Case Studies
7x Invested Equity Exit
911 Software & Digital Switching - Patricof & Co. Ventures (now Apax Partners) x Golden Gate Capital
One example of a successful Technology-Driven Growth Acquisition involved a start-up stage software company that had developed a state-of-the-art system for managing emergency 911-calls and the deployment of emergency assets (EMS, police, fire, etc.). Based on that technological advantage, TCP was able to acquire the then-only manufacturer of digital switches for the 911 industry.
Essentially, TCP simultaneously acquired and merged the best “front room” in the industry (for managing emergency calls and assets) and the best “back room” in the industry (for routing massive quantities of E911 data.)
The existing cash flow of the acquired operating company enabled TCP to conservatively leverage the $30 million transaction with $18 million in bank debt from the Industrial Bank of Japan.
The $12 million equity investment in this deal from Patricof & Co. Ventures (now known as Apax Partners) exited five years later, to Golden Gate Capital, at $85 million; a 700% return on equity.
Quintessential Example
Industrial Tank Inspection Industry Roll-Up:
The large industrial storage tanks at oil refineries and tank farms need to be inspected periodically. Today, the tank inspection industry, which is highly fragmented and comprised of hundreds of small competitors, conducts these inspections by draining the storage tanks and then entering those containers to test their structural integrity. Operating as it does, the cost of a tank inspection can run $100,000 per inspected tank; the inspection company clears ~$20,000 but the opportunity cost of the empty tank adds another ~$80,000 to the cost of each inspection. As a result of this inefficiency and related high cost, tanks often go un-inspected for long periods.
In its first iteration, TCP partnered with a startup company that controlled a turnkey submersible robotic wall-crawler with embedded ultrasonic and GPS technology. This robot was fully operational and was demonstrated flawlessly by inspecting a Mobil Oil refinery tank full of diesel fuel in three days without draining the tank. With this robot, a tank inspection could be conducted in a fraction of the time, more precisely and without the opportunity cost associated with an idle tank.
The TCP plan in that case was to acquire multiple competing storage tank inspection companies, empowering each acquired company with this technological advantage thus enabling them to take market share and dramatically improve pricing and margins.
By virtue of not having to drain the tanks, even doubling the $20,000 market-rate inspection fee would still result in a more than 50% reduction in the final cost to the customer while eliminating the logistical headaches of draining and refilling the tanks, and enabling refinery and tank-farm operators to satisfy EPA requirements. TCP believed, and still believes, that these economics would enable the empowered company(s) to rapidly capture market share while premium pricing thus driving rapid cash flow growth.
Blood Collection Tubes
Acquisition of Commodity Blood Collection Tube Manufacturers
In the blood collection tube (“BCT”) industry, plasma sample contamination is a major issue for customers. When blood samples are collected in BCTs they undergo centrifugation to separate the testable plasma from the red blood cells. The red blood cells and testable plasma are separated by a semi-permeable separator gel. The problem with this semi-permeable gel membrane is that it does not completely prohibit blood cells from leaking back into the serum and therefore many samples are contaminated due to even slight jostling during the shipping process. Further, this gel also creates blockages in the instrument probes used to draw the plasma from the tube. Tubes using this gel cannot be frozen for long-term storage and thawed without significant contamination. This problem is exacerbated when blood is drawn and lab-tested in different locations (generally shipped by courier; over 95% of blood samples are drawn and tested in separate locations).
TCP identified a material technology that replaces the current gels (that are similar to Vaseline), with a photopolymer gel (photogel) that, after the centrifuge separation process, is exposed to a UV light for approx. 30 seconds hardening the photogel into a solid barrier. This permanent barrier creates vastly cleaner serum samples, improves test accuracy, does not interfere with instrument probes, allows storage by freezing down to ultralow temperatures, obviates shipping problems, and greatly eliminates the need to re-draw and re-test blood.
The technology is immediately-deployable and has demonstrated market validity, however, remains relatively uncommercialized due to a 10-year pursuit of a traditional licensing model. The industry is dominated by several core incumbents who recognize the technology’s value but are reluctant to adopt it. As public companies focused on achieving their short-term revenue forecasts, adopting a technology that immediately abates BCT sales would be detractory and subversive.
While standard “commodity” BCTs sell for $0.10-$0.16 each, specialty BCTs used in liquid biopsy cancer research and other clinical applications sell for $7.00-$15.00 each. The cost of replacing the existing separator gel with TCP’s photogel in the manufacturing process is less than $0.01/tube. A top US research university estimates the value of obviating the issues associated with the current separator gel is $0.30/tube.
Therefore, TCP’s plan was to acquire manufacturers of commodity blood collection tubes with subsequent acquisition into the higher margin specialty tube market, each of which’s product will now be empowered and unfairly advantaged by the new photogel technology. As a consequence of the advantages delivered by the new photogel technology we can conservatively premium price in the commodity tube market at $0.16-$0.18/tube, achieving substantial margin improvement, while simultaneously saving end users $0.30/tube thus taking market share from our competitors resulting in rapid revenue growth.