What is a strategic buyer?
A strategic buyer is a company that acquires another company in the same sector capture synergies. The strategic buyer believes that the two combined companies will be greater than the sum of their separate individual parts and aims to integrate the acquired entity for the long term assess creation.
Key points to remember
- A strategic buyer is a company that acquires another company in the same sector to capture synergies.
- Because a strategic buyer expects to derive more value from an acquisition than its intrinsic value, they will generally be willing to pay a higher price to complete the transaction.
- With opportunities to increase total sales and improve productivity at the same time, the strategic buyer has a good chance of turning two plus two into five.
- However, success will likely not be achieved overnight. Strategic buyers think long term and growing pains are normal at first.
How does a strategic buyer work?
As the name suggests, strategic buyers buy businesses that they believe are a strategic fit with what they already own. A target company is usually either a competitor in the same industry as the buyer or a company with complementary attributes in another similar industry. The “strategy” part comes into play when the acquirer sees an opportunity for expansion production lines in the same market, diversifying into new regions, securing distribution channelsor generally boost operational efficiency.
Suppose a food manufacturer that has been making processed foods for decades wants to start an effort to offer organic products. She becomes a strategic buyer when she acquires an organic food company to serve the same market.
After the acquisition, the combined company will not only benefit from this top of the line synergy, but it will also create production and distribution synergies by increasing factory use tariffs and using the same channels to deliver products to customers.
Throughout the cost structure of the combined enterprise, overlapping costs can be eliminated, such as a redundant factory or offices and external services. With possibilities to increase the total Sales and improve productivity at the same time, the strategic buyer has a good chance of turning two plus two into five.
The value creation of these combinations will be seen primarily in sales synergies in the early stages – other synergies typically take longer to materialize.
Criticism of strategic buyers
A strategic buyer often generates a large part of the cost savings by fire workers. When two companies operating in the same market combine, many positions begin to overlap or become overloaded, leaving some employees surplus to requirements.
For example, there is no need for two financial directors (CFO), sell and marketing staff can be reduced and a middle-level management layer is no longer needed. Firing this staff makes sense for the strategic buyer, helping them reduce costs and increase efficiency, even if not everyone is so understanding.
Concerns about potential job losses may trigger public outcry, unions, and the government. Negative publicity could end up damaging the company’s reputation. In rare cases, it can even lead to an acquisition veto, especially if the strategic acquirer is a foreign buyer whose main operations are located abroad.
Example of a strategic buyer
In 2017, Amazon.com Inc. (AMZN) made headlines when it bought grocery chain Whole Foods for $13.7 billion. Amazon was a strategic buyer with two major objectives: immediate and widespread penetration in the grocery sector, and a network of brick and mortar locations that serve many of the same types of customers who shop online at Amazon.
One of Amazon’s first missions was to boost Whole Foods income by making the products of the organic grocer “accessible to all”. Amazon wasted no time making its mark, offering its subscriber base in-store discounts and free two-hour deliveries.
So far, price cuts and other new services haven’t translated into Amazon stealing a significant chunk of groceries market share industry giants Walmart Inc. (WMT) and Kroger Co. (KR). It should be remembered, however, that this is a long-term project and, like any other major acquisition, was bound to experience some growing pains. The new venture is still a work in progress and immediate success was not to be achieved overnight.
Another example of a strategic buyer is T-Mobile’s acquisition of rival Sprint in 2020. The deal between the third and fourth largest US mobile carriers at the time was valued at $26.5 billion. , and the combined company serves approximately 127 million customers, according to The Wall Street Journal. The telcos say the merger has created a “fierce competitor” for AT&T Inc. (J) and Verizon Communications Inc. (VZ).
Strategic Buyer vs Financial Buyer
Acquirers are often described as strategic or financial buyers. Unlike the former, a financial buyer’s goal is to buy businesses for as cheap as possible, hoping to resell them at a profit five or ten years later. The sector the target in which operates is not necessarily large and issues large enough to be influential are generally preferred at full scale takeovers.
Financial buyers look for potential bargains that can be upgraded and end up earning their investors a decent return. Often they will be interested in what cash flow the investment will generate, as well as the type of exit strategies it will offer in the future.
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