JVs under stress

Of all the business organisms under the capitalist sun, few are as susceptible to change as joint ventures. There are JVs that have worked more or less the same way for decades, but those are exceptions. The vast majority have shorter and more eventful lives, adapting or dissolving as the strategies of the parents who created them evolve and diverge in a changing world. Ask a corporate dealmaker about JVs and you're likely to get an earful about complexity and instability. And yet JVs proliferate because they're sometimes the only way to accomplish an objective.

So what's happening in joint-venture land during this economic crunch? The answer, based on conversations with specialists and a review of JVs in the news lately, is that two main trends are getting under way.

First is the restructuring of JVs. "You have multiple owners, with different abilities to respond to the financial crisis," says James Bamford, who with David Ernst left McKinsey & Co. a year ago to start Water Street Partners, a consulting and best-practice sharing organization focused on JVs. "Often, they have different views on how they want their ventures to respond."

The other development is the way economic adversity is expected to give rise to new JVs as companies reach for alternate tools to keep pace in R&D, support suppliers or accomplish other goals. This doesn't mean a wave of JV formation. According to Water Street's numbers, global JV announcements were down by around 30% in 2008 after peaking -- like acquisition activity -- in 2007. But as Ernst points out, since JVs usually involve contributing assets rather than cash and can also help avoid debates about valuation, they're more feasible than acquisitions during a credit crunch.

Restructurings, meanwhile, are already in evidence. A couple of recent ones illustrate the forces that are at work. Not coincidentally, both are in semiconductors -- a sector known for cyclicality, capital intensity and use of JVs -- and involve U.S.-Japan partnerships.

Start with Axcelis Technologies Inc., a Beverly, Mass., semiconductor equipment company, and its soon to be ex-partner, Sumitomo Heavy Industries Ltd. For now the two remain 50-50 owners of SEN Corp., which sells Axcelis's ion-implant technology in Japan. The relationship is complicated, dating to at least the 1990s, when Axcelis was a part of Eaton Corp. Sumitomo tried to acquire Axcelis last year but withdrew as industry conditions worsened.

After Sumitomo's exit in September, Axcelis CEO Mary Puma detailed a big disagreement in a letter to Sumitomo's CEO that was filed with the Securities and Exchange Commission. With a convertible debt issue coming due in January, Axcelis wanted a loan from SEN, arguing that the JV's $120 million cash balance exceeded its needs.

Puma complained that Axcelis' share of the cash had been trapped in Japan because Sumitomo had refused to agree to dividends in recent years. The two sides found a solution at the end of February. Sumitomo will buy Axcelis' half of the JV for $113 million. Axcelis will license certain technologies to SEN and use part of the proceeds to (belatedly) meet its convertible bond obligations. Assuming the transaction closes, another JV will have lived out its lifespan.

Another recent restructuring involves SanDisk Corp. of Milpitas, Calif., and its flash-memory manufacturing JVs with Toshiba Corp. Like Axcelis, SanDisk, the biggest maker of memory cards for digital cameras, is suffering. In September it drew a hostile bid from Samsung Electronics Co. Ltd., a major licensor of SanDisk's technology. After rejecting the bid, SanDisk moved to boost its financial flexibility by restructuring its manufacturing JVs with Toshiba. At the end of January, they signed a definitive agreement transferring capacity and lease obligations to Toshiba and yielding SanDisk $890 million. (With SanDisk's share price languishing, investors may wish Samsung's offer was still on the table.)

If semiconductor players are blazing the trail in restructuring, which sector will lead the way in forming defensive JVs? Autos, of course. Mark Short, an automotive-supply-chain expert in the transaction advisory services practice at Ernst & Young LLP, foresees common customers forming JVs just to buy and run troubled but vital suppliers. And Gary Silberg, national advisory automotive industry leader for KPMG LLP, says automakers' need to develop new technologies when cash is scarce will lead to more R&D JVs.

JVs are subject to change, all right. The flip side is that they're also flexible, which assures that corporate dealmakers will be complaining about them for years to come.