Joint ventures: Strategic alternatives for dealmakers

Within our current economic climate, a perfect storm of factors is driving market uncertainty. These factors, including higher interest rates, high valuations, regulatory scrutiny, geopolitical conflict and supply chain disruptions, are creating greater complexity in dealmaking. To compensate for these M&A challenges — especially to large and transformational deals — more companies are considering joint ventures (JVs) as a possible alternative to traditional deals.

Over the past half decade, we have seen an increase in average JV transaction values (as reported); from $300 million in 2017 to $1.26 billion in 2023. After a dip since mid-2021, reported volumes are once again on the rise, increasing 30% from Q2 to Q4 in 2023 — signaling that JVs are becoming a more material alternative for capital allocation.

Key drivers

JVs can be a useful lever for growth. Both companies benefit from shared knowledge and ideally can leverage distinct capabilities to make the venture successful. Also, joint investment helps reduce risk and drives certainty in transaction closure by addressing:

1. Regulatory scrutiny: The current regulatory environment has become a barrier for deals in recent years. JVs can often mitigate regulatory resistance by using structural flexibility to remain compliant with existing laws. This flexibility allows for ease of expansion into new markets as JV partners can provide more comprehensive offerings at a greater depth in both new geographies and market segments.

2. Capital allocation: The JV model can help mitigate valuation and ROI discrepancies created by higher interest rates and market volatility. As JVs facilitate collaboration between potential acquirers and target companies without requiring a full-scale acquisition and requisite capital, it dampens the strategic impacts of these discrepancies — both parties are able to bear risks and reap rewards equitably.

3. Innovation: Companies are under mounting pressure to outpace competitors as the global business landscape evolves. Partnerships can help companies innovate and leverage cutting-edge technology such as AI.

Key considerations for dealmakers

When considering a joint venture, companies should conduct a thorough assessment of both organizations’ core capabilities, such as:

• What strengths and unique competencies distinguish the organizations in the broader market?

• How do the businesses excel and what competitive advantages can be leveraged?

• How could the formation of a joint venture better allocate capital?

Upon answering these critical questions, look to clearly define your strategic objectives:

• What goals should be achieved through business partnership or expansion, and why?

• Which specific aspects of your organization can be strengthened through this opportunity? Enhanced core capabilities, extension of market reach, acquisition of innovative technology, realization of growth aspirations, or a combination of these?

• What is the investment’s timeframe, and what are the measures of success to monitor on that horizon? (JVs typically have a timeframe that should be contemplated from the start.)

• What are the mechanisms to exit the venture, and what kind of governance will be in place until then?

Consider a joint venture when your organization’s core capabilities or investment priorities are insufficient to capitalize on market opportunities or resolve specific challenges. Joint ventures not only augment the ability to collaborate with complementary resources and skill sets, but also promote the achievement of mutually beneficial goals.

Keys to success

Getting this right requires a team – internal or external – with experience in JVs. Such a team can provide advice on key considerations, including the following tips:

• Strategy first: Start with a strategy, not a partner. Be clear on why and how this alliance helps execute your strategy more effectively than organic growth.

• Plan for success: Research your partner’s JV track record and their culture. Identify common objectives and jointly develop a business case based on incremental sources of value. Agree on the desired culture and behaviors of the JV, and determine the appropriate incentives and leaders needed to drive both. Establish clear governance, responsibilities and decision rights.

• Begin with the end in mind: Alliances are finite; the average duration is just four years. Consider what might cause dissolution and agree on what would happen to shared assets and people.

• Create trust: Adopt a “win-win” mindset focused on growing the whole pie — not securing the biggest slice. Provide transparency and equity, in which each party is proportionately rewarded for what they put into the JV.

• Start small: Begin with a narrow and achievable shared objective. Evolve to larger ambitions as trust and confidence grow.

• Measure performance: Implement a dedicated corporate alliance management function to oversee all alliance activity. Use mutually agreed upon metrics to track performance against the alliance’s objectives.

How we can help

PwC can advise clients across the deal continuum from strategy through execution, including structuring alliances to help increase value. We help clients to:

• Develop the growth strategy underpinning the deal;

• Select partners for the JV;

• Structure the deal, including assessing tax implications and transfer pricing;

• Perform diligence (commercial, financial, tax, operations, HR, IT) on the business and potential partners;

• Implement transaction governance;

• Prepare for JV stand-up and Day 1 readiness;

• Assist with post-close considerations, including establishing financial reporting and shareholders’ communications, implementing transitional service agreements, supporting IT and system integration, operational effectiveness, etc.; and

• Consult on exit strategy.

With a JV, organizations can realize synergies, minimize inefficiencies, and unlock new growth prospects while mitigating some drawbacks of traditional deals. In other words, JVs are another key lever in the "transact to transform" toolkit.