The New Paradigm For Platform M&A

Cofounder at zblocks and at Mergeflo. Globally recognized business builder, thought leader and entrepreneur.

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Platforms are more than a buzzword. As of 2019, 7 out of 10 of the largest global brands use the platform model.

Many people conflate platforms and products, but platforms are different from products because they are two-sided marketplaces: Facebook has users and advertisers, Uber has drivers and riders, Google has publishers and advertisers. With each of these examples, the company can create a network effect at scale by growing on both sides of the dichotomy.

While mergers and acquisitions (M&A) have been a vital growth lever for both products and platforms, platform M&A are less understood. Platform M&A are typically undertaken to add, enhance or multiply the network effects mentioned above. Typically, one side of the platform gets weaker over time and could require a boost through M&A rather than organic growth.

Product And Platform Differences

As mentioned above, people misunderstand platforms as simply technical layers and glue. They might also not understand that “platforms” differ from “products,” although they are often related.

A product is created, made or developed for sale or distribution. It can be a physical item, like a car or a piece of clothing, or it can be a service, like accounting or law. Products are typically designed to solve a specific problem or meet a specific need.

A platform is a type of infrastructure or foundation used to support the development, distribution or delivery of products. It can be a physical structure, like a stage or a desk, or it can be a digital environment, like a website or a mobile app. Platforms provide the tools, resources and support necessary for products to be created, marketed, transacted and sold.

A product and a platform, however, are closely related. A mobile app might be a product sold to users, while the app store or website which it is downloaded from is the platform that supports its distribution. However, with a platform, the bulk of the value creation happens outside of the company’s internal functions—i.e., inversion—and creates two-sided network effects.

M&A Value Drivers

There are many reasons to embark on platform M&A, such as strengthening one side of the platform, adding a new network effect, lowering the cost of platform operations or accelerating ecosystem reach. M&A involving platforms can be complex and challenging because platforms often have unique features and dynamics that need to be considered. Some of the core value drivers for platform M&A include:

User Base

The size and composition of the platform’s user base can be a key factor in determining its value and potential for growth. A platform with a large and engaged user base is likely to be more attractive to potential acquirers because it provides a ready-made audience for new products and services. It can strengthen one or both sides of the platform, which can help to scale.

Network Effects

Platforms must show strong network effects, where the value of the platform increases as more people use it. This can create barriers to entry for new competitors and make it difficult for an acquired platform to keep its user base if the acquisition is perceived as unfavorable.

Openness

Openness refers to how much a platform, system or environment is accessible for others to use, change or build upon. An open platform, for example, is one that lets developers create and distribute their own apps or services without having to seek permission or pay a fee. An open system lets users access and manipulate data or information without being restricted by proprietary technologies or formats.

Openness is a key value driver during M&A. The more you open the platform, the more adoption you get. However, it generates less direct revenue. One of the key aspects of M&A is about increasing openness to drive enhanced adoption and volume or reducing openness to drive high monetization. Integration can alter, enhance, protect, amplify or change openness with a profound impact on the deal value.

Regulation

Platforms are often subject to various regulations, including antitrust laws, privacy rules and consumer protection laws. These regulations can affect the feasibility and terms of platform M&A and require careful consideration and compliance to protect value.

Inversion

Inversion means flipping value creation from inside the company to outside the company. For example, open innovation helps the platform evolve, rather than traditional R&D with the product model. Instead of traditional marketing, platforms depend more on customer reviews. These factors affect the openness and operational costs of the platform.

Considerations For Platform M&A

When companies look to acquire or merge with a platform, they need to conduct due diligence. While this is a lengthy process, a few of the considerations they should be making include:

• Acquire platforms for the right reason. Some good reasons include strengthening one side of the platform, adding scale, increasing inversion to reduce operational costs or driving openness for scale. Because of this, usually platforms acquire other platforms.

• Due diligence should evaluate all the core value drivers in addition to traditional diligence areas like commercial, financial, operational, legal, etc. Specific emphasis should be placed on the level of openness, inversion and risks or opportunities created after the acquisition is consummated.

• Given that all the functions are located outside the company, traditional functional M&A integration approaches do not work. The integration management office (IMO) must be configured by value drivers as work streams rather than functions.

• Synergies do not appear as cost or revenue synergies. Instead, they manifest themselves through network effects changing the KPIs from traditional deals.

• Choosing the right speed to integrate is a must. Moving too fast to lower operational costs could break network effects.

• Remember that the more the inversion and openness, and the less the level of internal operational integration, creates a departure from traditional M&A playbooks.

Conclusion

Platform M&A have changed the way value is created. In this new paradigm, one must depart from functional M&A methods and think of value drivers. The traditional M&A integration process is still necessary. That said, the new process requires new strategy, operations, product and platform skills. In short, rigid playbooks from yesteryears have broken down as this new paradigm evolves.

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