In today’s fast-paced business world, companies are constantly looking for ways to stay ahead of the competition. One strategy that has become increasingly popular is platform acquisitions. While you may have heard this term thrown around, you may not fully understand what it means or why it’s so important. These acquisitions can be a game-changer for companies, giving them access to new technologies, markets, and customer bases. But why are platform acquisitions so important? Let’s take a closer look.
What is a Platform Company?
A platform company is created when a private equity group first acquires a company in a particular industry. This acquisition works as a foundation for more purchases within the same industry. They’re also known as “strategic private equity” and often have an already established business model, complete with an employee base and steady growth.
How is a Platform Acquisition Different from Other Acquisitions?
A platform acquisition differs significantly from other types of acquisitions. This is primarily because a platform acquisition involves adding a company that provides a platform for other companies or individuals to build their own products or services. For example, a bolt-on acquisition is when the platform company takes on a smaller business in the same market. The bolt-on will run semi-independently, whereas the platform is more controlled.
A platform acquisition is not necessarily focused on acquiring a company’s existing products or services. Instead, the focus is on acquiring the platform itself and the network of developers, customers, and partners that use the platform. The acquisition often involves a company with a large user base or customer network. This network is valuable because it provides a foundation for other companies and developers to build on top of. In many cases, the value of a platform is in its network effect.
How do Platform Companies Work?
Private equity groups prioritize investing in platform companies that are top performers in their specific markets. Such companies employ innovative systems that give them an edge over their competitors and maintain their leadership position in the industry. After acquiring such companies, private equity groups look for complementary companies to add on and enhance profitability and bolster industry dominance.
A well-versed leadership team is crucial for a platform company to succeed. Private equity firms seek out executives with a proven track record in their respective industries and strong capabilities in directing business operations. The management team may include retired executives from large businesses who serve as advisors on regulation and expansion while they sit on the board.
Private equity firms evaluate potential platform companies based on specific investment criteria such as geography, industry, cash flows, and profit potential. These criteria require the companies to have well-established systems that match the acquirer’s investment goals.
Example of a Platform Company
Facebook is a large platform company as a well-established and well-known social media network. It acquired Whatsapp and Instagram, and is integrating their functions and networks into Facebook and vice versa. This gives Facebook an even larger corner of their niche market.
Benefits of a Platform Acquisition
There are several benefits to a platform acquisition. It provides an opportunity to acquire a large and engaged user base or customer network. This can be valuable for companies that are looking to expand their reach and grow their customer base. It also provides an opportunity to expand into new markets and industries. This is because platforms are often used by a wide range of companies and developers and can be leveraged to create new products and services.
Finally, a platform acquisition can be a strategic move to strengthen a company’s position in the market. This is because it allows a company to control a critical infrastructure that other companies and developers rely on.
Challenges of a Platform Acquisition
There are also several challenges to a platform acquisition. it can be difficult to integrate the platform into an existing product or service offering. This is because platforms are often complex and require a high degree of technical expertise to operate. Also, a platform acquisition can be expensive, mainly if the platform is already widely used and has an extensive network of users and developers.
Finally, a platform acquisition can be risky if the platform is not well-maintained or if the company that owns the platform experiences financial or technical difficulties.
A platform acquisition can be a strategic move for companies looking to strengthen their position in the market and expand into new markets and industries. Whether you’re a business owner and investor or just curious about the latest industry trends, getting acquainted with how platform companies work will give you valuable information.
