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Use of Joint Ventures to Ease the Pain ofRestructuring

By Ashish Nanda & Peter J. Williamson

Article presented by:Group 7

Anupam LavVivek Rokade

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

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

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

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The Philips Whirlpool casePhilips, in the 1980s, identified that the $1.55 billion domestic appliances business was nolonger 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

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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

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The SolutionWhirlpool is offered a 53% stake in the Joint Venture at a cost of $381 million with the resowned 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 intia

Benefits for PhilipsA smooth exit on favorable terms and completing the sale at a higher value

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Benefits of Such Joint VenturesStakeholders stay engaged & committed

An announcement of sale could a stroke a wave of uncertainty in the organizationCustomers & 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 theUS 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 therest of the stake for $150 million in 1989

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Benefits of Such Joint VenturesBuyer receives continued managerial and technical inputs from the seller

Outright purchases signify the umbilical cord from the parent is cut right awayA 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 thebusiness 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 althe stakeholders and make them comfortable with Ciba.

Customers, distributors and vendors remained loyal to Ciba even after it Corning left.

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Deciding When a JV makes Sense

The nature of Restructuring Problem

Disentangling a business from the systems and structures of parent iscomplex and slow

In vertical integrations

Where businesses share facilities , systems,personnel , JV provides asmooth and gradual separation.

Example : Dresser-Komatsu JV in construction business.

When important assets are intangibles

Consumer franchises,Distribution relationship,humanresources,systems

Example : IBM-Siemens JV for Rolm System (PBX)

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Deciding When a JV makes Sense

The Goals of the B uying Partner

JV requires attention , so asset stripes are not interested in JV.

More relevant to buyer that plans to apply own assets and skills innurturing the business as it learns about it.

Example Honeywell- Groupe Bull JV (mainframe computerbusiness)

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Minimizing the burden onManagement

JV requires more management time and attention than singleownership

Communications often are duplicated

Contradictory signals from the parties involved has to be resolved

Minimizing the Burden without reducing the effectivenessEnsuring goal alignment

Bridging cultural divide

Selecting staff who can manage effectively without an elaborateorg framework

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Negotiating the DealAcknowledging 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.

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Thank You !