closely watched by the industry. Partnerships will be required to deliver capability at a reduced unit-cost-perplatform basis. 2. Contractors are increasingly compelled to build long-term partnerships with local businesses Companies now need to demonstrate commitment to the local military and industrial base, AND a willingness to transfer technology and skills. For example, Boeing, Rolls-Royce, RUAG, BAE Systems, Dassault and Thales have all established recent collaborations in India, hoping to participate further in one of the world s fastest growing economies. Rockwell Collins has formed multiple JVs in China to grow its market share through long-term technology-focused partnerships. Increasingly stringent requirement for offset deals by foreign governments, making local partnerships essential. 3. Cost control through JVs, partnerships and collaborations Increased competition, lower commodity prices and tighter government budgets are pinching military spending. Companies must be cost-competitive when seeking entry into new markets and often team up with local partners to build cost optimization strategies (e.g. localized procurement to lower labor costs and sustain supply chain savings). 4. Research & Development (R&D) and Intellectual Property (IP) collaboration to develop new products & share future value The A&D market is demanding innovation across the product / platform spectrum, driven by the desire for greater efficiencies (e.g. fuel), improved performance, enhanced passenger experience, etc. In select cases, Original Equipment Manufacturers (OEMs) and suppliers are partnering to develop new technologies and share in new value streams, particularly in the aftermarket, where one and one can be three if a partnership is carefully constructed. Joint Ventures & Partnering InSight 3

4 Rationale for Initiating A&D Collaborations 1 Satisfy customers / regulators through local activity, e.g. offsets, customer Maintenance, Repair and Operations (MRO) 25% 61% Pursue lower costs / economies of scale, e.g. via consolidation R&D & commercialisation of new products Source: SDC Data, 2015 Industrials (which includes the A&D industry) contributed the highest number of JV transactions during the last quarter (Dec16 Feb17), at 18%. This was closely followed by Information Technology at 1 perhaps no coincidence given the increasing collaboration between these two industries. Our A&D clients are telling us that partnering with new, fast-moving technology businesses helps create product and platform innovation and differentiation. In summary, collaboration is on the up in the A&D industry. We expect this to continue over the next few quarters with increased cross-border activity in high growth countries and continued growth in R&D and innovation-oriented partnerships, especially around technology. Q&A with Dr. Marc van Grondelle, Head of Lincoln s JV&P Advisory Team We talk to Dr. Marc van Grondelle about his JV and partnering experience, and his view on current partnering trends. 1. How did you become a specialist in JVs and partnerships? As an oil industry exec at Shell International, I was continuously exposed to JVs and partnerships. And I saw that not all of them were going as planned. I decided to specialize in making them work, and I have been doing JVs and partnerships all over the world ever since, from India to China, and from Africa to Kazakhstan. 3. In your experience, what are the commonest challenges encountered in the creation of new JVs or partnerships? I often see too much emphasis on doing the deal, huge focus on the legalities, and insufficient time and attention given to the practical operational requirements of setting the partnership up for success from day one. 2. There is a lot of JV and partnering activity in the Asia Pacific region at the moment (see page 1). Why do you think this is? Many corporates, PE houses and funds wish to tap into the higher growth rates in Asia. However, an all-out acquisition may not be possible, either legally, politically or practically. It may also, on occasions, not be desirable. Carefully selecting the Asian partner, and structuring a robust and appropriate partnership, is the key to unlocking value and growth. Achieving this is less easy than it sounds. Well scoped and executed due diligence and successful negotiation depend, to a great extent, on cultural awareness and practical, operational experience. In our experience, these can be in short supply, which is, of course, where we come in. 4. How does the JV&P Advisory team at Lincoln help clients avoid such pitfalls? Our specialist team combines decades of global experience in JVs and other partnerships with Lincoln s unparalleled global network of industry groups, which means we can source the right partner as well as identify and structure the optimal form of partnership deal. If clients have existing underperforming JVs and partnerships, we can usually sort those out too, based on our experience, without the need for an expensive, risky, and valueeroding re-negotiation. It is often insights from these projects where things have not gone so well, which we are able to share with those embarking on new JVs and partnerships. Joint Ventures & Partnering InSight 4

5 Global Industry Groups Aerospace & Defense Automotive & Truck Building & Infrastructure Business Services Chemicals Consumer Distribution Electronics Energy & Power Financial Institutions Food & Beverage Healthcare Industrials Packaging Technology & Media About Lincoln International Lincoln International specializes in merger and acquisition advisory services, debt advisory services, private capital raising and restructuring advice on mid-market transactions. Lincoln International also provides fairness opinions, valuations and joint venture and partnering advisory services on a wide range of transaction sizes. With seventeen offices in the Americas, Asia and Europe, Lincoln International has strong local knowledge and contacts in key global economies. The firm provides clients with senior-level attention, in-depth industry expertise and integrated resources. By being focused and independent, Lincoln International serves its clients without conflicts of interest. More information about Lincoln International can be obtained at Lincoln s Global JV & Partnering Team - Contacts Dr. Marc van Grondelle Managing Director mvangrondelle@ Emma Blackley Director eblackley@ Lauren Sharp Vice President lsharp@ Global Locations Amsterdam Beijing Chicago Dallas Frankfurt London Los Angeles Madrid Milan Moscow Mumbai Munich New York Paris São Paulo Tokyo Vienna Zurich Advisory Services Mergers & Acquisitions Debt Advisory Special Situations JV & Partnering Valuations & Opinions Disclaimer This document contains significant assumptions and has been prepared based on publicly available information, or additional information supplied by the owners and/or managers of the company(ies) described in this document, which has not been independently verified. Accuracy and completeness of the information provided has been presumed and, therefore, its content may or may not be accurate and complete. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information or statements made in this document and Lincoln International, its affiliates, directors, officers, employees and representatives expressly disclaim any and all liability with regards thereto. This document has been prepared for informational purposes only, is not a research report (as such term is defined by applicable law and regulations) and is not to be relied on by any person for any purpose. In addition, it is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. No part of this material may be copied or duplicated in any form, or redistributed, without the prior written consent of Lincoln International. Joint Ventures & Partnering InSight 5