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.
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What are the Characteristics of Strategic Buyers 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.
Synergies represent the estimated cost savings or incremental revenue arising from a merger or acquisition, which are regularly used by buyers to rationalize higher purchase price premiums.
- 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.