Strategic Pearls

The industrial world is said to be at a technological inflection point. Global ESG funds are demonstrably making the Industrial sector their number one investment category with the hope of benefiting from its transition. This trend directly contributes to the bifurcation between Growth and Value observed in the stock market. In that evolving context, investing in fast-growing industrial technologies represents more than ever an important strategic option for industrial groups (see ‘Think Big’).


The expansion strategy into Growth and industrial technologies favored over many years has been that of the string of pearls.’ The expression is inspired by China’s geopolitical plan initiated two decades ago in the Indian Ocean. The objective was to establish China-controlled port locations (or ‘pearls’) in Pakistan, Sri Lanka, Bangladesh, Myanmar, and Thailand to create strategically networked nodes between China and the Middle East along the world’s busiest maritime lanes. It was and remains a matter of trade and energy security – to the great displeasure of India and its allies.


Translated to business practice, the pearl strategy points to an industrial group betting on its patient ability to acquire several fast-growing industrial tech companies of modest size over a few years. It would then link these pearls to create value by extracting technological or commercial synergies. The new platform would eventually improve the group’s strategic, operational, and financial profile, thereby leading to a repositioning and re-rating in the stock market.


The opportunity this approach represents must be weighed against its challenges. To start with, locating ‘pearls’ in the world’s oceans is daunting. Besides, this type of asset often relies on a small set of competencies serving a narrow group of customers. Assessing their long-term potential for differentiation and their scalability is difficult. Without public market validation, their price tag requires a leap of faith as they typically do not generate much of a profit, if any. Furthermore, integrating them into a larger entity is complicated since pearls can easily get lost in their new home. Finally, implementing this treacherous acquisition and integration process successfully time after time to build a true platform of integrated ‘pearls’ raises the level of complexity in an exponential way.


And yet, the string of pearls approach appears to have been the strategy of choice for many groups, ready to embark on a trial-and-error process. The approach is supported by the seductive notion that placing bets through a diversified portfolio of ‘pearls’ is attractive from a risk/return perspective. Moreover, there have not been many alternatives to this approach, which has made it the best by default.


Well-established, fast-growing industrial tech groups with a double-digit growth profile, a global brand, access to a large and diversified customer base across various end-markets supported by a deep and broad technological platform, and with an entrepreneurial spirit turned into an innovation machine, are scarce.


But these rather unique, ready-to-wear pearl necklaces do come up as acquisition opportunities from time to time. They cannot be missed: their risk/return profile may be significantly more attractive than the one achievable through a string of pearls strategy, including when considering their transformative power for the acquirer.



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