Roper Technologies, Inc. ranks as the seventh largest software company in the United States of America as of 2022. It was incorporated more than a century ago — but for a majority of this time, it was not a technology company. Roper was a classic industrial conglomerate, capital-hungry and diversified across unrelated verticals. Fast forward to today, the company describes itself as developing vertical software products for niche markets.
First off, thank you for recommending Lessons from the Titans. This and United Technologies were my favorites. While I haven’t read your case, I’ve thought about this, so hang with me here. Roper’s moat is the niche mid-growth assets it buys. The total addressable markets are small enough that there isn’t excessive entry. They aren’t on the radar of large software firms. Also, Roper can improve these assets through experience. Now, it owns a portfolio of them. I read a book once Strategic Logic, saying Shimano had a great situations in bicycles in that that market for brakes was smaller enough no one could profitably enter. I think Roper had a ton of those.
Jonathan Knee has an excellent assertion that goes something like this: large, fast growing TAM’s aren’t good for industry economics as company’s enter. Roper’s markets likely aren’t subject to that because they grow slower. Another Knee assertions: there is no such thing as a global market, rather many smaller markets that have different demand profiles, supply situations, and regulatory underpinnings. So, to summarize, no true global market, and large fast growing TAMs aren’t great for companies as advantage gets diluted.
Roper’s benefit comes from smaller, niche markets that only support (a few players). Now it owns a large diversified portfolio of them. I probably blabbed too much, sorry.
If we take the comment “buy businesses from private equity guys that don’t know how to run them” seriously, it would seem to me that we can make a case for process power. Roper has a working framework to get these acquisitions to perform. And not end up in Paul graham’s founders that can’t get management to deliver properly. That’s at least my first level thinking.
I agree with you on process power as the strongest case to be made. I think there is clearly some sub-moats to each of the businesses they acquire, for instance I would bet switching costs is a major moat they look for in a vertical software business.
The moat for Roper as a whole is clearly their process of finding these businesses to acquire and improving them using reliable levers. It doesn’t seem apparent to me that another company couldn’t just adopt the same north star of CRI and then compete for the same deal flow.
I don’t know enough, but I would bet understanding why private equity firms aren’t just holding and following the same playbook is the key to understanding their moat.
First, a collection of cornered resources - the multitude of vertical market software businesses it owns. If vertical market software companies are leaders in their niches, that software and the ongoing service for that software could be considered a cornered resource in that market. Said another way, a collection of mini monopolies or clear niche leaders.
Second, the collective internal knowledge and learnings that come out of having first-hand access to many vertical market software businesses under one roof. If you want to see how a strategic change interacts with this business model, you have an immediate and sizable experimentation lab to do so (or at least a wealth of knowledge from the collective CEOs and talented operators) that is likely to be more effective than most other set-ups.
Third, their proprietary database of companies that are attractive acquisition targets and relationships with those companies. Because of their expertise and track record acquiring businesses and leaving them alone, they are probably an attractive buyer for the selling parties on the other side of the deals. And because of synergies, maybe they are able to pay more in certain cases. So all of these things together make them a “buyer of choice” relative to most strategics or financial buyers looking for vertical market software targets.
Fourth, Jellison himself? Though his status as a cornered resource probably expired long before he left but after he established the playbook that has been able to live on.
I don’t think I know enough about the details of Roper and how the businesses are run but I struggle with process power as the leading source of power.
The act of buying businesses within a specific industry sector isn’t necessarily difficult to replicate. Constellation Software has the same basic strategy (I’m not experienced in VMS so I may be missing nuances here), and there other serial VMS acquirers at various levels of scale
Usually process power is associated with high complexity and/or the choreography of many parts. I don’t see high complexity in Roper’s business; the process of finding and acquiring a single business, and doing that over and over again on a well-defined set of parameters, is not that complex in and of itself
That said, if there is a process power, I think it has to do with the institutional knowledge that has become embedded in the organization around the business identification process
Caveat to all of the above - outsider’s observations based on the reading of the case and not much other reading on Roper (the other reading coincidentally has been from Liberty and scuttleblurb, which are both cited in the case).
It’s Process Power, specifically it’s Capital Allocation and acquisition skills, similar to your Danaher case study.
Creating value from M&A is really hard, and the supermajority of transactions destroy value, but this is only for public transactions. All of Roper’s large acquisitions were of private companies. This is the one area of M&A that most evidence suggests is ripe for value creation. Private company cash flows are valued lower than public company cash flows due to an illiquidity discount. A smart acquirer can take advantage of this arbitrage opportunity by acquiring private company cash flows. This instantly creates value by converting those cash flows into higher valued, more liquid public company cash flows. Roper took advantage of this.
Roper also took advantage of the Supply-Demand imbalance for quality companies. In the vast majority of cases, these businesses had no logical strategic owner, and were too small to go public, or their mid-single digit organic growth rates were not attractive enough to other would-be competitors so it avoided auctions and the winner’s curse. And Roper was able to outbid PE firms who require a high return threshold which limited the valuation multiples they could pay.
The other importance factor in their strategy was giving equal importance to organic growth of its legacy businesses and the quality of the assets it acquired i.e. it did not allow its core business to decay, which is a common challenge in acquisition-driven firms. Optimizing legacy cash flows allowed to have a large balance sheet, support more debt, and a higher multiple because of its size and diversity of cash flows (this is the point of doing roll-ups which is a favorite of private equity).
There’s certainly some kind of scale economies, no? As in, the larger they get, the more cashflow they have to make more, bigger, and/or better deals. They’re surfing the benefits of compounding at this point.
And sure, I take it they have some process power in terms of turning those acquisitions into the maximum potential cash flow (or CRI, in their case). But I get the sense that process power is one of those things that’s assumed to not be there unless very clearly proven otherwise.
I think Scale is secondary because they used astute capital allocation to get to that scale & hence get the higher multiples on their FCF. Many of their business units are fairly independent so they don’t get the the classic ‘reduction in unit costs as volume increases’ scale benefit. So what they really do is the private-public arbitrage from acquiring not-so-big companies that other companies can’t/don’t want. Their deal sizes are getting bigger, but it’s no proportionate with their total balance sheet size increase – this takes a lot of discipline and restraint, and is the core of their capital allocation skill.
Actually, both of these are true. Each business Roper owns has a protected market where it benefits from relative scale and switching costs, aided by market size and switching costs. At the “portfolio level” it might have some process power, but I looked at ROIC multiple ways and returns has come down over the last 5-6 years. Deal prices are up. So, they moats and they are nested. Some exist at company level and others at portfolio level.
I’ve been following this thread with great interest, and am working on an update to the Roper case — mostly because I think we haven’t included enough detail on the company to talk sufficiently about the moats at play. (In particular, I haven’t included detail from the Lessons From the Titans book chapter — despite recommending you the book, @ajzitz!)
This company is a lot more complicated than first meets the eye. I’m looking forward to synthesising our source material, and will update this thread when that’s done.
We’ve updated the Roper case with more detail from Lessons from the Titans. I think there should be enough detail here now to discuss Roper’s moats (or lack of moats ).
At the end of 7 Powers Helmer does make the point that his strategy is not designed with multidivisional or conglomerates in mind, and that there is the possibility that strategy will change in those scenarios. I wonder if @TylerD’s idea of ability to experiment across such a wide range of verticals helps them gain advantages over others.
But if I had to guess it would still be their skill in Capital management + each of their verticals having some element of switching costs + smaller markets being less efficient
Reading the additional case material, reinforced that one of the better advantages at this stage might be Roper’s early / off-market access to companies that will be on the selling block – in other words, they are going to be a very high percentage of buyers lists for VMS assets looking to trade. A buyer of choice. This is like having the best real estate agent in your town where you know about every house coming on the market before it’s actually on the market. Effectively creates a ROFR (right of first refusal).
Where is Roper’s growth going to stall? Only so long can they shed “non-core” assets and face the challenge of sustaining higher growth rates on a larger base. How are small to mid size VMS businesses going to be disintermediated?
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At the end of 7 Powers Helmer does make the point that his strategy is not designed with multidivisional or conglomerates in mind, and that there is the possibility that strategy will change in those scenarios. I wonder if