How integrating a platform acquisition is more challenging than a tuck-in or scale acquisition?

Introduction

  1. More companies are using M&A as a growth strategy to increase market share.The acquisition strategy adopted by each business to grow its market share is different.Companies acquire businesses that align to their corporate strategy.
  2. Previously, most acquisitions were done to increase scale. Companies acquired their competitors to increase their market share and revenues.The rationale was that a bigger company would have a power over suppliers and customers on pricing.Such acquisitions focused on cost savings with integration strategy based on maximizing costs synergies.
  3. With advent of Digital, technology is used as a operating and business model by most companies to generate revenues. Companies are no longer focused on acquiring businesses for scale.The existing business model of legacy companies are not relevant when compared against the new age technology companies.Due to this, most legacy companies are losing customers and market share to digital entrants.One instance is how Square and PayPal has disrupted the conventional payment business model of legacy businesses. Hence to stay relevant, legacy businesses are acquiring digital business that are complementary to their business. Most of these acquisition strategy are either tuck-in or platform based acquisitions.

Tuck-In acquisition strategy

  1. In case of tuck-in acquisitions, companies acquire businesses with revenues less than 10% of its business.These business primarily strengthen the existing offering or fill gaps in their existing services or processes.Post acquisition, these companies are completely integrated into acquirer business.If the target has a huge brand value, then the acquirer might allow the target to retain its identity for 1-2years post acquisition to protect the revenues from target customers, but after the stabilization phase, the target is completely integrated with buyer.As the deal objective is to strengthen the capability or acquire talent, integration strategy is mostly focused on revenue synergies by retaining the talent and redeploying them at higher margins for other projects.There might be some cost savings in integrating the backoffice functions of target like Accounting, Finance and IT with acquirer, but the integration focuses on leveraging the service/product/skills of target to increase revenues.

What is Platform Acquisition?

  1. Incase of a platform acquisition, the acquirer is buying a business that is orthogonal to its core business.Some common situations would include the acquirer looking to enter a new market or bring a new product to market.It would take years to organically build a presence for acquirer.Hence the acquirer acquires a strong target operating in the new business and use the target company as a platform to build market share and presence.Hence the name Platform acquisition.
  2. Platform acquisitions differ from Tuck-in acquisition, as the target companies acquired is a big company with good revenue, high margin and substantial customer base.These companies have a good presence in their respective regions.The management running the business is extremely competent and responsible for the growth of the target business.These business operate in multiple locations and countries, have a defined standard operating procedures to run their company in a professional manner to generate high growth.
  3. As these companies have a powerful management, strong brand, good revenues, high growth due to loyal customer base, valuation of these companies come at a premium.The acquirer buys these companies at a higher price as organically building the market share takes lot of time and cost.Hence the acquirer is ready to pay a huge price because benefits from acquiring such business is huge.
  4. Hence integration strategy for Platform acquisitions are different from any acquisition.The acquirer after paying a premium price would be interested to capture value and synergies post acquisition with sound integration frame work to justify the premium price paid.

Integration strategy for Platform Acquisitions

  • Any integration strategy needs to follow the deal rationale and to realize the deal objectives of why the acquisition was done in the first place.
  • An integration manager needs to ask two questions before creating an integration strategy

What are we acquiring?
Why are we acquiring?

The integration strategy needs to capture the answers to the above question.

  • In case of a platform acquisition, the buyer intends to build a presence in a business which is orthogonal to its existing core business.
  • Hence the acquirer should retain the target senior management leadership post acquisition and allow them to continue running their business as the acquirer does not possess the core skill and experience to run the target business.
  • The acquirer needs to preserve the operating model of the target which was responsible for the growth of the target all this while and what prompted the acquirer towards this acquisition. Any move by acquirer to tinker on the operating model will destroy the value.The acquirer can offer its opinions to further refine/improve the existing processes of the target but any move to integrate the operating model of the target with acquirer would destroy value.
  • The acquirer should allow the target to run as a stand alone entity and selectively integrate only those functions which can complement both of them.
  • The target culture would be different as the operating/business model is different.The culture required to remain successful in one business model might be different in another.The acquirer would have assessed the culture fitment with target during due diligence and would identify the risks involved in cultural integration.Hence it would better for acquirer to allow the target to run separately and after sometime can borrow the best practices from target culture to improve it’s own culture and Working environment.
  • The core business of the target, be it product development/new technology should not be disrupted.The acquirer needs to ensure the core business of target and its business is protected against competitors by retaining its customers and workforce.
  • The brand identity of the target company should be allowed to exist for a long time post acquisition. As the target company is a matured business with a loyal customer base, it has a strong brand which the acquirer would want to leverage in capturing new customers and revenues.Hence the target brand needs to continue for a long time.
  • The sales model of the acquirer and target needs to be analyzed in detail for similarities and differences. If the sales model is different then Salesforce integration should not happen.
  • The acquirer also needs to invest on Target business to strengthen its existing service offering.The investments can be done on the basis of resource addition or expanding in new locations or adding a new product offering.The target business model and service offerings should have a buy-in in the acquirer organization.This can be done by working on projects that involve employees from both entities. With increasing interactions by way of working together, the acquirer and target can build a good relationship that would lead to the increase in buy-in among both organizations.

Amazon acquisition of Whole Foods is a classic example of Platform acquisition

  1. A classic example of a platform acquisition is Amazon acquisition of Whole Foods.Amazon business model is online and digital while that of Whole foods is a brick and mortar retail chain.Amazon strategic rationale behind this acquisition is to leverage Whole Foods as a warehouse to deliver goods to Amazon customers.Customers can return their Amazon goods in any of the Whole Foods store.This gives the customer to buy items in the store when they come to refund their Amazon goods.This increases the revenues through Point of Sale.In addition, Amazon can provide huge discounts and cashback offers to customers in Whole Foods store.
  2. Amazon had ensured that Whole Foods stores brand is preserved as it has a legacy and following among customers.Hence this acquisition which was based on combination of Digital operating model with Brick and Mortar model generated complementary revenues for both Amazon and Whole Foods.

Conclusion

  1. There is no one size fit all integration strategy for all acquisitions.The integration strategy is based on the deal objectives.
  2. The value drivers for each acquisition is identified and integration plans are executed to capture revenues from the value drivers.
  3. Integrating a platform acquisition is challenging and different against conventional acquisitions.The Integration team needs to preserve the operating model and brand identity of the target to realize additional synergies.Hence the integration can be limited to only integrating the backoffice functions like HR, IT and Finance to track the key business metric like Revenues, Billing and invoicing.
  4. If the acquirer intends to integrate a function, then detailed study is required how each functions operate similarly and differently through gap analysis. This is followed by integrating only those areas which do not disrupt or destroy the value.


Leave a Reply

Open chat
Powered by