Research indicates that 50 to 70 per cent of all joint ventures fail. The most common causes of failure cited by researchers are cultural differences, poor or unclear leadership and poor integration process. The failure rate is high, but how you go about handling the situation can mean the difference between an amicable split, where you run the business as you deem fit, and a messy separation, in which you wind up losing clients, resources or other critical assets. The best way to handle a business breakup is to prepare for the possibility of a separation when you’re just starting out. Sounds commonsensical but that’s where many erstwhile partners have tripped, say experts.
Mritunjay Kapur, country MD, Protiviti, the world’s largest independent business and risk consulting firm, lists out the typical reasons that have put many business partnerships under severe strain. They are performance parameters related to cash flow, profitability, the gestation period of the business, governance issue (in case of frauds, diversion of funds, right to audit); exit clauses (the commitment of both partners if the market — and thus the JV — doesn’t go according to plan); finally, technology transfer issues (who keeps R&D it at what cost, if a partner keeps it at all). There can also be unforeseen circumstances that relate to national security (“During the 26/11 attack, one particular company decided to end its brand new JV with immediate effect,” he remembers).
But before we move to the issue of managing a break up, it is pertinent to understand the reasons why they may break up.
Think about it: the JV, which is ‘one’ entity created by two equally talented, powerful and seasoned masters, evolves financially and successfully but not without complexities. Far too many times, the difficulties are compounded when the joint venture is created by potential rivals — as in the case of Hero and Honda, both equally successful in the business. Then, if you treat a partnership as your ‘special purpose vehicle’ it will have a finite life, which is over as soon as the goal is achieved, or, if things get derailed, looks completely unattainable. Like Adi Godrej, chairman, Godrej Group, said at the time of the Hershey-Godrej split that JVs can’t always last forever given that they are formed for a specific purpose.
Preet Mohan Singh" height="120" alt="Preet Mohan Singh" hspace="5" width="100" align="left" src="/newsimgfiles/2012/november/25112012/112612_08.jpg" />Preet Mohan Singh, executive director, industrials, Avendus Capital, a financial advisory firm, feels that before understanding why a split occurs, companies need to take one hard look at what got them together in the first place. Any split occurs when partners find that somewhere there’s very little real value-addition happening in the business/company by virtue of the partnership. In his view, a reason why JVs are ending is because the market in India is growing and...global companies are reluctant to share technological expertise, preferring to come on their own, take advantage of the scaled-up market. “Continued access to new technologies, emergence of a new competitor are key pain points that an Indian company may go through after termination of their JVs,” says Singh.
Then, specific sectors can have peculiar pain points that should be sorted out by partners even before they join hands. In the area of infrastructure, for instance, there are two major pain areas — share of control and decision — making in financial, management and operational terms. According to Rajesh Samson, partner, infrastructure, Ernst&Young, “Sometimes one company wants to make snap decisions and often assesses the other solely in financial terms.” He adds, “Most Indian infrastructure companies would feel it not necessary to involve the foreign partner in day-to-day management decisions but the latter may expect just that.”
At the end of the day, the success of any enterprise hinges one key factor-trust. Says Kapur of Protiviti, “It’s important for companies in JVs to build trust and align that trust to the overall business goals. This is a soft but it’s the most important element.” He says, even as JV agreements are watertight, with the roles of companies clearly etched out, they should offer some flexibility in accordance to how the markets operate. Also, in his view, companies must remember that they are tied together for a purpose and if at all they need to go their separate ways, it needs to be done with maturity, amicably, without destroying the value of the other partner because, at the end of the day, they are competitors.
The onus to part ways amicably, feels Ashok Venkatramani, chief executive officer, Media Content and Communication Services (MCCS), lies on the two companies that once came together to create a success story. “Just like a marriage brings together two people in a formidable relationship, a joint venture does the same, too,” says Venkatramani.
Prepare for the worst
India Inc, to be sure, has seen quite a few break-ups. Among the more recent examples where erstwhile business partners have opted to go their own ways are Hero and Honda, Mahindra and Renault, Ananda Bazar Patrika Group and STAR India, Fiat and Tata Motors, Godrej and Hershey, to name a few. Some of these have been less painful than the others but all of them have been preceded by a lot of soul searching about whether a split could have been avoided and media analysis about what the erstwhile partners have in store.
That explains why the “pre-nup” has to be watertight with legal experts drafting “exit rights” in joint venture agreements carefully. In the majority of the cases the focus is on the following areas-the right of first refusal, right of first offer (to safeguard interests and prevent business to be sold off to competitors once the JV ends), details on intellectual property rights, trademarks etc (vital in pharma industry where patents are critical; or media industry where channel logos are so important), and the lock-in period for partnerships (in infrastructure and real estate, where foreign investors pump in money, government regulations stipulate a lock-in period of three years at the very least).
These factors sum up the majority of the issues faced by partners headed for a split. But there are many other issues—people issues, as an expert calls them — that requires companies to approach the whole process of break-up with a different game plan.
Earlier this year, Star India decided to exit Media Content and Communications Pvt Ltd (MCCS), its news business in partnership with Anand Bazar Patrika to focus solely on general entertainment programming. The channel, now called ABP News, didn’t turn things around overnight, admits Venkatramani. What was needed, he says, was a transparent approach, clarity in communication (to both, the employees and audiences) and a strategic vision to get brand recognition (the logo and the channel name was changed) all over again. “We identified the pain areas even as the JV had ended; we translated those into winning strategies,” says Venkatramani.
The channel recognised that there would be quite a bit of unrest and uncertainty among employees who knew that a formidable partnership had drawn to a close forever. The company decided to take the challenge head on. To soothe rattled nerves, employees at the news channel were given bonuses and appraisals before time this year.
A bigger challenge was to project a business-as-usual face to the outside world. Nearly six months before the partnership was to formally and legally end, the strategy to rebuild the brand was undertaken with heavy advertising both in the on-line and off-line space-television, radio, newspapers and social networking sites were covered in the exercise. “We needed to over-communicate — we said that though the branding had changed, the news channel’s promise still remained the same. The strategy worked, says Venkatramani.
Now comes the part about ‘outside stakeholders’. Besides communicating with clarity with employees, audiences, ABP News engaged with media buyers and advertisers who are critical in pumping up advertising revenues for the channel. “We knew that we needed to handle the ‘pain areas’ well because not doing so could have affected our business adversely. In less than four weeks, we changed the logos on all our previous videos that were on the net. The work was immense but we did it,” he says.
Experts warn that even the best JV agreements can’t always be foolproof. “Unless the parting of ways is amicable, there can be some pain areas in any unwinding of business or exits...long drawn, slow process of enforcement of contracts, regulatory issues and bottlenecks (especially when foreign investors are involved) and tax issues,” says Saket Shukla, co-founding partner, Phoenix Legal.
So there you have it. It’s a humungous task-picking the pieces after you have part ways with a business partner. That is why identifying potential pain points at the outset is important-at best, it can help partners avoid a split. At worst, it can help partners sidestep legal tangles in case the separation looks unavoidable.