Strategic Buyers

Strategic acquisitions occur in nascent industries, especially those dominated by venture-capital-backed companies or “winner take all” industries, such as technology platforms or industries in which research and development (R&D) is critical to the ongoing success of a company. 

Google, Salesforce, Microsoft, Apple, PayPal, and many other technology companies are perennial acquirers. Once nascent industries mature, companies make acquisitions to eliminate competition, such as Facebook’s acquisition of Instagram and WhatsApp, PayPal’s acquisition of Braintree, Google’s acquisition of Motorola, and HP’s acquisition of Compaq. In these industries, the pace of growth is so fast that companies furiously compete to become the dominant industry leader in a winner-take-all pot. 

Strategic buyers may pay a higher multiple than other buyers if they can’t easily replicate what your company has to offer. The replication aspect is a key distinction.

Goals

Strategic or synergistic buyers are often direct or indirect competitors that purchase a company as an alternative to organic growth. Strategic buyers can include competitors, customers, or suppliers who may be looking to enter new markets or acquire proprietary products, technology, or access to customers. 

These buyers have longer holding periods than financial buyers and often have no defined exit plan. They typically expect to fully integrate your company into theirs and hold it indefinitely. They may sometimes seek to acquire only your technology, intellectual property, or customer base and may plan to shut down your operations and lay off your staff after the closing. 

In an “acqui-hire,” a competitor purchases your company with the sole objective of acquiring your staff and ceases operations at closing. Acqui-hires are common in the technology sector and other sectors in which talent is scarce. 

It may make more financial sense for a strategic buyer to grow through acquisitions than to grow by creating new products and services or by acquiring new customers. 

This happens most often in mature industries. Some examples include the cellular industry with T-Mobile’s acquisition of Sprint and MetroPCS, growth in media companies such as AT&T’s acquisition of Time Warner or Walt Disney’s acquisition of Twenty-First Century Fox, and consumer products with Heinz’s acquisition of Kraft. These are examples of mature industry acquisitions in which organic growth has slowed, and the most suitable option for increasing revenues is to “buy growth.” 

Considerations

These buyers focus on the long-term fit with their companies and synergies, as well as the ability to integrate your company with theirs.

All strategic buyers will recreate whatever value you have to offer if they can do so at a lower price than it would cost to acquire your company. These companies also consider the amount of time it may take to recreate your value proposition. If the company must move quickly, it may make more sense for them to acquire your company due to the lost opportunity cost of building it from scratch. This is known as the “buy vs. build” decision.

Tips for Dealing With Strategic Buyers

When dealing with strategic buyers, I recommend focusing on these areas:

• Value Proposition: Focus on building a company whose value is difficult to replicate. If the buyer can easily replicate what your company has to offer, they are unlikely to buy it.
• Realistic Assessment: Be realistic in determining if your company is a suitable investment for a strategic buyer. Consider retaining a middle-market M&A advisor to perform an unbiased assessment of your business to determine if a synergistic buyer may be a likely candidate for your business. In my estimate, less than 5% to 10% of middle-market companies can be sold to a strategic buyer.
• Private Auction: Hire an M&A intermediary to conduct a private auction. Strategic buyers do not offer to pay for strategic value unless they are aware that other buyers are also competing to acquire your company.