M&A: Making asymmetric bets in tech sector
We recently received an email from a client asking for our thoughts about a recent acquisition that had just appeared on the “ticker tape”. We spent some time writing this up but at the same time it enabled us to study in more detail what was happening in this specific sector more broadly. The sector in question was the procurement technology market (procure to pay technology to be precise) but I think the insights have a broad relevance.
The influence a company has in its space is a function of its status and prospects relative to its competitors and this is often reflected in its market share. In this case the acquirer has different levels of influence in different categories across the procurement technology space. By acquiring a company focused on data, it filled a gap in its portfolio. An investor studying this may calculate that company’s influence and prospects by adding up the positions it has in its various categories that make up its total revenues, multiplied by the influence or power those categories have in their own right, whilst adding in the synergies they may be able to crystallize from the acquisition.
If we look at the procurement technology market place it is split into three tiers. Tier 1 are companies with true market authority like Ariba, Tier 2 are those with brand recognition and are punching upwards like Coupa (probably should be Tier 1!). Whilst the 3rd tier tends to be lesser brands and are fragmented with minimal influence.
This acquisition, like so many, saw the acquirer looking to move up a tier and free itself from the forces it is in. Its aspiration is to change its position relative to those in its tier and possibly break out by developing new and disruptive advantages and assets. This requires making an asymmetric bet ie a bet on something that is new.
In this case (like so many others I have seen) is a classic case of management struggling to fill gaps in a lackluster situation which will result in a short-term flip followed by a mediocre outcome. The reason being the focus needed to turn this into a crown jewel is not there. Yet elsewhere in the same sector I see the likes of Amazon entering the market place for the first time with a completely different rule book and making what can only be termed a true asymmetric bet which could completely disrupt the procure to pay technology market place. The procurement technology market like much of the B2B market place has been cyclical in its behavior but with an Amazon entering the arena, we could see something that is secular – i.e. not to be repeated.
Companies in this space need to start thinking about making similar asymmetric bets if they are going to survive. Allocate resources and develop power in new or specific areas that create clear differentiation that is unmatched. These bets create power and drives a wedge between the theories of leadership and management.
Managers loathe asymmetric bets. They are unpopular with the firm and its employees as they are hard to support and often result in change. They are highly visible and involve accountability. They also threaten the past and stretch a firm beyond its comfort zone.
Leaders don’t ignore this but they are focused on making the company powerful because this enables the company to win. They look outside not inwards like managers. They shape the company to the market and the opportunity whilst managers strive to shape the market or customers to them. Unlike a manager, it is important for a leader to be different and make a difference, and therefore sacrifices are worthwhile.
A company wishing to become a Tier 1 player whether small or large needs to lead first and manage second. Both are necessary but in the correct order and emphasis.