When to Take a Joint Venture Public
Part 1: When — and when not — to IPO a joint venture
THERE ARE MORE THAN 2,000 JVs with significant profitability, strong management, and over $500 million in assets. Many of these could comfortably exceed the initial minimum listing requirements of various stock exchanges. For instance, the NASDAQ Global Market has initial minimum listing requirements of $11 million in pre-tax income in the last fiscal year or two of last three fiscal years, $55 million in stockholders’ equity and $45 million in market value of publicly held shares. As balance sheets get squeezed, and as JVs mature, more corporate parents are beginning to think about the IPO option for their joint ventures.
IPOs of JVs can be a phenomenalway to unlock value for owners — both as a means to monetize earlier investments and, potentially more important, to drive improved performance in the future through a more independent, market-oriented, and less complex operating structure. Moreover, by creating publicly-traded stock, an IPO can also create a “currency” to attract and retain top talent — something that has proven quite difficult in traditional joint venture environments. Among the many prominent IPOs of JVs are VISA, Genencor, Vodacom, Orbitz, and LG Philips (Exhibit 1).
Despite the attractiveness of an IPO, however, fewer than 5% of JVs have pursued this path. While the IPO option is not always the right approach — as we explain below — we think that the paucity of JV IPOs also represents some missed opportunities: owners not appreciating the potential, deal makers not building in appropriate terms at the outset, and JV directors not migrating the operating model to make an IPO a more feasible option down the road.
The purpose of this insight is to provide shareholders, directors, and JV CEOs with a set of practical guidelines for when — and when not — to IPO a JV. In a subsequent Part 2, we will share how to prepare a JV for an IPO, if desired.