What is a Financial Buyer?
A Financial Buyer in M&A is defined as an acquirer that purchases a company as an investment to achieve a targeted return.
Unlike strategic acquirers, financial buyers are more returns-oriented and have near-term potential exit strategies in mind at purchase.
Characteristics of a Financial Buyer in M&A
Financial buyers are investors such as private equity firms that purchase companies primarily as investments to achieve a specific monetary return.
The most common type of buyer in an M&A transaction is a financial sponsor, e.g. a private equity firm (PE), which refer to investors that specialize in leveraged buyouts (LBOs).
Financial buyers, such as private equity firms or family offices, are investing on behalf of their fund’s limited partners (LPs), which provides the firm’s general partners (GPs) with the capital to deploy and generate positive returns.
Leveraged buyouts (LBOs) are transactions in which a significant portion of the purchase price is funded using debt – most often a 60% debt to 40% equity split.
Given the risk associated with LBOs, where a significant debt burden is placed on the acquired company, i.e. the portfolio company, PE firms must spend extensive time performing diligence on the company and its ability to handle the potential debt load.
Specifically, the portfolio company must meet periodic interest payments and repay the debt principal at maturity, or else the company would be in technical default.
If the company were to default, the PE firm will likely incur a significant loss in returns from the investment, which not only hurts the fund’s current returns but also its ability to raise capital for future funds due to the damage inflicted on the firm’s reputation.
Strategic vs. Financial Buyer: What is the Difference?
The other acquirer type is a strategic buyer, or a company seeking to purchase a controlling stake in another company.
Strategic buyers are corporations acquiring companies that operate in overlapping markets, whereas financial buyers are firms that view the acquisition as an investment.
In contrast to a financial buyer, a strategic buyer – or “strategic” for short – is acquiring the target company for the opportunities to realize synergies post-deal.
Most often, a strategic buyer operates in the same or an adjacent market to the target, creating the potential for the combined entity to benefit from revenue or cost synergies, i.e. the incremental revenue or cost savings from the combination of the two companies.
Strategic buyers can afford to offer higher purchase price premiums because of their ability to benefit from synergies, such as generating more revenue from greater reach in terms of end markets or product capabilities, as well as cost-cutting measures like consolidating overlapping business functions and eliminating operating inefficiencies.
Since strategic buyers have historically paid higher purchase prices than financial buyers and perform diligence more quickly, sellers tend to prefer exiting (i.e. selling) to strategics.
Besides the higher purchase prices, another key difference is the objective of the purchase.
On the date of purchase, the strategic buyer seeks to create long-term value from the acquisition (and the acquisition target becomes part of the larger company).
