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Focus swings to Joint Ventures as economic outlook weakens


* After three years of incremental growth, 2008 set to be a JV boom year

The next twelve months are set to be characterized by a major increase in Joint Venture (JV) activity claims one UK-based dealmaker today.

With the global economic outlook continuing to weaken but with numerous corporates still keen to do business, the idea of a JV will now be rocketing up many Board agendas, claims professional services firm KPMG in the U.K.

The past three years have seen consecutive increases in the amount of global JV activity and KPMG sees no reason why 2008 will not see the biggest increase yet.

Doug McPhee, a partner with KPMG’s Corporate Finance practice in the U.K., said: “In these post credit crunch days, you have to ask whether corporates will hunker down and concentrate solely on their existing markets or will they still pursue growth from new products and markets in spite of difficult market conditions? I believe it will be the latter; in which case – with new debt so much harder to come by – the Joint Venture will suddenly find itself back in vogue.”

“The JV was at the height of its recent popularity in 2000 at the peak of the dotcom boom, with just shy of 3500 deals announced globally. By 2004, that number was down to just 800 but then a turnaround began. Despite three subsequent years of bull market conditions in which debt was freely available, it looks as if corporates remembered the benefits a JV could bring and started guiltily returning to the fold.”

“Access to cheap debt may have been removed for now – but the vocal demands from activist investors to realize or release shareholder value have not gone away. As more proposed transactions collapse due to an inability to raise mezzanine and senior takeover debt, then the smart money must be on a significant increase in JV activity.”

KPMG’s data on the state of the JV market (sourced by Thomson Financial) shows that there were 1759 JV deals globally during 2007; well down on the 3391 from the boom days of 2000 but – significantly – more than double the 810 deals registered in 2004. Interestingly, when taken in conjunction with the number of Strategic Alliance (SA) deals also announced, it becomes clear that total JV / SA activity has been reasonably flat for six years, constantly hovering between 4000 and 5000 deals. In the latter three years though, JVs have been steadily gaining on their SA counterparts and now account for 36 percent of the total, as opposed to the low point of 19 percent in 2004.

It is no surprise that SA deals outnumber JVs by two to one –as such deals are far less complex to establish. According to McPhee though, it is the trend which is important, not the actual numbers – and it is seems clear that it is the JV star which is the one in the ascendancy.

He continued: “Now seems like an ideal time for corporates to reacquaint themselves with the Joint Venture. Despite everything happening around us, excellent growth opportunities still remain, especially in the emerging markets, yet companies risk missing out. In times of falling corporate debt issuance, a JV can be very powerful in quickly achieving exposure to new technologies and products, distribution channels and markets – and all with limited capital investment.”

“In a hypothetical example, Company A contributes assets and know-how to a JV while Company B provides market access and / or cash. As well as securing strategic market goals, the JV means that Company A avoids having to obtain debt financing for, say, general goodwill or the takeover premium which may have been required if it went for an outright acquisition. The potential benefits should be clear – in the absence of cheap debt – 2008 could become the year of the JV.”

Other findings to emerge from the Thomson research include:

* In terms of their involvement with JV and SA deals, the U.S., Japan, U.K., Canada, China, Australia, India, Germany, France and Hong Kong have been the top ten most active countries over an eight year period.
* Japan dropped out of the top five for the first time in 2007, China has been in the top five since 2001 while Russia is the big mover in recent times; breaking into the top 15 for the first time in 2006.
* The US is the single greatest participant in the JV market, responsible for 404 JVs in 2007 alone. However, this is still only about 30 percent of the activity it registered in 2000. Japan’s fall has been even greater with 2007 JV activity levels a mere one-seventh of that in 2000.


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