Interview: "if the company is so good, why are there no strategic buyers?"
After talking about a deal on my resume—which I agreed with—my interviewer asked me, "if the company is so good, why do you think there are no strategic buyers"?
As I understand, when thinking about PE exits, strategic buyers are the best, since they are more willing to pay a premium multiple, in order to take advantage of the synergies acquiring the portfolio company gives them.
That begs the question: 1) why are there no strategic buyers right now? 2) what's going to change in 5-7 years that, with PE help, there will be strategic buyers?
Does anyone have any thoughts on how to tackle this question?
Rates are up and capital markets are tight. A strategic still needs to finance their purchase somehow, and if they can't raise corporate debt, or as much as preferred, then acquisitions need to be funded with equity or cash, each of which has their own drawbacks - e.g., dilution to current shareholders. So you need to find cash rich buyers or those that don't mind using their equity currency, but in general you'd expect fewer deals than when capital is more available.
That's helpful. But rates up and capital market tight, that's more of a macro factor. I think what my interviewer meant was more along the lines of: if the company that you describe is such a good company, then why are there no strategic buyers right now? And what value does the PE firm expect to be able to create in 5 years, that might make the business more attractive to a strategic buyer, when they sell it?
IDK, maybe the business is too small right now for a corporate buyer to really unlock any real synergies. But with PE help and a buy-and-build strategy, it might become more attractive. Maybe something like that... Any other ideas?
Yeah that’s not the answer lol
Can you provide more context as to what your resume actually says about the deal? Was it a sell-side where the target was sold to a sponsor, which is why the interviewer was asking the question? Or was it a failed process? What was your bank's role in this deal? Didn't you / your team figure out why there was a lack of strategic buyers just naturally through the transaction process?
This - OP, you should have some idea here if this is on your resume. Surely you at least discussed a strategic or two. Was this a $5B deal and it's just too large for a strategic in this financing environment, or was it a tiny transaction that was a better fit for a growth buyer?
- Timing: possible that there's realistically only 2-3 strategic buyers who will ever make sense and they're dealing with internal issues, digesting another acquisition, etc. They should be in a different place by the time you exit
- Lack of strategic fit: Companies in newer categories sometimes face this issue. This can go away during the hold period if 1) the product roadmap takes the company into a newer space with more strategic interest, or 2) the company's industry/area becomes better understood and strategics who are not currently interested see more value than they used to.
- Size: Certain strategics don't see it as worth the time to pursue any company below $X revenue threshold. Maybe you surpass that during the hold.
- Financial profile: A high-growth + unprofitable business could attract interest from certain growth buyout investors whereas a lot of strategics will be concerned about absorbing a large level of burn. If there's line of sight to improving / altering economics during the hold, you can make the case it would be more attractive next time around
- Regulatory environment: this only applies to the largest of deals, but if there's been more enforcement at a certain company (e.g. all of Facebook's deals getting scrutinized) or around a category (e.g. pharma consolidation), strategics will often be more gun-shy about M&A. A lot tougher to project what this would look like 5+ years out though so you probably wouldn't underwrite a deal based on this softening.
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