Strategic vs Financial Buyer

What is Strategic vs. Financial Buyer?

When we first read about the companies and how they work, we would have never thought that there are companies that could buy other companies and there are companies that divide themselves into two whole different entities.

We will talk about similar companies in this article. When a company is doing well and they think of expanding its operations in any form, they buy other companies. 

Now we have two types of such buyers in the market, one is a strategic buyer, and the other is a financial buyer. 

As the name suggests, the former has its goals aligned with only strategic purposes, and the latter only focuses on the financial results yielded out of the deal.

However, it does not mean that a strategic buyer would not care about the financial outcomes of the deal. It will simply mean that it probably comes second in the priority list of the acquirer.

The same case is with the companies that go for financial deals. Their main focus lies in the financial outcomes of the deal, but it does not imply that they do not consider the strategic benefits either. 

Strategic Buyer Explained

Talking more about strategic buyers, these companies buy only those entities that they think will complement their existing owned businesses and, thus, give them an advantage or an edge over other businesses in the same or other industries. 

The acquiree could be a company that is a competitor of the acquirer or any company in another similar industry.

It is an attempt to widen the operations and revenue streams, expand its business to new geographical stretches and enter new markets for the acquirer or the buyer to reach a larger audience and capture as much market as one can to create a high level of competition.

We also call such an acquisition a synergy. A synergy merger and acquisition activity is a catalyst in increasing the combined firm value post-merger than it was before the entities were merged. This type of merger helps both businesses to gain benefits from each other.

The acquirer, thus, sees an opportunity where they can expand their product lines, and distribution channels, obtain operational efficiency and economies of scale, and enjoy increased market share.

It will also help in cost reductions by eliminating costs of similar activities that were carried out before the merger, thus, giving competition as well as cost benefits over other businesses.

Financial Buyer Explained

Now let's look at the financial buyers. It is not that different from a strategic one, but the only difference is with the motive that these two individually strive for.

Such buyers look for a company that has been long established and has a firm standing in the industry concerned. Such companies have surpassed their break-even point, and they rarely incur losses.

These buyers primarily focus on the financial aspects like cash flow generation and/or share prices in the market. However, they also keep in mind the exit strategies that may include the initial public offering (IPO) or even selling off the company to buyers who are looking for synergy mergers.

In other words, financial buyers are investors who are solely interested in the outcomes or the returns they can achieve by buying into a business. These could be entities or even individual buyers or investment banks as well.

The acquirer in this situation knows exactly what they are dealing with. They see potential in the future revenues and cash flows of the acquiree as seen at the time when the deal is in action. It tends to catch a glimpse of the future of the business after it merges with the acquirer.

Strategic vs. Financial Buyers

Now let us look into various perspectives in which a strategic buyer differs from a financial buyer.

1. Company evaluation

Business evaluation is one of the top most important distinctions between a strategic and a financial buyer. The point of view from which both assess the business to be bought is what makes all the difference.

A strategic acquirer focuses the most on the synergies created after the merger, whereas a financial acquirer looks at the company's cash-generating capabilities.

However, in real-world implications, firms cannot be completely recognized as strategic or financial dealers as their main motives can change over time.

This essentially means that the distinction is partially practical in the real world, where decisions do not only depend on such classifications.

2. Investment duration

Talking about the investment horizon of such entities, strategic buyers tend to own the company for an indefinite period and, later on, integrate that business into their operations. However, financial buyers only have monetary requirements out of the deal.

3. Cost of M&A

Strategic buyers tend to have paid more than financial buyers.

This is solely because strategic buyers are buying a business to realize benefits from the deal in the coming future, and thus, they have the potential to pay higher than what a financial buyer could pay.

Moreover, the latter can pay more because the synergies that they intend to extract monetary benefits from are a greater source of revenue for the acquirer.

However, a financial dealer seeks to obtain maximum cash flows out of the deal in a much shorter period as they are only in the deal for monetary benefits.

Thus, it makes complete sense why this kind of buyer would be least interested in the core values of the firm as they only have one goal and that is to reap as many financial benefits out of the deal as possible.

4. Company's management teams

In the case of a strategic party, the firm heeds less attention to the management component of the acquired business as the operations will eventually overlap once the merger is done, and the acquirer will have to eliminate some of the management to avoid extra expenses.

One of the other differences can occur in transactional efficiency. It refers to the ease of transaction between the acquirer and the acquiree.

The entities with strategic purposes take much more time to finalize the deal than those with financial purposes. This is because strategic buyers are not as often as financial buyers.

Financial buyers are entities like boutique investment banks, private equity (PE) firms, and other firms whose core activity consists of buying businesses that could fetch monetary results for them.

As for the strategic one, they do not have a dedicated team for the mergers and acquisitions performed by them. Thus, they require a lot of time before the deal is done.

Real-life Examples of Strategic and Financial Buyers

We have read about the two types of buyers and talked about their differences in detail. However, to procure a deeper understanding, we shall look into some real-life case studies to get a better understanding of the topics concerned.

To name a few of the most famous examples of such case studies are Vodafone and Mannesmann, which has been one of the largest unsolicited mergers of the 90s, we have Google and Android, which has been an all-time successful merger.

And the Blackstone and Hilton Hotels are classic examples of the LBO.

Let us look at the examples of some of the biggest acquisitions and mergers in the history of M&A.

Vodafone and Mannesmann 

Vodafone has performed many mergers and acquisitions before this case, and they have all been to provide a strategic edge to themselves.

On November 13, 1999, the largest unsolicited merger of that time took place when the UK-based Vodafone Airtouch, which is the world's largest mobile phone group, announced a takeover bid for Mannesmann AG, the German telecommunications and engineering group.

The takeover was agreed upon to exchange the shares between the two companies.

The offer was accepted on February 3, 2000, and every shareholder of Mannesmann received 58.96 Vodafone shares which rendered them a stake of 49.5% in the new resultant company.

Now this merger is a classic case of strategic buyout because the new company enjoyed a controlling stake in ten European markets. The market coverage that they obtained with the merger was one of the most extensive in the industry at that time.

However, the cultural challenges for Vodafone were unmatched. Vodafone still managed to leverage Mannesmann's existing experience into implementation.

Google and Android

Google's acquisition of Android is one of the best acquisitions of its life. The deal occurred on July 11, 2005, and purchased a small start-up company, Android.

Leveraging the skill set of Android engineers, Google developed an operating system for mobile devices, and the first version of Android was launched in 2008. A good amount of three years was spent on the R&D of the operating system before its launch.

Even though Android's acquisition by Google is the best thing to happen to the former and probably the reason why 69.74% of smartphones inhibit Android, the deal was valued only at $50 million.

The strongest reasons for Google to acquire Android were that the former believed that a mobile OS would immensely help expand its core business activities and boost ad business, which turned out to be even better; both companies provided for the new entity in a synergistic manner.

Blackstone and Hilton Hotels 

This case is a very special LBO that happened in the year 2007. The hospitality sector was in high demand, and consecutive growth was seen before the great recession of 2008.

The hospitality sector suffered from a downfall and thus, all the people involved with this sector at that time were of the opinion that this LBO could be the worst decision taken in history.

But in the retrospective, the Blackstone-Hilton deal turned out to be one of the most successful LBOs of all time!

After acquiring the Hilton Hotels, one of the first things they did was to hire Christopher Nassetta to be the CEO of the Hilton Group of Hotels.

He, along with his team, detected what was wrong with this hotel chain and transformed the whole business by bringing a lot of new and long-needed changes into it.

They saw a plethora of new markets to enter into and grow their business to have the upper hand over their competitors in the number of customers.

With all the strategies put into place, Hilton almost doubled their room numbers, with even more in progress.

Finally, after 11 years, the PE group sold its stake of 15.8 million shares at a value of $1.32 billion, making a lot of gains out of the deal.

There are many more successful as well as failed moves by financial buyers. It all depends on how one chooses their strategies to up their game in the market by clearly understanding the mere notion of the deal in the first place.

Researched and authored by Anushka Raj Sonkar | Linkedin

Reviewed and edited by Raghav Dharmarajan

Free Resources

To continue learning and advancing your career, check out these additional helpful  WSO resources:

• Buyout
• Corporate Raider
• Financial Synergy
• Friendly Takeovers vs Hostile Takeovers
• Timing of Synergies