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Use Joint Ventures to Ease the Pain of

Restructuring
By Ashish Nanda and Peter J.Williamson

Team members
ANKIT AGARWAL (2015PGP007)
KUNAL KAUSHAL (2015PGP024)
YOGENDRA KUMAR (2015PGP048)

How to dispose of underperforming


business?

Noncore Business
Lacks high quality physical assets, corporate attention.

Formidable Brands, enviable distribution network, skilled people,


proprietary systems.

Competitors would take year to develop the same intangible assets.

As these are not core business so investment of time and money


into these business is not justified.

Fundamental issue faced by while selling


these business?
How to convey what the business is really worth to potential
buyer?
Not pay premium for what they cant see
Bids arrives are substantially below the expectation
How to maintain the health of business during the process of
selling it?
To maintain commitment to all stakeholder during the disposal
phase.
Labelling business for sale may result in distracted employee,
distrustful customers, distributors and vendors.
Putting business for auction reduces its value than enhancing it.

The Joint Venture as Restructuring tool:


The Philips-Whirlpool Case

Philips identified $1.55 billion domestic appliances division


(supporting nine different brands) , not essential to its future.

Sales and distribution were not coordinated resulting in


inefficiencies and overlap.

Division had valuable assets, underutilized manufacturing


skill, best brands, world class design expertise and wide
distribution network.

continued

Whirlpool was looking to expand beyond U.S base.

It believed it could alter the cost structure of the business if it


sourced components globally, coordinated production, sales,
and distribution.

Time and money to transform the business into a lean and


focused operation

Different assumptions and experiences produced valuations


that were not close.

Continued
Joint venture the solution.
Opportunity to learn about the appliances division plan and to
improve it.
Whirlpool imported technology, common platforms, and
standardized components across factories, reduced inventories
to give new life to the business.
Joint venture transformed the business into vibrant and
profitable operation.

Unlocking Imprisoned Assets


Advantages of Joint Venture over conventional Sale
Stakeholders

stay engaged and committed.


Announcement that division is for sale can be its kiss of death.
High-caliber people leave other divert their energies.
Customer and distributers fret about the after sale services and
technical support.
Vendors tighten their credit terms and relax their delivery and
service standard.
A spiral of retrenchment, plummeting performance and declining
stock markets often results.
In restructuring joint venture business will be invested in rather
than shut down completely.
Option for employee to continue.

The unknown becomes known

Joint venture allows the buyer to gain an understanding of the


business, inaccessible to outsider.
The buyer is able to assess the true value of intangible assets
and understands how the business operates.
Reduces risk of making uninformed decision.
E.g. Whirlpool was able to take decision on plant closure,
brand strengthening and supplier rationalization
The buyer receives continued managerial and technical input
from restructurer in the form of knowledge, technology and
skill

Deciding When a Joint Venture Makes


Sense
What precisely is the nature of our restructuring problems
and what really are buyers goal?

Joint venture are effective when task of disentangling a


business from the systems and structure of its corporates is
slow and complex.
Joint ventures provides the grace period for smooth and
gradual separation where several business share facilities,
systems, personnel or administrative backup.
Eg.IBM-Siemens Joint venture

Minimizing the Burden on Management

Given the benefit of Joint venturing why do many companies


chose to sell their business?
Why dont they maintain the partnership on ongoing basis?
Joint venturing requires more of managements time and
attention than does single ownership.
To minimize the management burden without reducing the
effectiveness ,three central tasks to be focused.
Ensuring goal alignment
Bridging the cultural divide
Selecting staff who can manage effectively without elaborate
organizational framework.

continued
For joint venture to operate smoothly it is critical that partners
shares a commonality of purpose.
The commitment of top management is not enough for success
of restructuring joint venture.
But the need to identify and resolve
Right at the beginning of the joint venture
Cultural differences between the lower level executives.
Third key to reducing the burden is to ensure that joint
ventures runs with minimal structure.

Planning for the termination of the


Venture

Writing a termination clause for joint venture is unthinkable.

Success in a joint venture is transitory and measured by the


smoothness rather than the longevity.

Termination is natural step in joint venture and it should be


planed ahead of time for an orderly disentanglement.

For avoiding value destroying conflicts between the partners.

When is a JV preferable to sale of business?

Joint venture solution is preferable over sale of business when


most important assets in the business being sold are
intangibles-a consumer franchise, distribution relationships,
human resources.

When does the restructuring


become necessary?

Restructuring is a type of corporate action taken to eliminate the


potential financial harm and to improve the overall business of the
company by modifying the debt, operation or structure of the
company.
A company restructures its operations or structure by cutting
costs, such as payroll, or reducing its size through the sale of
asset.

What are the advantages of JV over


buying out the target company?

A joint venture by contrast allows continuity of access to the


former parents assets, brand equity, system and services. It
ensure continuity for the dealer and customer.
The buyer is able to assess the true value of intangible assets
such as brands, distribution network, people and system and
understands the operation of business through direct
involvement.
The buyer can make a informed decision whether he should
buy the company or not in future.

How does JV help to maximise


operating synergies / efficiencies?

JVs can facilitate increased access to customers.


JV partners may take advantage of increased capacity in terms
of production, as well as other economies of scale and scope.
JV partners may share technology. A JV may also enable
increased research, and the development of new innovative
technologies
In a joint venture, firms also pool their financial resources,
potentially eliminating the need to borrow funds or seek
outside investors.

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