The end of the affair

IT HAS BEEN a week of romantic second-chances in the business world. On March 11th Barrick Gold, the world’s most valuable gold producer, said it would no longer pursue its $17.8bn hostile quest for Newmont Mining, its nearest rival. Instead both parties agreed to form a joint venture (JV) to create the world’s largest gold-mining site, in north-eastern Nevada. The tie-up cemented the view that the state is the easiest place to get hitched in America.

A day later in Japan, the partners in what had become the business world’s most spectacular falling-out announced a “new start” to their ménage-à-trois. Renault, Nissan and Mitsubishi launched a “consensus-based” board to replace the command-and-control structure imposed by Carlos Ghosn, who chaired all three companies until his arrest in Japan on charges of financial misconduct (which he denies). The aim is to rekindle the romance that began when Renault first rescued Nissan from near-bankruptcy in 1999.

Such JVs and strategic alliances, however schmaltzy, receive too little attention as business entities. They lack the swashbuckling allure of mergers and acquisitions (M&A). Investment bankers shun them because they generate few fees. Yet they are indispensable. They enable businesses to collaborate without entering the touchy terrain of changing who controls them. The RenaultNissan-Mitsubishi alliance is a car-producing powerhouse. But it is also a textbook example of why such structures often go wrong.

JVs and strategic alliances are structured differently but share some characteristics. As PwC, an accountancy firm, describes it, a JV enables companies to pool resources in a separate business entity, like the Nevada gold company. An alliance is looser; it allows firms to share production platforms, for instance, which lets them preserve more autonomy, as in the car industry. In an era of globalisation, blurred lines between industries and technological disruption, such ad hoc relationships become more important. Firms want to keep their options open, rather than undergoing the Herculean task of buying and integrating a firm that may not provide the answers to the challenges of the age. By some estimates, the value of JVs and alliances is growing even faster than M&A.

The partnerships share some overlapping motivations. The most common is to enable cross-border transactions. In some countries (like China) and some industries (like airlines), they have been a key way to enter new markets. Call these long-distance relationships. A second is access to new products and technologies; pharmaceutical firms forming partnerships with biotech companies, for example. In other words, friends with benefits. The most traditional rationale is cost-savings, which underpins Barrick-Newmont’s JV. This is a bit like civil unions: closely akin to marriage, but not quite. The most modern motivation is to avoid the threat of strategic disruption. In the car industry, for instance, electrification and autonomous driving are forcing companies to pool ideas. A study by the Boston Consulting Group says that a typical European carmaker has more than 30 partners across five different industries in a handful of countries. Call this constructive promiscuity: sleeping around to gain experience.

While hookups may be easier to pull off than a full-scale merger, they often end in tears. According to Water Street Partners, a consultancy, only around half succeed. Common reasons why they go wrong include partners’ changing strategic objectives, new executives finding them tedious, and culture clashes. Under Mr Ghosn, the Renault-Nissan-Mitsubishi alliance eventually came to exemplify many of their worst traits. It and other tie-ups could do with a corporate equivalent of a “prenup” clause—a legal contract stating how to terminate the relationship when the passion runs out.

The Franco-Japanese fling started out well, with a clear, limited aim: Mr Ghosn was parachuted in by Renault to rescue Nissan. Then the focus turned to preserving each firm’s independence and sharing costs such as purchasing. Though there were cross-shareholdings, their main objective was not control.

But as often happens in partnerships, control eventually became a problem. Mr Ghosn began to consider a full-scale merger, on terms the Japanese executives feared would be unequal—even though Nissan had become the stronger partner. The alliance had no governance structures in place for dealing with such questions; it was shaped largely by the force of Mr Ghosn’s personality. That may be why things only came to a head when the police arrested him in Tokyo last November.

It is a credit to the alliance that it has, at least for now, survived the bedroom brawl. On March 12th Jean-Dominique Senard, Renault’s chairman, took the helm of a new four-man board, that includes the bosses of the three car companies, and which aims to replace the patriarchal Mr Ghosn. To further mollify the Japanese, Mr Senard is likely to be vice-chairman of Nissan, not chairman.

Behind the boardroom door

Some of the Ghosn-era shortcomings remain, however. Strategic objectives are still ill-defined. The questions of ownership continue to be taboo, even as the alliance moves further to combine operations. There are no rules for resolving disputes; Mr Senard said only that he would use his diplomatic skills if they arose. The potential for clashes persists (as Japanese journalists noted, Renault provides two of the alliance’s board members, Nissan and Mitsubishi one each). And there is no hint of a prenup.

If partnerships want to adapt to new circumstances, taking evolving strategies and strong personalities in their stride, they should do what Renault-Nissan-Mitsubishi has failed to and establish clear rules of engagement—and disengagement, just as banks now have “living wills” to wind them down if disaster strikes. JVs and alliances are tricky to manage for a reason. The more successful they become, the more the question of control that they were set up to avoid will rear its ugly head.

This post was originally posted at https://www.economist.com/business/2019/03/16/the-end-of-the-affair.

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