M&A Investors: What’s a Strategic Buyer?
Strategic Buyer is simply a fancy term for corporate Buyer. Companies make acquisitions for a slew of reasons: growth, new markets, new products, buying out a competitor, and more. Strategic Buyers often focus their acquisition activity on companies that are a fit for their current (or future) strategic plans, often buying from PE firms.
Strategic Buyers are often the end Buyer after a PE firm has made an acquisition. PE firms may be willing to get their hands a little dirtier than a strategic Buyer is; that is, a PE firm may be willing to take on a deal with some moving parts, replace management, fix operations, add on other acquisitions, and so on.
After the PE firm has spruced up the portfolio company, a strategic Buyer may have great interest in making an acquisition. Much of the heavy lifting, such as turning an entrepreneurial company into a professionally managed company, has been done by the PE firm, and a strategic Buyer recognizes and pays for that value.
Aside from the added value of professional management, strategic Buyers pay more for companies for a few reasons:
They need specific pieces for their puzzles. As the name implies, strategic acquisition is exactly that. The acquirer is buying a company that has an important strategic fit, so the acquirer may be willing to pay a premium to keep a valuable company out of the hands of a competitor.
They’re often not bound by the same limitations as PE firms. The investors in PE firms agree to invest only if certain parameters are part of the deal; not paying too much for a portfolio company is often part of the PE mandate. Strategic Buyers have more freedom to spend what’s necessary to get what they need.
They may be looking for a long-term investment. Strategic Buyers may be willing to pay a higher price because their strategy is to buy and hold long term. They aren’t seeking to earn a return on the investment; they’re seeking to earn a return on the cash flow of the acquired company’s operations.