This year, every single industry will face some type of disruption. The short- and long-term fallouts from the disruption could leave many companies struggling to gain solid footing. In addition to considering ways to pivot to meet your consumers’ changing needs or demands (link to past article), you may also want to consider joining forces with a peer to alleviate ownership burdens. Creating a healthy team reduces not only the financial impact but also the psychological. I found this article “Joint Ventures and Partnerships in a Downturn” by James Bamford, Gerard Baynham, and David Ernst, to be an exceptional list of approaches to leveraging existing partnerships or creating new ones in the face of economic strife.
Surviving the economic downturn means rewiring operations, reallocating resources, and reinventing business models. Joint ventures act as a cost-sharing and capital-reducing vehicle — alleviating pressure on companies and helping reposition for growth once the downturn subsides. Joint ventures and partnerships are essential to industries that are under pressure like oil, gas, and alternative energies, as well as health care and life sciences. For example, in March 2020, Pfizer and BioNTech announced a team endeavors to bring out a Covid-19 vaccine; other partnerships to tackle the COVID vaccines included Sanofi and GSK, and by Hoth Therapeutics, Voltron Therapeutics, and Mass General Hospital.
Other benefits of joint ventures include less likelihood of an increase in terminations, as well as an increase in return on assets. The writers’ analysis shows that new joint venture and partnerships transactions “tend to increase during a downturn and to accelerate during recovery because they allow companies to get off to a much quicker start than organic growth does and are less risky than M&A.” However, joint ventures can also be difficult to restructure because of different owner-company agendas, politicized processes, and general inertia.
Here is how a crisis can serve as a catalyst for change by tapping into growth opportunities in capital-light ways:
Shoring up existing joint ventures
Severe revenue shortfalls from supply chain and operational disruptions, market demand inconsistencies, and frozen credit markets all contribute to current financial challenges that joint ventures and wholly-owned companies may be facing. Interventional responses are needed now and in anticipation of the long haul, including more governance by joint ventures’ board of directors. Opportunities to reset and respond to the quickly changing market will also need to be evaluated.
Approaches that joint ventures can use for restructuring:
- Raising capital in unconventional ways. This could take the shape of securing low- or interest-free loans or capital from cash-rich owners, or in some cases of improving future liquidity or opening new markets, it may mean bringing in new owners (e.g., PE firms, pension funds, other financial institutions, strategic industry partners, etc.). In addition, businesses can structure creative commercial arrangements with suppliers, customers, lenders, and other business partners.
- Reducing costs through synergies and new operating models. Savings may be possible from consolidating or optimizing activities and assets with other owners. Cost-cutting may fundamentally change the operating model, especially if it is reducing operating expenses or increasing strategic and financial flexibility. A lower-cost partner in a joint venture can open up these types of synergy.
- Regearing financial ratios. This can mean increasing external borrowing if an entity is under-leveraged. Or conversely, if a venture has excess cash, the board might seek to repatriate it to fund other more pressing needs.
- Assisting owners through buyouts and other means.
Creating new joint ventures and partnerships
The writers’ research shows that joint ventures and partnerships increased in the later stages of downtown, signaling recovery and outpacing M&A. Joint ventures and partnerships can help companies navigate the economic crisis.
- Partial divestments. This works well for companies that need more liquidity. One approach is to use the first step in a planned exit, such as placing a non-core business in a joint venture with a potential buyer and negotiating to sell the full business over time. A second approach is to sell a partial interest in a business unit or third party, converting the business into a joint venture. And finally, there can be an asset sale with a lease-back (i.e., a company divests from certain non-core assets but them to a joint venture).
- Business consolidations. A range of options is available, such as consolidating a set of adjacent assets in a single joint venture to align incentives and save money on infrastructure. Companies might also join up with industry peers to consolidate back-office, sales, or purchasing functions into joint ventures and accomplish greater economies of scale.
- Partnerships for capital-light growth. These transaction structures are great for companies seeking growth but lower investment risk opportunities. Transaction structures can include entering global strategic partnerships with cash-rich players to develop a portfolio of opportunities in a sector or market; acquiring a partial stake in trouble business units in attractive markets; investing in or partnering with innovative suppliers and technology companies, and teaming up with industry peers and adjacent players to create and commercialize new products.
Whether restructuring existing ventures or creating new partnerships, there is a surprising number of avenues that companies can get creative with. The economic downturn of 2020 can be a turning point and catalyst for change wherein companies courageously navigate the turbulent waters with proven teamwork and a financially-savvy approach–ultimately, poised for accelerated growth upon emerging on the other side. Link to Article
All opinions & expressions are solely those of the author and not those of any other individual, institution or business.