Wednesday, 14 November 2012

It is all About the Platform

I have mentioned the word platform several times in my posts, however, the word actually means different things in different circumstances, so I thought I should clarify.  Private Equity (PE) looks for platform investments and sellers look for platform buyers but they are not necessarily the same thing.
A platform investment for a PE is an investment/acquisition in a new space that it intends to grow in.  For example, when Vector Capital bought 20-20 Technologies in July of this year, they announced it as a platform investment.  Before the acquisition Vector had holdings in consumer software (Corel) and digital media (RealNetworks) but nothing in computer-aided design software for the interior design and furniture industries.  In a platform investment, the buyer is looking for a market leader that it can use as a platform for growth.  Subsequent acquisitions or “add-on” investments will be one way to achieve this growth.  The investment criteria differ between platform and add-on investments in that they are typically stricter for a platform investment. A platform investment would ideally be on the larger end of a PE’s size range and be bought at a good price.  There is more risk in a platform investment because it comes with the challenges of learning a new sector landscape and the target company’s competitive position in it.  When considering add-on investments the PE is effectively acting as a strategic buyer and looks to exploit potential synergies between the buyer and the target.  Add-on investments are also called “tuck-in” or “tuck-under” investments because they tend to be smaller than the platform investment.
The other way the word platform is used is to describe a type of buyer.  A platform buyer is a strategic buyer looking for a platform to grow its revenues by adding complementary products, personnel, technology, etc.  Platform buyers are good buyers because, (i) they can pay a good price because they bring a growth opportunity to the target, and (ii) they will leave the existing assets (brands, people and legacy) in tact.  As an example, we were engaged to sell a pattern recognition company in the field of product quality control.  The technology would scan a production line and identify products that did not meet certain quality parameters.  In this case, the ultimate buyer was the US Department of Defense, who paid a strong premium and who then used the technology for facial recognition for national security purposes. 
I spoke earlier of a PE acting as a strategic buyer and looking to exploit synergies.  Synergies can come about in constructive or destructive ways.  A destructive way would occur when a direct competitor buys a company for its customer base.  In this case, if the buyer has excess capacity, it could shut down the acquired company and service the customers using its existing product and plant, thereby growing revenues and improving margins (synergies) but leaving the target decimated.  On the other hand, a platform buyer will consider the target company’s customers, personnel, or technology as complementary rather than redundant. In this case the target retains the existing customer base and also adds the acquirers’ customers thereby growing revenues by a higher factor than in the previous example and creating more value.  As a result, a platform buyer is a good buyer.  They can pay more because they can create more value and they retain the brand, team and legacy of the seller.
In the first instance the word platform refers to the vehicle that will form the basis of a sector growth strategy and in the second case it refers to the assets that generate complementary growth.  Either way, it is all about the platform.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.

1 comment:

  1. Many organizations are enjoying the success derived from mergers and acquisitions. Mergers and acquisitions is a company strategy for buying or working together organizations to save costs, provide company development, improve capital structure and other company goals and goals. It requires a great knowledge about a company and its prospective buyers to make it a successful undertaking for both the organizations.

    Mergers and Acquisitions