When Caterpillar revealed earlier this month its joint venture with Ariel Corporation to serve oil and gas customers, the maker of construction and mining equipment described itself as “thrilled”.
However, the thrill of joint ventures seems to be on the wane more generally. Data from Mergermarket show that this year is shaping up to be the worst for JVs since before the financial crash. Up until the end of November, only 42 deals above $5m had been announced, with a total value of just $2.1bn.
While JVs can work as a substitute for M&A when the buyer and seller valuation gap is large and access to financing is limited – which is not the case now, especially for larger groups that have significant cash reserves – the 2012 data show companies being cautious about announcing any type of corporate transactions.”
She also points to the effect of relaxed regulations for foreign investors in some emerging markets. “In many markets, such as India or China, the entry route used to be through a JV or nothing, but now that appears to be changing.”
While JVs are down this year, there are still sectors where their rationale remains strong. Ms Faelten’s research, which studied JVs announced from 1985 to 2009, found that 56 per cent of all JVs were set up in just three sectors: industrials, materials and high technology, partly driven by the very high research and development intensity such companies require.
Similar considerations can apply elsewhere. Peter Hutton, an analyst at RBC Capital Markets, says that for the oil and gas sector JVs are “almost bread and butter” because they mean spreading risk for capital intensive and risky projects such as deep sea drilling.
Saikat Chaudhuri, assistant professor of management at the Wharton school at the University of Pennsylvania, says JVs can provide other advantages, such as giving partners the opportunity to experiment with new products.
“The auto industry often uses JVs to set up a platform to develop new vehicles.”
Telecoms is another sector that is JV heavy, though for different reasons. Robin Bienenstock, analyst at Bernstein, says companies sometimes turn to JVs when competition rules prevent them consolidating in mature markets. She says they resort to such deals “to skirt regulation and to shore up returns that are, for the third and fourth operators, very often well below their weighted average cost of capital”.
But sometimes, the defensive factors that can persuade companies into a JV also make it hard for the new vehicle to succeed. Mr Chaudhuri cites the long-running but troubled mobile phone JV between Sony and Ericsson. “It may have suffered from mismanagement, but it was also operating in a sector where everything was shifting, and so there were too many things to do.”
And even where a JV looks successful, its inherently temporary nature means it can be assessed fully only once it is over. “So far they [telecoms JVs] have resulted in better margins and pretty good savings,” says Ms Bienenstock, “but they will really be judged when both partners try to exit”. She says the ending of EE – the JV in the UK between France Telecom’s Orange and Deutsche Telekom’s T-Mobile – will be a big test.
On that basis, the demise of the JV between Danone and Wahaha failed spectacularly: the relationship finished in a long and global legal battle between the French food group and its erstwhile Chinese partner.
Ms Faelten says JV partners can make life harder for themselves by not looking ahead to how it will end. She was surprised at how much those involved in JVs talked about the long term and did not discuss exit strategies even though the median duration of JVs she studied was just three years. “Perhaps when you’re starting out in a corporate relationship it’s easier to talk about the benefits than about what happens if it goes wrong.”
It does not have to go wrong for a JV to be broken up. Mr Chaudhuri says that JVs set up to explore a new product can finish once they have served their purpose, while those established to get around regulatory constraints can end once those rules are liberalised.
In amicable exits, an initial public offering or the buying out of one partner by the other are the most likely outcomes. In February this year, Caterpillar announced that it was becoming sole owner of its Japanese JV with Mitsubishi Heavy Industries after a relationship lasting more than 45 years. With that sort of record, perhaps Caterpillar is right to be excited about its latest JV.