Platform company

A platform company is a company that a Private equity group (PEG) views—when investing through acquisition in a new industry or market space—as a starting point for follow-on acquisitions in the same area.^[1]

Business context

At the time the PEG acquires the platform, they do not have an existing compatible company to combine it with that would yield synergies. Platform companies stand in contrast to “add-on” or “tuck-in” acquisitions, where synergies to an existing portfolio company exist.^[2]

Estimates vary across sources, but add-ons constitute roughly 40-50% of PE buyout activity, making it critical for business owners who are thinking of taking a private equity investment to understand some of the strategic implications of both views.^[3]

Add-on and tuck-in acquisitions are usually marketed by Boutique investment bank and considerably smaller companies so as to not dilute the culture of the platform. In academia, Platform companies are those that involve not only one company's technology or service but also an ecosystem of complements to it that are usually produced by a variety of businesses. As a result, becoming a platform leader requires different business and technology strategies than those needed to launch a successful stand-alone product.

Fundamental approaches

Platform leadership is typically built with one of two fundamental approaches: "coring"; and "tipping". "Coring" is using a set of techniques to create a platform by making a technology "core" to a particular technological system and market. When pursuing a coring strategy, would-be platform leaders think about issues such as how to make it easy for third parties to provide add-ons to the technology and how to encourage third-party companies to create complementary innovations. Examples of successful coring include Google Inc. in Internet search and Qualcomm Inc. in wireless technology. "Tipping" is the set of activities that helps a company "tip" a market toward its platform rather than some other potential one. Examples of tipping include Linux's growth in the market for Web server operating systems. Another tipping strategy is for a company to bundle features from an adjacent market into its existing platform. This is referred to as "tipping across markets".^[4][5]

In common use of the term, platform companies are those of sufficient size and talent, and with enough talent management and succession planning capabilities, to support add add-on or tuck-in acquisitions. Private equity groups (PEGs) seek to acquire companies that they can grow or improve (or both) with a view toward eventual sale or public offering. In terms of growth, the financial sponsor usually acquires a platform company in a particular industry and then tries to add additional companies to the platform through acquisition. These add-ons may be competitors of the original platform company, or may be businesses with some link to it, but they are added with the goal of increasing overall revenues and earnings of the platform investment.^[6]

Strategic planning

PEGs spend much time developing strategic plans and an investment case for a new platform to determine why they are buying a business and how to generate an attractive return. This analysis is usually even more comprehensive for businesses that are new to a PEG. For add-on acquisitions, PEGs sometimes lean more on the expertise of its relevant portfolio company's management to determine the fit, synergies and strategic benefits of a transaction. For new platforms, PEGs view each transaction as stand-alone. There are no synergies, there is only a transaction with an investment rationale on how to grow the business and generate a targeted return. That rationale is the driver behind the deal, and it defines how the PEG creates value through things like capital infusions, operating partners and even future add-on acquisitions. As a result, the strategy behind the deal is more open-ended. The PEG has a greater degree of operating flexibility and seeks more avenues of growth to maximize the probability of a successful investment. For new platforms, PEGs require that the company not only be self-sustaining, but be scalable. The ability to grow the company is the rationale behind the deal. The PEG seeks avenues of growth to maximize value of the investment.

For new platforms, PEGs focus on issues including industry attractiveness, the opportunities for growth, the self-sufficiency and scalability of the target, and whether the PEG can add value in the acquisitions process. To be self-sufficient and scalable, the target must be able to prosper without any one individual. Customers must be “owned’ by the company, not one person, and certainly not the current owner. Critical processes must be mapped, and the organization must be in a highly efficient.

References