How PE Firms Multiply Market Share Using A Platform Play
Generally, when you hear about acquisitions in the news, you’re looking at a one-off acquisition, however, there’s another major type of acquisition that private equity (PE) firms love: platform acquisitions, also known as a platform play within the industry. It’s a simple strategy that if carried out correctly can help make the parent company (that was initially acquired by the PE firm) become an unstoppable force in its industry. But if you haven’t guessed it yet — it’s a challenging task. In this post, I’ll talk about what exactly is this strategy, what goes into a successful platform play, and the challenges that must be overcome. Let’s begin.
What are Platform Acquisitions?
Platform acquisition or a platform play is an acquisition strategy where the PE firm or parent company acquires a target or platform company for its technological foundation. Acquirers are looking for small, relatively new companies (often industry disruptors) that have a proven track record with competent management and the ability to scale their platform significantly. This, of course, raises the price of the initial acquisition but PE firms believe that bolt-on acquisition (acquisitions made by the platform company to expand) will help make this money back relatively quickly (in most cases).
Bolt-on acquisitions are the other part of the equation. The entire premise is that the private equity group will acquire the platform company, ready it for future expansion, and then acquire other smaller direct competitors. The latter acquisitions being the “bolt-ons”. That’s why the strategy is sometimes called an add-on or tuck-in.
I personally am seeing a growing trend of platform acquisitions in almost every industry. We’re living in a time of cut-throat competition and companies need to expand — often in new territories. Take, for instance, Walmart with its recent series of acquisitions into the digital industry. The brand has acquired over 26 companies in the last few years with 6 in 2018 alone. These also include the $16 billion acquisition of Flipkart, the biggest eCommerce site in India, continuing its rivalry with Amazon. Flipkart, in turn, is acquiring other companies in the digital space to solidify Walmart’s footing in the Indian eCommerce industry.
What Goes Into a Choosing a Platform Company?
There is a long list of requirements that a company must fulfill before it becomes a promising candidate for a platform company. From my experience, private equity firms look for the following criteria:
- Industry Leaders and Competent Management
PE firms do not want to start from scratch, they’re looking for companies that already have a healthy market share that can be expanded. More importantly, after already having paid for a premium acquisition, they do not want to spend additional resources on solving internal problems. To ensure that the company will move forward at a fast pace, they look for experienced executives at the helm.
2. Established SOPs — “Standard Onboarding Procedure”
Since the platform company will be absorbing more smaller sized companies across various locations with different staff, having proven and established SOPs can cut down a lot of work during integration and expansion and help steer the newly acquired entities in the right direction. Having SOPs will also streamline the process of onboarding of data (users, customers, transactions, trends, metrics, etc) onto the platform company. Migrating data and onboarding new accounts efficiently and effectively is crucial to the success of any platform play and having effective onboarding strategies and techniques can improve time-to-productivity by 60 percent!
3. Scalable Operating Platforms
The scalability and compatibility of the operating platform(s) will play a key role in whether or not the bolt-on acquisitions are successful. Since I deal mainly in the tech industry, these platforms are generally technological foundations like a group of the core software.
I’ve also been a judge on a technical ‘beauty contest’ between two competing firms’ platforms. Often PE firms do not have the technical expertise to decide which platforms would scale and provide an engine for go-forward growth, which is where I can help dispel some of the marketing, and evaluates which of the platforms will be most feasible and viable in the long run to meet my client’s growth objectives.
Challenges To Platform Plays
Almost any form of merger or acquisition poses serious challenges and while a platform play will share many of those challenges, there are some unique ones. Here are some of the challenges I have personally faced.
Technical Scalability Of Target’s Platform: Technical scalability refers to the entire tech platform’s ability to grow and expand — hardware, software, manual processes (call centers, support centers, etc). Naturally, this is the most important part of any platform play but almost every target company needs some work done in this area and that’s the challenge — preparing the target company’s platform for the expansion by upgrading their hardware and software, finding bottlenecks, and scouring the code for technical debt. Depending on the size and sophistication of the target company, this can require a lot of time, money, and manpower.
It’s important to understand that while tech startups and companies are built with scalability in mind, almost none are built as a platform company for a platform play. This means that the technical hyper-scalability will nearly always present as a challenge.
Manual Processing: The premise behind any platform play is to use the contacts and reach of a relatively established platform company to grow it into an industry giant, but there is another challenge you have to face during this actual expansion period: manual processing. Manual processing is all the work related to actually scaling up or expanding the platform. Depending on the nature of the platform company, this could mean onboarding new clients, marketing, customer support, call centers etc.
Manual processing includes finding different target companies, evaluating how these will fare for the company, and acquiring them in the most efficient and effective way possible.
Both technical scalability and manual processing need to be optimized at the platform company that will serve as the go-forward platform for an industry consolidation effort by a PE firm.
Conclusion: Platform Plays in the Coming Years
We’re seeing an unprecedented increase in the number of disruptive tech companies starting and succeeding. Many of these companies have proprietary technologies that show incredible potential for scaling up but often lack the capital, market expertise, managerial competence, or all three. Nevertheless, these companies make for a very attractive option for private equity firms and even large corporations that can use the proprietary tech to get their foot in the door without pouring in significant resources to creating something new themselves. Soon enough, the acquirer can exploit the scalability of the platform to acquire additional companies and increase profitability with the goal of becoming a true market leader — very attractive indeed.
Seeing the current trend of PE firms and large corporations acquiring startups and disruptive tech, even in completely different lines of business, I reckon we’re about to see a very large increase in popularity of platform plays in the coming years, with certain startups even creating their growth strategies as a platform, to become more valuable to potential acquirers.