Theranos-Walgreens Lessons for Joint Ventures


An article in Friday’s New York Times describes the partnership designed to place Theranos blood testing mini-labs in Walgreens drugstores as “a promising marriage gone sour.” The article addresses the hype that surrounded the launch of Theranos, and Walgreens’s excitement about the potential for Theranos to drive customers into its stores. It describes Theranos’ penchant for secrecy and says that Walgreens “skipped its usual due diligence” to get the deal done fast.

The article asks what it will “take for Walgreens to end its troubled relationship,” and refers to unnamed legal experts who correctly say that “nearly all” agreements like this have termination clauses in case something goes wrong. The article goes on to say, “If this one doesn’t, Walgreens would have a good case for suing its lawyers for malpractice.” It states that Walgreens was repeatedly “blindsided,” learning bad news about Theranos from the press.

Although it’s always fun to blame the lawyers, this looks like a story of businesspeople falling in love with their deal, not a story of legal malpractice. Experienced lawyers seldom forget due diligence or termination clauses. When a prospective partner has many suitors, when an opportunity promises to be the deal of the century, business leaders are tempted to set aside the basics that deliver sound deals.

I described this dilemma in a recent article on joint ventures (JVs):

“If you give up too much in your early negotiations, it is nearly impossible to recover. You need to have enough power to protect yourself over the life of the JV or you will pay a high price at the most critical times. On the other hand, if you drive the partner away in the negotiations, you will never get the JV at all.”

Was it worth the risk for Walgreens to enter a venture with Theranos without due diligence and possibly with a weak termination clause? Was Walgreens’s decision based on careful analysis of a considered risk — or on wishful thinking? The Times article suggests that Walgreens was reckless, which is easy to say with hindsight.

How can businesses manage the risk of joint venture failures? My series on Keys to International Joint Ventures points out the critical importance of understanding your partner before entering a JV. The next installment in the series will focus on anticipating change, including change at your partner.

Assess your JV risks dispassionately and consider the potential returns on a risk-adjusted basis. This is a team activity, requiring a lawyer with JV experience, as well as finance, engineering or technology, tax and other professionals. I don’t think Walgreens’ general counsel forgot about termination clauses and due diligence. Did Walgreen’s management carefully consider the Theranos opportunity with its team? Or did top people make commitments based on the hype surrounding Theranos and its founder, leaving lawyers and other professionals out of the process until critical deal points were cast in stone?

We don’t know the process Walgreens used, but we can learn from its experience — you can enhance your JV story by carefully evaluating and deciding on risk.

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