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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 !