7 Reasons Why Strategic Buyers Outperform Financial Buyers
Strategic buyers and financial buyers are two types of acquirers in the mergers and acquisitions (M&A) market. Strategic buyers are companies that seek to acquire other businesses that can complement or enhance their existing operations, products, or services. Financial buyers are investors, such as private equity firms, that look for profitable businesses that can generate returns on their investment.
But which type of buyer is better for your business? In this article, we will compare strategic buyers and financial buyers and explain why strategic buyers often outperform financial buyers in terms of valuation, synergies, integration, and long-term growth.
Key Takeaways
Strategic buyers are companies that seek to acquire other businesses that can complement or enhance their existing operations, products, or services.
Financial buyers are investors, such as private equity firms, that look for profitable
Valuation
One of the main advantages of strategic buyers is that they can offer higher valuations than financial buyers. This is because strategic buyers can factor in the potential synergies and benefits that the acquisition can bring to their business, such as increased market share, reduced costs, improved efficiency, or enhanced innovation. Financial buyers, on the other hand, are more concerned with the current and future cash flows of the target business and the return on their investment. They also need to account for the debt they use to finance the deal and the exit strategy they plan to pursue.
For example, suppose a strategic buyer is interested in acquiring a software company that has a similar customer base and product offering. The strategic buyer can estimate how much revenue and cost savings they can generate by cross-selling their products, eliminating redundancies, and leveraging their existing resources. They can then use these estimates to justify a higher purchase price for the target company. A financial buyer, however, would only look at the software company’s historical and projected financial performance and compare it with other comparable companies in the market. They would also deduct the amount of debt they need to borrow and the expected return they need to achieve from their investment.
Synergies
Another benefit of strategic buyers is that they can realize more synergies than financial buyers. Synergies are the positive effects that result from combining two or more businesses, such as increased revenues, reduced costs, or improved efficiency. Strategic buyers can achieve synergies by integrating the target business with their existing operations and leveraging their core competencies, resources, and capabilities. Financial buyers, however, usually have limited operational involvement in the target business and focus more on improving its financial performance and governance.
For instance, suppose a strategic buyer is a large retailer that acquires a smaller online store that sells niche products. The strategic buyer can create synergies by expanding its product portfolio, reaching new customers, increasing its online presence, and reducing its distribution costs. A financial buyer, on the other hand, would not be able to create such synergies because they do not have the same operational expertise or scale as the strategic buyer.
Integration
A third advantage of strategic buyers is that they can integrate the target business more smoothly and effectively than financial buyers. Integration is the process of combining two or more businesses into one unified entity after an acquisition. Strategic buyers have more experience and knowledge in integrating businesses that are similar or related to their own. They also have more control and influence over the target business and its employees, customers, suppliers, and stakeholders. Financial buyers, however, may face more challenges and risks in integrating businesses that are unfamiliar or unrelated to their own. They also have less authority and involvement in the target business and its operations.
For example, suppose a strategic buyer is a global manufacturer that acquires a local supplier that provides raw materials for its products. The strategic buyer can integrate the supplier easily and efficiently by aligning their processes, systems, standards, and cultures. They can also leverage their existing relationships and networks to ensure a smooth transition and cooperation. A financial buyer, however, would have more difficulty in integrating the supplier because they do not have the same industry knowledge or operational expertise as the strategic buyer. They would also have to deal with potential conflicts or resistance from the supplier’s management, employees, customers, or suppliers.
Long-term growth
A fourth benefit of strategic buyers is that they can support the long-term growth of the target business more than financial buyers. Strategic buyers have a long-term vision and strategy for their business and the target business. They are committed to investing in the target business’s development, innovation, expansion, and sustainability. They also have more resources and capabilities to support the target business’s growth opportunities and challenges. Financial buyers, however, have a short-term horizon and goal for their investment. They are focused on maximizing their returns and exiting the target business within a few years. They also have less resources and capabilities to support the target business’s growth initiatives or difficulties.
For instance, suppose a strategic buyer is a media company that acquires a content creation platform that has a loyal user base and a unique value proposition. The strategic buyer can support the long-term growth of the platform by providing it with access to capital, technology, talent, distribution, and marketing. They can also help the platform to innovate, diversify, and scale its content and services. A financial buyer, on the other hand, would not be able to support the long-term growth of the platform because they do not have the same media expertise or resources as the strategic buyer. They would also be more likely to cut costs, extract dividends, or sell the platform to another buyer.
Strategic buyers and financial buyers are two different types of acquirers in the M&A market. Strategic buyers are companies that seek to acquire other businesses that can complement or enhance their existing operations, products, or services. Financial buyers are investors, such as private equity firms, that look for profitable businesses that can generate returns on their investment.
Strategic buyers often outperform financial buyers in terms of valuation, synergies, integration, and long-term growth. Strategic buyers can offer higher valuations than financial buyers because they can factor in the potential synergies and benefits that the acquisition can bring to their business. Strategic buyers can realize more synergies than financial buyers by integrating the target business with their existing operations and leveraging their core competencies, resources, and capabilities. Strategic buyers can integrate the target business more smoothly and effectively than financial buyers because they have more experience and knowledge in integrating businesses that are similar or related to their own. Strategic buyers can support the long-term growth of the target business more than financial buyers because they have a long-term vision and strategy for their business and the target business.
Tips
- If you are looking for a strategic buyer for your business, you should identify potential acquirers that operate in your industry or market and have complementary or compatible products or services.
- If you are looking for a financial buyer for your business, you should demonstrate your business’s profitability, growth potential, scalability, and exit opportunities.
- If you are a strategic buyer looking for an acquisition target, you should evaluate how well the target business fits into your existing operations, products, or services and how much value you can create from the deal.
- If you are a financial buyer looking for an investment opportunity, you should assess the target business’s financial performance, cash flow generation, competitive advantage, and risk profile.
Strategic Buyer vs Financial Buyer: A Statistical Report
In the world of mergers and acquisitions (M&A), there are two main types of buyers: strategic buyers and financial buyers. Strategic buyers are companies that acquire other businesses that complement or augment their own, resulting in cost savings or additional income. Financial buyers are investors that acquire businesses to earn a return on investment, usually in another exit event several years after acquisition. This report will compare and contrast the characteristics, motivations, and trends of strategic and financial buyers in the global M&A market.
Characteristics and Motivations
Strategic buyers are often in the same or a related industry as the target company, and they seek to create synergies from the acquisition. Synergies are the estimated cost savings or incremental revenue arising from a merger or acquisition, which can justify paying a higher price for the target. Synergies can be classified into two types: revenue synergies and cost synergies. Revenue synergies arise from the increased reach in terms of customers, markets, products, or services, while cost synergies arise from the elimination of redundancies, consolidation of functions, or economies of scale. Strategic buyers typically have a long-term vision for the acquired business and integrate it into their existing operations.
Financial buyers are investors that acquire businesses as an investment, with an exit strategy and date in mind. Financial buyers include private equity firms, family offices, sovereign wealth funds, hedge funds, and other institutional investors. Financial buyers look for businesses with strong cash flows, growth potential, and attractive valuations. Financial buyers use leverage to finance the acquisition, which increases the risk and return of the investment. Financial buyers aim to improve the performance of the acquired business through various techniques, such as revenue enhancement, cost reduction, debt repayment, or strategic partnerships. Financial buyers usually exit the investment within five to seven years through an initial public offering (IPO), a sale to another buyer, or a dividend recapitalization.
Trends and Outlook
According to Refinitiv data, global M&A activity reached a record high of $4.8 trillion in 2021, surpassing the previous peak of $4.4 trillion in 2015. The surge in dealmaking was driven by several factors, such as low interest rates, abundant liquidity, high valuations, pent-up demand, digital transformation, industry consolidation, and geopolitical shifts. The data also showed that strategic buyers accounted for 79% of the total deal value in 2021, while financial buyers accounted for 21%. This indicates that strategic buyers were more active and aggressive than financial buyers in pursuing M&A opportunities.
However, the data also revealed some interesting trends within each type of buyer. For strategic buyers, cross-border deals increased by 25% year-on-year to $1.6 trillion in 2021, reflecting the growing appetite for global expansion and diversification. The most active sectors for strategic buyers were technology, healthcare, industrials, energy, and consumer goods. For financial buyers, buyouts increased by 41% year-on-year to $788 billion in 2021, reaching the highest level since 2007. The most active sectors for financial buyers were technology, healthcare, financials, industrials, and consumer goods.
The outlook for global M&A activity in 2022 remains positive, as both strategic and financial buyers have ample capital and motivation to pursue deals. However, some challenges and uncertainties may also arise, such as inflationary pressures, rising interest rates, regulatory scrutiny, geopolitical tensions, environmental concerns, and pandemic-related risks. Therefore, both types of buyers will need to be selective and diligent in identifying and executing deals that create value and enhance competitiveness.
Frequently Asked Questions
Q1: What is a strategic buyer?
A: A strategic buyer is a company that seeks to acquire another business that can complement or enhance its existing operations, products, or services.
Q2: What is a financial buyer?
A: A financial buyer is an investor, such as a private equity firm, that looks for profitable businesses that can generate returns on its investment.
Q3: How do strategic buyers and financial buyers differ in valuation?
A: Strategic buyers can offer higher valuations than financial buyers because they can factor in the potential synergies and benefits that the acquisition can bring to their business.
Q4: How do strategic buyers and financial buyers differ in synergies?
A: Strategic buyers can realize more synergies than financial buyers by integrating the target business with their existing operations and leveraging their core competencies, resources, and capabilities.
Q5: How do strategic buyers and financial buyers differ in integration?
A: Strategic buyers can integrate the target business more smoothly and effectively than financial buyers because they have more experience and knowledge in integrating businesses that are similar or related to their own.
Q6: How do strategic buyers and financial buyers differ in long-term growth?
A: Strategic buyers can support the long-term growth of the target business more than financial buyers because they have a long-term vision and strategy for their business and the target business.
References:
http://eprints.whiterose.ac.uk/77341/7/SD%20young%20et%20al%202008.pdf
http://www.psych.upenn.edu/kable_lab/Joes_Homepage/Publications_files/Yoon%20et%20al%202012.pdf
https://corporatefinanceinstitute.com/resources/valuation/strategic-buyer-vs-financial-buyer/
https://www.wallstreetprep.com/knowledge/strategic-buyer/
https://corporatefinanceinstitute.com/resources/valuation/strategic-buyer-vs-financial-buyer/
https://www.wallstreetprep.com/knowledge/strategic-buyer/
https://blog.acquire.com/strategic-buyer-vs-financial-buyer-whats-the-difference/
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