Financial vs Strategic Buyers Premium
Hey WSO,
I recently had an interview with a MM IB on the West Coast.
Anyways, we were talking about the differences between strategic and financial buyers.
I was asked who would be expected to pay more - so textbook says strategic due to the anticipated synergies.
However, although he agreed with me about the theory - he noted that in practice financial buyers actually pay more.
Why?
Just because the idea of synergies is very doubtful - and hard to make happen. So strategic buyers will be more reluctant to pay high premiums. On the other hand, financial buyers care about return and return only, and due to the amount of leverage they can use - they are able to maximise this. So they will be willing to actually pay more than strategic buyers purely as they can leverage up, maximise returns and earn a decent profit.
This was all very interesting to hear and made a lot of sense - has anyone ever heard this tendency before? I was interested in hearing about your views on this?!
I don't know of any data that conclusively supports this claim, but I wouldn't be surprised if there is some truth to that.
In my experience financial buyers have outbid strategics in situations where there were not clearly defined synergies, making the advantage to a strategic muted. The other thing that's always at play in the middle market is that financial buyers benefit from better (often cheaper) access to capital, making them more tolerant of a higher purchase price. There is another, less scientific explanation (which many will argue with me on) and that is that leverage makes you put in less skin in the game, making you slightly less sensitive to the price.
From my experience, the strategic buyers will be paying more due to the assumed synergies. Financial buyers will be paying less as they are looking to increase their IRRs on the exit of the business. A Financial buyer usually doesn't gain any synergies as there isn't overlap in expenses so they aren't able to combine the acquired business into their existing P/L to create incremental long-term shareholder value.
The synergies can expand outside of just things that would show up on the P/L, such as eliminating a competitor in the marketplace which would hopefully in turn increase your market share and revenue. Also, you can increase the stability of your business and potentially smooth out your revenue streams to make forecasting more predictable.
Hope that helps. There will obviously always be a situation where this is not the case. It could be an example of where a Financial buyer feels like they may be able to turn around a company through direction on the BoD or potentially connecting the company with suppliers/buyers. In that event they may end up paying more.
Just keep in mind that a Financial buyer has a selling event horizon where they are looking to exit the investment in some time period (5-7 years typically), so they are looking to buy low and be able to sell at a higher exit multiple.
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