Success

in joint
ventures

Joint ventures are an effective way to create platforms for

growth and increase optionality—and to share costs and
risks with a partner. They are also complex to stand up
and, therefore, underutilized. The key to successful joint
ventures lies in the upfront design. Read about how to set
up JVs for success.

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Introduction
Across industries, M&A activity has fallen sharply from Overall, we believe that JVs are an underutilized tool
the recent peak in Q4’21 and generally remains below that could help companies in any economic environment
pre-pandemic levels. With higher cost of capital, strategic and under all kinds of market conditions. There are good
and financial buyers are being far more selective. Many are reasons to avoid JVs. They can be complex, and it is
holding back, waiting for valuations to fall and more clarity difficult to resolve questions of control and jointly run an
on the future of their markets. asset or business to the satisfaction of all parties. There
are many stories of JVs that have failed or broken up over
But the business drivers of M&A are still in force—the
diverging needs of partners.
need to expand into new markets, the need to build scale,
the need to acquire new capabilities for growth. This is But JVs are also a proven way to accelerate innovation,
why acquirers are turning increasingly to joint ventures. share costs and risks, and quickly achieve scale. For
In fact, top executives in KPMG’s annual CEO survey rank example, as the auto industry pivots to electric propulsion,
joint ventures on equal footing with traditional M&A as automakers are using joint ventures to quickly build
a growth strategy for growth in the next three years.1 In capacity for batteries, charging stations, and other
2018, CEOs ranked JVs far below M&A.2 essential components.
In 2020, as the pandemic recession hit and M&A activity Success in launching and operating joint ventures requires
dropped by 12 percent (on average), the number of JVs clear definition of key elements in the early stages of
announced rose by 6 percent (Exhibit 1).3 Conversely, dealmaking to secure alignment with the partner. This
when the economy recovered and dealmaking took off, JV paper explores the common challenges in JV formation
announcements fell by 12 percent. and leading practices to enable the effective launch and
operation of a joint venture.

Exhibit 1. When M&A volumes drop, JV volumes rise, and vice-versa

Historically, joint venture volume has risen when M&A volume decreases. In 2020, the pandemic dramatically lowered
risk appetite and fueled a shift toward JV s. Then, in 2021, the economy rebounded and the momentum shifted back
towards traditional M&A.

2020 Pandemic | JVs vs. M&A 2021 Rebound | JVs vs. M&A
Change in volume from prior year Change in volume from prior year
30% 30%

20% 20%

10% 10% +22%

+6%
0% 0%
-12% -12%
-10% -10%

-20% -20%
Traditional M&A Joint ventures

1
Source: KPMG CEO Survey 2022
2
Source: KPMG CEO Survey 2018
3
Source: KPMG analysis
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Why JVs are attractive
transactions
Joint ventures provide clear advantages when compared to traditional M&A, though these advantages are
often overshadowed by the complexity of setting up JVs. While formation is complex, JVs are an effective tool
to minimize transaction risk and upfront cash, create optionality, and establish a platform for growth.

Reduce exposure through risk-sharing Flexibility to calibrate up-front cash

JVs allow partners to dial into the right mix of risk and Joint ventures can provide an opportunity for parties to
expected reward in a way that optimizes their expected combine existing non-cash assets (e.g., fixed assets,
return on contributed assets. This goes beyond financial personnel, contracts, IP) into a structure that allows them
exposure—partnering via a JV can reduce risk through to calibrate or outright minimize upfront cash investment.
resource sharing, business diversification, supplier & Regardless of cash upfront, partners seeking outsized JV
customer bargaining power, and much more. growth should commit to a phased investment schedule to
fuel the JV’s growth ambitions.

A platform for growth

Optionality over the long-term
Joint ventures can create a substantial avenue for growth
—partners can benefit from access to not only new JVs provide more optionality over the long term than their
customers, but entirely new markets and geographies that traditional M&A counterparts. Unlike traditional M&A
were previously unavailable. JVs also provide access to transactions, JVs can allow for various scenarios of exit
increased financial capacity, which the business can deploy all while sharing risk and reward with a partner. These
for new projects, market expansions, or even to fund options can include selling one’s stake to the partner or
further acquisitions. The operating model flexibility inherent third party, selling both parties’ stake in the entire NewCo,
to JVs can allow the business to pivot more quickly than taking the NewCo public (IPO), buying out the partner’s
would be possible with a traditional acquisition, letting stake, and more. While some of these options are available
partners react to changing market conditions and continue to a buyer in a traditional acquisition setting, the buyer
driving growth. bears the entirety of the risk. Furthermore, JVs can serve
as a means of testing the success of a new venture or
combination prior to acquiring full ownership.

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Common strategic rationales for JVs

Access to international or Co-develop, combine, or access Access new products and

challenging local markets capabilities services
JVs are often used to provide JVs allow partners to selectively By strategically partnering with
access to specific regions—both access each other’s skills or counterparts that have access to
near and far—that one of the capabilities to combine or co- desired customers, partners can
partners would be challenged to develop an advantage without drive new revenue streams
enter organically permanently giving away valuable
rights

Drive a staged exit and buyout Satisfy regulatory requirements Build scale

JVs can serve as an intermediary In certain markets, regulations may Consolidation JVs offer partners
“test” of fit between two require or be more amenable to the opportunity to combine like-for-
organizations, and allow one of JVs—specifically when partnering like resources and gain efficiencies
the parties to eventually sell their with a local partner, unlocking while creating further scale
stake in the JV and exit a non-core industry-specific incentives advantages
business

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But JVs are still underutilized
due to complexity
Over the years, JV volume has averaged about 20 percent
of M&A volume.4 While there is no ideal ratio of JVs to
acquisitions, we believe that JVs would be a more widely
used if companies knew how to deal with the real and
perceived barriers. These include lack of experience and
strategic focus—companies too often look for the “right”
partner, rather than defining a partner-agnostic strategy,
then looking for partners that fit the profile.

Experience
Lack of JV formation expertise
Corporate Development teams tend to have more
experience in traditional M&A transactions when
compared to joint ventures. One of the key reasons for
lack of repeatability is that the to-be JV leadership team
involved in the upfront planning ends up transitioning with
the NewCo itself, leaving behind little muscle memory in
RemainCo to replicate the model.

Strategy
Partner-focus tendencies

A common and elusive pitfall to JV success is having a

partner focus instead of anchoring to a partner-agnostic
strategic objective. Partnership formation efforts that
originate with partner selection instead of strategy
definition are more prone to ignoring red flags, committing
to sub-optimal terms, or stalling out before signing and
scrambling for another partner without a north star to
follow.

4
Source: KPMG analysis

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 Governance Exit
Balancing ParentCo control Alignment on the breakup terms
A joint venture’s board allows ParentCos to control key JV The key to defining equitable exit terms before signing
NewCo decisions. So, ParentCos tend to maneuver for is focusing on the true non-negotiables that each party
the majority of appointments to the JV board to secure should be reasonably entitled to take away in the event of
maximum control. This creates friction and a sense of a breakup. Deal-focused strategists will aim for a finite set
disparate interests in the formative stages. Instead, there of reasonable breakup take-aways based on a combination
should be an equitable split that reflects the share ratio. of initial and ongoing partner contributions.
What’s more, ParentCos may use the secondment method
when staffing a JV, raising questions from the other side
on where loyalties truly lie.
Culture
Unintentional JV culture

Operating structure Unless deliberately defined, joint venture cultures often

end up being a haphazard combination of the two
Two-sided carve-outs and integrations
parent company cultures. If the parent companies are
Operating structure design for a JV is often more complex not intentional about shaping the NewCo culture, it will
than in a traditional acquisition, especially as it relates to develop on its own, often out of dominant norms, rather
deals where both ParentCos must carve out assets that than being defined specifically to realize the JV’s strategy.
then require integration into a newly formed entity to
achieve expected returns. In this highly complex scenario,
both parent companies must align on the level of ParentCo
TSAs/LTAs, the associated costs, the right mix of “best of
both” people, systems, contract terms, IP, etc., and must
integrate the components in alignment with the expected
synergies or growth schedule.

Financials
Profit-sharing and cost allocation

A few factors drive the complexity of JV structuring

financials. For one, a NewCo is often sustained by service
agreements from parent companies, which require
negotiation to determine to what extent the NewCo will
be burdened by a ParentCo’s support costs. Perhaps most
contentious, though, is defining the share ratio and profit-
sharing mechanics between the NewCo and ParentCos.
Lastly, partners should anticipate accounting gains and
losses that can occur upon deconsolidation of existing
businesses.

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Successful JVs start with
careful design
JV setup requires clarity on a few key interlocking components. It is essential to start with the strategy rather than
the partner. Then align on governance and economics, while working through operating structure, exit terms, and
cultural alignment.

1 Be strategy-centric vs. partner-focused

2 Keep governance nimble and empower
JV management

Rather than starting with the decision to partner with a A joint venture’s NewCo traditionally requires a board
specific company due to familiarity, fit, or other reasons, with representation from ParentCos, supported by sub-
successful deal makers start with the strategic objective committees that serve more focused purposes. The
and business case before proceeding into partner focus of governance often intensifies around number of
selection. As an example: Despite growing demand in appointments for board seats. While this is a crucial factor,
a developing region, a client of ours was experiencing successful JV boards instead concentrate on delegating
production and supply-chain constraints in their economy most decisions to the NewCo’s management team while
product line. In response, they set an objective to retaining voting rights in key decision such as material
capitalize on growth for economy-line products in ongoing investments.
developing markets and evaluated strategies to reach the
objective. What followed was a careful selection of JV as
the optimal partnership structure, and partner selection to
narrow down a short list of candidates.

Case study

A leading industrial equipment manufacturer uses a JV to grow in a new category

A leading industrial equipment manufacturer sought to grow in a competitive new market with a line of economy
products, but it faced constraints. After a strategic review, the company decided to pursue a joint venture combining its
production operations with a partner’s IP and supply chain. The goal of the JV was to accelerate production while lowering
cost. KPMG assisted the client with defining the NewCo governance structure, defining the perimeter of contributions,
valuation of contributions, operating structure design, and a roadmap for reaching the NewCo’s growth targets.

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3 Design a JV operating structure with the
“best-of-both parents”
Our experience suggests two factors are key to navigating
this delicate topic: first, confine the exit terms to a finite
set of scenarios to avoid venturing into the obscure/
At the broadest level, the JV’s operating structure should unknowable. Secondly and most importantly, define a set
be designed to optimize the JV’s operations in a way that of terms that would reasonably be agreed to by the other
maximizes its ability to achieve the NewCo’s strategic goal side—especially in case of an unwinding and who walks
and return on the ParentCo’s contributed assets. Each away with which key assets (e.g., intellectual property).
individual design choice that goes into the JV’s overall
operating structure should answer the question: “Which

6
party is most advantaged in this specific capability or
function (e.g., engineering), considering key factors such Proactively define the JV’s culture
as cost, scale, sophistication, etc.?” to achieve the best-fit
balance of people, systems, facilities, and other resources. JVs provide an exceptional opportunity to intentionally
establish new behaviors and norms. They are often defined
to accomplish an objective that a single partner cannot

4 Create equitable NewCo economics

and profit-sharing
easily achieve on its own. It is critical to understand the
differences between both parties’ ways of working early
on—and define what elements are required for the JV’s
When we say “equitable” in this case, we mean a state success. Knowledge of the parent companies’ cultural
where contributions, share ratio, and profit-sharing are differences and NewCo’s cultural direction arms both
congruent — a feat that is easier said than done. The key partners with a better baseline of understanding during
to balancing this equation is 1) define the asset perimeter, negotiations and establishes the winning behaviors to
2) establish the forecast, and 3) calibrate to a share ratio establish during formation.
reflective of contributions, and finally aligning on a profit
sharing mechanism. Too often, we have seen parties get
to signing while taking these steps out of sequence.
We have seen more success when parties directionally Case study
agree on these financial principles in early talks and
only renegotiating ahead of signing if the equation gets Automaker aims to cut $1 billion in
materially out of balance as the finer details of the models
comes together. Lastly, Partners should keep a watchful
costs through a JV
eye towards downstream accounting implications,
A major automaker calculated that it could realize
especially as the primary beneficiary, and how to financially
$1 billion in synergies by combining production
consolidate the JV if not truly 50-50.
operations of two of its operating brands in a new
jointly owned company. Prior to deciding on the

5
joint venture concept, KPMG assisted with the
It’s never too soon to discuss exit terms synergy assessment and selection of the best-fit
structure among various partnership alternatives for
Defining when and how each partner can trigger an exit both operating brands and the ParentCo to realize
from the JV can promote a more stable operation of the the expected synergies. KPMG further assisted
JV itself. Typically, exits entail one partner buying the other the client with defining the NewCo governance
one out, unwinding of the JV, dissolution, taking the JV structure, defining the perimeter of contributions,
public, or selling the JV to a third party. While discussing operating structure design, and a roadmap for
the terms of an exit with a partner signing can seem like a reaching the NewCo’s synergy targets.
deal breaker itself, we find that unresolved questions about
exit terms can push the parties apart at the eleventh hour.

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Four structural archetypes
for JVs
There are four basic JV types, which range in degree of integration required and in difficulty of separation. A new
business that does not depend on assets from the partners requires the least integration and is easiest to separate.
A two-sided carve-out is the most challenging, involving the integration of assets from both parents.

Standalone consolidation Two-sided carve-out integration

Integration: High
Each partner has a standalone business in the Both partners have operating assets that need
market, and the objective is to consolidate the two to be separated from the parent company, and
under the JV structure subsequently integrated to form the JV
Advantages: Advantages:
• Minimal operational entanglements; already • Larger pool of resources to contribute to the JV
established in the market • Combines “best practices” of each partner
• Potential for synergy opportunities Complexity drivers:
Complexity drivers: • Extensive separation exercise before partners put
• Extensive integration effort is required to assets into a JV
operationalize the JV • Requires highly coordinated planning between
• May require challenging decisions around the partners to contribute or build necessary
rationalizing assets, people, and products assets, people, contracts, etc.

Separation: Low Separation: High

New business Carve-out and intangibles

Neither partner contributes operating assets to the One of the partners brings operating assets, the
JV. Instead, each partner brings a combination of other contributes intangibles such as customer
funding, IP, management experience, etc. relationships, IP, and industry expertise
Advantages: Advantages:
• Optimal flexibility in defining new business and • Ability to select optimal suite of tangible and
operating structure intangible assets for the JV
• Minimal to zero effort required in traditional • Reduced integration effort and cost when
integration or separation activities compared to two-sided carve-out
Complexity drivers: Complexity drivers:
Integration: Low

• Increased risk stemming from standing up a new • Perceived inequity between the partners’
business and entering a new market contributions to the JV
• Requires extensive effort in hiring, procuring • Partner separating physical assets may be
assets, and establishing the operating structure exposed to a higher level of effort and associated
separation cost

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How KPMG can help
Defining the strategy
Assisting in defining and pressure testing the strategic objective, expected
synergies, transaction options (e.g., alliance vs. JV vs. M&A), and JV partner
evaluation.

NewCo financial modeling & contribution valuation

Developing valuation models to assess the value of partner contributions.

Financial due diligence of contributions and carve-out financials

Analyzing normalized run-rate earnings, net working capital, and debt
of ParentCo contributions, as well as carve-out financials and technical
accounting.

Structuring NewCo governance

Identifying functional leadership for the JV, supported by a management office
and steering committee, to drive accountability and stand up the
new business.

Designing the NewCo operating structure

Designing the NewCo’s operating structure for Day 1 and its fully standalone-
state, facilitating alignment with the partner company to design a best-of-
both model.

Standing up the JV, separating assets and integrating into NewCo

Executing on detailed separation and integration project plans to implement
the NewCo operating structure, manage workforce transitions, and enable
value capture.

Defining the joint venture’s culture

Assessing existing parent company cultures and defining the JV culture that
will serve to drive the broader strategy, operating model, and org structure.

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Authors
Matt Dintelman Alex Aschenbroich
Principal, Deal Advisory & Strategy Director, Deal Advisory & Strategy
312-665-2064 404-221-2362
mdintelman@kpmg.com aaschenbroich@kpmg.com

Our team
Marc Schmidt Brad Hirsch
Principal, Financial Diligence Principal, Valuation
312-665-8461 312-665-4267
mschmidt3@kpmg.com bhirsch@kpmg.com

Kristine Coogan Matt Jones

Principal, People Strategy Principal, Business Modeling
312-665-2641 612-305-5836
kristinecoogan@kpmg.com mattjones@kpmg.com

Maggie Muzzin
Partner, Accounting Advisory
313-230-3227
mmuzzin@kpmg.com

We would like to thank our contributors:

Andrew Billings, Kathy Nichols

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Related thought leadership:

Navigating complex M&A Culture shock: Anticipating the Putting the “active” in active
risks when companies merge portfolio management

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