Deals don’t get much bigger than the now scrapped plans between mining giants BHP Billiton (ASX:BHP) and Rio Tinto (ASX:RIO) which intended a $US116 billion joint venture in the Pilbara. Each party took the view that the proposal would not be approved in its current form by the European Commission, Australian Competition and Consumer Commission, Japan Fair Trade Commission, Korea Fair Trade Commission or the German Federal Cartel Office.
The public face of the deals was of course the respective chief executives, Rio Tinto chief Tom Albanese and BHP Billiton chief executive officer Marius Kloppers. Despite the potential for massive synergies the deal was nevertheless considered by markets as problematic; indeed upon the announcement the share price of each company rose. In deals of this magnitude, companies with solid exit strategies can avoid major grief such as this. This is where the CFO can play a critical role and in some cases be the public face.
Chief executives should certainly be the spokespeople for large companies’ deals but in the main, more often than not it is the CFO who walks through the deal in terms of the detail. Given the very public humiliation that the BHPBilliton joint venture collapse must have wrought on ceo Marius Kloppers and with a history of joint ventures dissolving, it would seem that you've got to spend a lot of time thinking about how this thing called a ‘joint venture’ could end.
One problem that appears to arise is that operations executives are charged with planning the terms, without any critical oversight. The problem is operating people including the chief executive have a very hard time with the divorce issue.
For one thing the question of value is really is a CFO issue. The CEO who crafts a joint venture may be the best person to negotiate exit arrangements, because they are working to build trust and an effective joint management team. Few companies spend time thinking about any exit provisions at all, because it's uncomfortable to do that, and in any case when both parties see the benefits, each side will work the sell side of the deal.
Changes in the marketplace or in the regulatory environment should never come as a shock at least not to the extent that there is no exit strategy predicated on these factors. After all, it is MBA 101 to first go through an external analysis looking at political, environmental, social and technological factors in order to be able to effectively peer around corners and assess what could be coming. The truth is things change, and you can't possibly think of everything when you start a joint venture.
Apart from strategy the CFO and his team will be charged with issues that ask the tough questions both in the back room and across the negotiating table. Lawyers will do what lawyers do but who is there to ask the tough questions? Such as:
- How good are the assumptions? (rate of growth, acceptance rate, pricing, multiple revenue streams, costs)
- Is there an exit strategy?
- Are revenues realistic?
- Have all tax returns been properly filed?
- What is the company’s debt carry? What are the ratios?
- Does the corporate structure fit with the business model of the joint venture?
- Who is on the board of directors? Do they have the right background for the company? Is there a sufficient number of outside directors? How are board members compensated?
- Has the company been involved in any litigation or been threatened with litigation?
- Does the company have all required permits and licenses?
Disclosure may be made to the Company’s directors, officers, employees, or representatives who need to know such information for the purpose of evaluating this proposed joint venture. Who else but the CFO will the Board and CEO be comfortable with in relation to such questions?
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