Fast growing companies in Europe are increasingly turning to taking minority stakes and setting up joint venture vehicles in order to turbo-charge their expansion.
Our recent research shows that 82% of Europe’s 400 fastest growing companies have acquired a minority stake in another company over the last three years. 40% also say alliances and joint ventures are key to their success.
This raises the question as to why minority stakes and joint ventures (JVs) are in vogue amongst fast growing companies. The primary reason is likely the increased flexibility these growth strategies offer.
Firstly, minority stakes and JVs require less due diligence than traditional M&A does, saving time and resources. This means that companies can enter into these arrangements quicker, which, in turn, allows them to get exposure to a market whilst they have an early mover advantage. The time difference between entering into minority stakes or JVs and completing an M&A deal can be months.
Secondly, minority stakes and JVs allow companies to take a more speculative approach to investment, than would be the case with traditional M&A. This is important for companies that are growing rapidly and burning through cash, who, therefore, often cannot afford to fund multiple acquisitions.
To put it simply, minority stakes and JVs can require less formal engagement and pose fewer risks than M&A whilst still offering some of the same benefits. For example, these include:
- Insights into different management styles which can be adapted and applied elsewhere
- Access to markets that would have otherwise required significant capital commitment through organic growth or the acquisition of another company
- Exposure to new technologies that may translate into new product offerings or time and cost efficiencies
However, benefiting from minority stakes and JVs and maximising the value of these arrangements are two separate points and can be the difference between obtaining a competitive edge or not.
Value creation story
So, how can fast growing companies maximise value? The answer is planning, which may sound simpler than some companies might expect. Before entering into a minority stake or a JV, managers should sit down and plan what they want to achieve.
Having clarity on what a company it wants to achieve and then applying metrics to measure success, allows companies to assess over time, whether they are getting best value from their investment. If not, they still have time to react.
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Metrics for measuring success may be financial; for example, common measures include Return on Investment (RoI) or Internal Rate of Return (IRoR), or strategic, which may include growth in customer markets, the development of new products or the introduction of new technology.
The aims of different stakeholders in a minority investment or JV may differ, so aligning interests at the outset is essential to ensure all parties get best value.
One of the most common areas of dispute is in relation to the ownership of intellectual property. Additionally, parties to JVs may disagree upon the extent to which they are liable to any third parties. However, these problems can usually be mitigated by careful planning and the inclusion of appropriate terms in the relevant contracts.
This brings us to the all-important exit. The ability to quickly and efficiently exit a minority stake or a JV is often as significant as the ability to enter into one in the first place. What a good exit strategy looks like will depend upon the nature of the investment. Whatever strategy is settled on, this should be built into the investment documentation.
One of the most common formulations, is “drag and tag” rights. A drag right enables a majority stakeholder to force a minority stakeholder into the sale of their stake in a company. In return, the majority stakeholder will generally allow the minority stakeholder the same terms and conditions as any other seller.
Other exit strategies may include a put option; which allows a shareholder to exit a JV by selling its shares to the JV or the other shareholders at a pre-agreed point, such as when a company reaches a certain valuation or on a specific date.
Minority stakes and JVs are becoming hugely popular with Europe’s fastest growing companies and with good reason. An awareness of the potential risks and a solid exit strategy can help ensure these companies maximise the benefits on offer.