Acquisitions 2.0 in animal agriculture
Prime Future 015: the weekly newsletter highlighting trends in animal protein
I’m reading the book Titan about John Rockefeller and Standard Oil’s “cooperation” strategy while following this week’s anti-trust hearings with the big tech companies. All of which has me thinking about WHY companies acquire companies. Before we jump into a proposed future for M&A activity in animal ag, here’s a Twitter thread on the general reasons acquisitions happen:
Software, data, analytics acquisitions in ag are all about #3 above and adding capability for an animal health or animal nutrition acquirer. These capabilities are quite different than formulating pre-mix or shepherding a molecule through the FDA approval process. Although far fewer than the crop side of the industry, the best examples in animal ag are Merck’s acquisitions of Antelliq and Quantified Ag, or Zoetis’ acquisition of Performance Livestock Analytics.
It seems like most companies selling products or services to integrators know they need some base level of digital capabilities. But there’s wild variation in how they are going about incorporating these capabilities:
A lot of companies trying to build capabilities internally. If it's not your game, it's a heavy heavy lift - you don’t just hire some software programmers and check the box. Aside from domain expertise, there’s the issue of internal bureaucracy barriers that can choke a prospective business line before it has the chance to grow.
Partner or license.
Acquire.
One issue with the acquisition path is, who do you acquire? There are not *that* many companies with digital offerings for livestock & poultry that are post-revenue, high growth, or near profitability. The acquisition pool is still fairly limited.
Another challenge for animal health and animal nutrition is that these companies have used digital and data offerings in the past as “value add” to win business in the form of core product sales. The strategies were right for their time but the consequence is that production companies are now accustomed to having access to new tools at no cost, leaving animal health & animal nutrition companies launching digital tools with a messy conundrum of how to price and actually capture value.
What strikes me is that every time I turn over a rock in livestock and poultry looking for places to add value through software, I find a trail of paper from manual processes OR I find a trove of data just sitting there with limited value being derived. There is so much low hanging fruit to improve work flows, data capture, and higher value data analysis in this space.
What makes animal ag so interesting is the scale. A $.01 per pound improvement creates millions in ROI for vertically integrated processors, particularly in poultry.
And yet, software is still a tricky sell in large swaths of poultry, swine, and even beef where the ROI is measurable and even significant, but not detected in x cents per pound reduced cost. Reducing cost is the mental model for justifying spend for most production companies. Perhaps I should say, that’s the mental model for justifying spend for production companies solely focused on the commodity game. There just seems to be a correlation of companies that are focusing on increasing revenue through differentiation in their product and those that see & prioritize other ways to win in the long run such as by attracting talent. As with many categories of tech, it seems that dairy processors are a decade ahead of their peers.
What’s the solution to all this?
Here’s what I want to see. I want to see more animal health and animal nutrition companies getting clear on their strategic vision of what problems they want to find solutions for, then execute a variation on the Startup Studio Model by putting entrepreneurial talent next to subject matter experts, providing seed funding, articulating outcomes, and then letting the newco run to create The Thing faster and better. Then if xyz pre-identified milestones are hit, the invested company becomes the acquirer. Its lower risk/higher reward for the strategic. Its lower reward/higher risk for the entrepreneur. But it can work.
I expect there to be more M&A activity in animal health and animal nutrition to build digital capabilities. I expect the winners will be the companies that are self-aware enough to acknowledge the challenges of building capabilities in house and find a path to external innovation whether through M&A, partnerships, licensing, or other creative ways.
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Great article Janette - completely agree on more widespread Startup Studio Model usage. Industry setting the problem statement and supporting with expertise and capital is a better model and needed. The one problem I see with the model (same one I called out in my rapid commercialization post that came to almost exactly the same conclusion as your post) is the capital source - the early money will rarely if ever ROI and the later stage money needed will be significant to scale startups with traction. It seems like more is needed than one or even a few companies would provide without much of a track record with good outcomes to demonstrate the model. Which studios do you think are doing it right? I think this is worthy of continued discussion - will post on Twitter as well to see what people have to say on the topic :)