Spotlight on trends towards alternative deal structures

Introduction

Alternative deal structures and in particular joint ventures and alliances (JV&A) are becoming increasingly popular amongst dealmakers across various industries.

By contrast to classic M&A which is focused on acquiring control and subsequent integration of the target into the buyer’s world, companies may enter into alternative deal structures such as joint ventures, strategic alliances, corporate venture capital or acquisitions of minority stakes. What is driving this trend?

Global trends accelerating alternative deal structures

Digital transformation, disruptive technology, and sustainability regulation are certainly amongst those global trends that explain why alternative forms of collaboration are increasingly on dealmakers’ agendas.

Firstly, there is almost no industry that remains unaffected by digital transformation. Digital transformation creates new ways of collaboration between industries and big technology and cloud providers. This trend has only been accelerated by the COVID-19 crisis.

Secondly, disruptive technology urges traditional industries to rethink their business model and adopt to new realities. Forms of disruptive technologies such as artificial intelligence, the internet of things, smart contracts, blockchain and distributed ledger technology and cryptocurrencies are some of the major drivers behind businesses increasingly needing to collaborate across industries, value chains, and jurisdictions to achieve risk-sharing through cooperation.

Thirdly, sustainability regulations dramatically change individual behaviors and can transform industries around the globe. Established business models are suddenly facing a survival test which may often identify ways of collaboration with competitors and suppliers.

Other driving factors

Deal makers may also consider alternative deal structures to de-risk a cost-intensive acquisition or investment faced with a lack of funding; to access new capabilities and markets; to initiate a creeping acquisition or sale; or simply enlarge the dealmaker’s toolkit. Moreover, whilst the COVID-19 crisis continues to dominate daily life, accelerated disruption and change will certainly be a decisive element for alternative deal making in the near future.

Focus on JV&A

Common pitfalls

There are a number of pitfalls dealmakers should be aware of when considering alternative deal structures, for instance, an incorporated joint venture.

Common hazards are:

• Shortsighted business planning: This is often caused by not having adjusted a draft business plan created at the outset of the joint venture after its initial phase
• A lack of joint strategy: This is often caused by unrealistic or different expectations or changes in (group) strategy of a joint venture partner
• Expertise, performance and financial strength of the joint venture partners which does not correspond to pre-agreed shareholding ratios. This increases the potential for disputes
• Inadequate dispute resolution solutions: This is often a result of poor governance structures and dispute escalation mechanics not tailored to the circumstances of the joint venture and its participants
• Lack of a shared vision of the route and time line to exit, bearing in mind that a typical lifespan of an incorporated joint venture is five to seven years (but can be considerably longer): This is most often caused by not having debated various exit scenarios and their suitability to the joint venture.

Features of success

Whilst not losing sight of the pitfalls, it is also important to assess the key hallmarks of successful JV-deal-making, such as:

• Partner fit: This is fundamental and assesses whether the selected JV-partner is aligned with joint strategic objectives and expectations to make the business case happen.
• Deal logic: Stakeholders will not approve the joint venture if there is not a convincing business case and a strong commercial backdrop. Benchmarking the proposed joint venture against other options, such as outsourcing, supply or R&D agreements, contractual joint venture or minority investment (or hybrid models) is important in the early planning phase.
• JV-Structure: There are multiple factors that drive a joint venture’s structure. In an ever more global and competitive economy, geographical footprint, regulatory risk, protection of IP and know-how, as well as access to trusted dispute resolution forums, become even more important.
• Governance and control: Studies have revealed that joint ventures where governance and control structures reflect intense debate and modelling ahead of implementation are far less prone to disputes than less tailored solutions.
• Financing: This must be appropriate to the joint venture’s business plan, particularly in times of economic downturn and in light of the Covid-19 crisis
• Exit: There is no room for reluctance to anticipate potential exit-scenarios. Testing a JV-partner’s attitude towards exit at early stage and agreeing on bespoke solutions creates legal certainty on one of the most critical aspects of a successful joint venture.