What is a Strategic Buyer?
A Strategic Buyer describes an acquirer that is another company, as opposed to a financial buyer (e.g. private equity firm).
The strategic buyer, or “strategic” for short, most often operates in the same or an adjacent market as the target, creating more opportunities to benefit from potential synergies post-transaction.
Strategic Buyer: Acquirer Profile in M&A
A strategic buyer refers to a company – i.e. a non-financial acquirer – that attempts to purchase another company.
Because strategic buyers are often in the same or a related industry as the acquisition target, the strategic can benefit from synergies.
- Revenue Synergies → The merged company can generate more future cash flows from the increased reach in terms of customers (i.e. end markets) and greater opportunities for upselling, cross-selling, and product bundling.
- Cost Synergies → The merged company can implement measures related to cost-cutting, consolidating overlapping functions (e.g. research and development, “R&D”), and eliminating redundancies.
A sale to a strategic buyer tends to be the least time-consuming while fetching higher valuations, since strategics can afford to offer a higher control premium given the potential synergies.
Revenue synergies are usually less likely to materialize, while cost synergies tend to be realized more easily.
For example, shutting down redundant job functions and reducing headcount can have a near-instant positive impact on a combined company’s profit margins.
M&A Industry Consolidation Strategy
Often, the highest control premiums (%) are paid in consolidation plays, where a strategic acquirer with plenty of cash on hand decides to acquire its competitors.
The reduced competition in the market can make these sorts of acquisitions very profitable and can contribute to a meaningful competitive advantage for the acquirer over the rest of the market.
For instance, the post-consolidation company’s branding improves from the strategic acquisition, with increased pricing power by virtue of being positioned favorably as the market leader.
Strategic vs. Financial Buyer: What is the Difference?
Strategic buyers represent companies operating in overlapping markets, while financial buyers seek to acquire LBO targets as more of an investment, with an exit strategy and date in mind on the date of initial buyout.
In recent years, the most active type of acquirer has been private equity firms, which are also known as financial sponsors.
The private equity industry comprises investment firms that acquire privately-held (or public) companies using a substantial amount of debt to fund the purchase. Hence, the acquisitions completed by PE firms are termed “leveraged buyouts”, or “LBOs” for short.
Given the capital structure of the post-LBO company, there is a significant burden placed on the company to perform well in order to meet interest payments and repay debt principal on the date of maturity.
On that note, financial buyers must be careful with the companies they acquire to avoid mismanaging the company and causing it to default on its debt obligations.
Transactions dealing with financial buyers tend to be more time-consuming because of the amount of extensive diligence required, as well as obtaining the necessary debt financing commitments from lenders.