How to Take a Joint Venture

Public
By David Ernst | Tuesday, January 31, 2017 |

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Part 2: Preparing for an IPO: The five essential building blocks.

TAKING A
JOINT
VENTURE
public can be
a powerful
way to
unlock value
for owners.
For most JVs,
preparing for
an IPO is
measured in
years, not
months. The
requirement
s for an IPO
are ones that
necessitate
Board
alignment
and
deliberate action – as well as some adjustments in the JV
operating model. In a previous insight, we outlined a set of
practical guidelines for when – and when not – to IPO a JV. In
this insight, based on our assessment of successful JV IPOs, we
share the five building blocks boards and corporate parents
should put into place when preparing to take a JV public
(Exhibit 1).

PREPARING FORAN IPO

First, enable the JV to have its own independent strategy
with sufficient running room for growth. The JV must have
its own competitively viable strategy. A key issue here is
enabling the JV to have enough running room – in terms of
product market growth, technology, and pricing freedom – to be
attractive to investors. The JV typically must graduate from
depending on the owners for a large share of sales, and should
preferably have a broad customer base with several product
lines.

Second, separate the JV’s business system as much as

possible from parent company support, and shift to true
arms-length relationships between the JV and parent
companies. To enable a future IPO, it is important to reduce the
dependency of a JV on parent companies for technology, inputs,
marketing/sales, and shared services. As an example, Spansion,
whose Board decided to pursue an IPO, tried to develop a truly
integrated JV business system, by transferring all related parent
assets into the venture, and structuring commercial
relationships with parents on an arms-length basis. By contrast,
a JV whose profits or processes are compromised because of
pre-existing agreements with parent companies will be less
attractive to outside investors – and may run afoul of
requirements for shareholder protection.  

As a side note, corporate parents that are considering a partial

IPO should beware of ending up “in the middle” – with neither
a controlled entity, nor a company that can compete against
fully independent players. The governance of partially public
ventures – with two or more strategic owners and public
shareholders – has a set of special challenges that must be
carefully planned for and managed. 

Exhibit 1: Preparing for a JV IPO 

Practices that can facilitate a successful public offering
Third, the JV Board and owners should shift toward a
“manager-managed” governance model, more like that of
an independent company than the typical JV. This includes,
for example, relatively high delegations of formal and informal
power to the JV management team; a Board that spends most of
its time on strategy, growth, investment decisions, and talent
issues – not detailed performance management or operational
reviews. In the “manager-managed” model, the owners may
also add independent directors to the Board, and sharply
reduce the typical long list of issues that require supra-majority
voting. For example, Newedge, the billion dollar global
brokerage JV between Société Générale and Calyon which
planned to IPO, was structured as an independent entity with a
high degree of operational freedom for its management team,
and with an independent non-voting observer on its Board.*

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Fourth, the JV Board should support the CEO in building a

deep and independent bench of talent, with attractive and
performance-focused incentive programs. The compensation
of most JV CEOs – and that of JV executives in general – is lower
than what is seen in public companies. As a JV prepares to IPO,
the pressures for growth and performance increases, as do the
requirements for the company to have its own full set of
corporate capabilities including shareholder relations. While
the IPO can provide a powerful growth story to attract
managers, it is usually necessary to redesign the compensation
system, shifting toward performance-based incentives, and
adding a long-term incentive program. To attract strong
executives, some JVs have added stock options for the top 5-10
managers as much as 5 years before an envisioned IPO, as a
way to help build the bench at the venture and keep joint
venture management focused on the requirements of the IPO. 

In addition, JVs that wish to pursue an IPO would be well-

served to have an outside CEO, to limit the number of
secondees from the parent companies, and to build internal
capabilities in strategy, business development, finance, legal,
and external affairs.

Fifth, the JV should be managed so as to build a strong

financial track record and balance sheet, or a very
compelling case for future profitability and cash flow. Many
JVs are run as assets, not businesses – and objectives may be
defined in terms of capacity utilization, production volumes, or
cost efficiency. To evolve toward an IPO, a JV should be a true
P&L-focused entity, with strong cash flows. In general, the JV
should be structured so that it is self-funding, or is able to show
a strong case for sustainable cash flow. Usually, the amount of
transparency will need to be dialed up from what’s mandated
for JVs, in order to give outside investors confidence in its
performance and prospects.

Three IPO paths illustrating the progression toward an IPO

over time. For Genencor, Spansion, and Orbitz the path to IPO
was characterized by a series of moves related to the strength
and independence of their strategy and market, business
system, governance and organizational models. By the time of
their IPOs, each had evolved to be more independent and
freestanding than most joint ventures. In Genencor, for
example, the parent companies put in place a long-term
incentive plan for management that had many independent-
company features (Exhibit 2). Similarly, in Spansion, AMD and
Fujitsu took steps to consolidate the full business system into
the venture. 

Exhibit 2: Charting the Journey of some JVs along the IPO

Path: Genencor
It’s worth noting that many of these changes are good things to
do – whether the parent companies in the end decide to go for
an IPO or not.

~~~
We expect to see a lot more IPOs of JVs in the future. This will
be driven by a number of converging factors: globalizing
capital markets, the desire of emerging market governments to
privatize current JVs that are partly owned by state-owned
enterprises, and the coming of age of many JVs that are today in
their adolescent years.

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*Societe Generale acquired a 100% stake in derivatives

brokerage Newedge, after buying out its joint venture partner
Credit Agricole, the French bank confirmed on Wednesday May
7, 2014. Source: MetalBulletin

Read Part 1: When to Take A Joint Venture Public >>

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