Strategic Buyer

From CEOpedia | Management online

Strategic Buyer - is a type of acquirer who is in the same industry as the target company. Unlike a financial buyer, a strategic buyer looks for businesses that can be quickly integrated with its main operations. Typically, a strategic buyer is a competitor in the industry, though not necessarily a direct competitor. It is understood that a strategic buyer operates in the same industry, but may not provide exactly the same services. A strategic buyer may provide similar services, but not necessarily for the same group of customers. May provide similar services to a similar group of customers, but it will do so in a different geographical location. These strategic buyer motives are what essentially makes them a strategic buyer[1].

Goal of strategic buyer

The goal of a strategic buyer who is a competitor may be:

  • gain insight into your business model,
  • obtaining customer lists,
  • identify key poaching employees and inform existing customers that they can no longer rely on you.

The most common business strategies used by strategic buyers

The buyer usually uses a business strategy[2]:

  • adds to a service or product mix - each of these two companies has a menu of products that they sell or services that they offer to their customers. A joint strategic maneuver would be to take over a company that offers services or sells products that are complementary but different from the products or services they currently offer. This gives the company taking over a new product or service line and the possibility of cross-selling. Cross-selling refers to the ability to sell goods or services of a newly acquired company to the customers of the acquiring company, and if the acquiring company has any goods or services that are not currently provided by the target company, the opportunity to sell the goods or services of the acquiring company to the customers or customers of the target company . Cross-selling is one of those concepts that works better in theory than in practice.
  • adds or changes the customer Mix-Each company has a list of customers and when assessing the profitability of connection transactions, the more customer lists are overlapped, the less attractive is business consolidation
  • adds to the company's geographical sphere of influence. If the company operates regionally in the northeast and has achieved significant market penetration in this area, the initial increase in market share may be more difficult and more expensive to get. Expansion into new markets may be a viable solution to ensure continuous development, but growing your business from scratch in a new market is daunting, risky and expensive. Therefore, taking over a successful business in another region of the country is an attractive alternative.

A potential buyer who is also a competitor may be a great strategy, but in fact, he may be more interested in what he can learn about your business than have any real interest in buying it[3].

Strategic buyers often focus their acquisition activities on companies that are appropriate for their current (or future) strategic plans, often buying from companies. Strategic buyers are often the final buyer after the acquisition by PE. PE companies may be more likely to get their hands dirty than strategic buyers, i.e. a PE company may want to contract with some moving parts, replace management, repairs, add other acquisitions, etc. After a PE company develops a company portfolio, a strategic buyer may be very interested in taking over. Most of the hard work, such as transforming an entrepreneurial company into a professionally managed company has been done by the PE, and the strategic buyer recognizes and pays for this value.

Strategic buyers pay more for companies for several reasons

Here are some reasons[4]:

  • they need specific pieces for their puzzle. As the name suggests, "a strategic acquisition is precise that a buyer buys a company that has an important strategic fit. So the buyer may be willing to pay a premium for keeping a valuable company in the hands of a competitor.
  • they are often not subject to the same restrictions as PE companies. Investors in PE companies agree to invest only when certain parameters are part of the transaction; not paying for a portfolio is often part of the EP's mandate. Strategic buyers have more freedom to spend everything necessary to get what they needed.
  • they may be looking for long-term investment. Strategies Buyers may be willing to pay a higher price because their strategy is to buy and maintain long-term. They do not want to get a return on investment that wants to get a return on the lowest cash from the business of the acquired company.

Strategic buyers are a great potential opportunity when they are motivated to buy, but they also pose a huge risk when you open your door to them. You must remember to enter into a confidentiality agreement and exercise extreme caution. One strategic buyer is good; two strategic buyers will turn your sales into a competitive auction[5].

Examples of Strategic Buyer

  • Amazon - Amazon is a strategic buyer in the online retail space. It has been acquiring a range of companies such as Whole Foods, Zappos, Twitch, and more to expand its reach in the retail market.
  • Wal-Mart - Wal-Mart is a strategic buyer in the retail space. It has been acquiring companies such as Jet.com, Bonobos, and Moosejaw to expand its reach in the ecommerce market.
  • Microsoft - Microsoft is a strategic buyer in the technology space. It has been acquiring companies such as LinkedIn, GitHub, Mojang, and more to expand its reach in the software market.
  • Google - Google is a strategic buyer in the technology space. It has been acquiring companies such as Waze, Nest, and DoubleClick to expand its reach in the digital advertising market.

Advantages of Strategic Buyer

  • High Synergies: By acquiring a business in the same industry, a strategic buyer often creates high synergies as it can quickly integrate the target company’s operations, customers and products into its own.
  • Cost Savings: A strategic buyer may be able to save on costs due to economies of scale, by combining the operations of the target company into its own operations.
  • Market Share Increase: A strategic buyer can increase its market share by purchasing a company in its own industry.
  • Access to New Technology: By acquiring a business in the same industry, a strategic buyer has access to the target company’s technologies, which can provide a competitive edge.
  • Reduced Competition: Through the acquisition of a business in the same industry, a strategic buyer can reduce the competition in the industry by eliminating a potential rival.

Limitations of Strategic Buyer

  • The main limitation of a strategic buyer is that the company may not necessarily have the financial resources to complete the purchase. This can be a major issue if the target company is particularly large and expensive, or if the target company’s operations are complex and require a large financial commitment.
  • Additionally, the strategic buyer’s main goal is to integrate the target company into their operations and may not be willing to pay a premium for the acquisition. This limits the potential returns of the transaction and may not be as beneficial to the target company as a financial buyer would be.
  • Furthermore, a strategic buyer may not be able to benefit from the synergies that a financial buyer would be able to. This is due to the fact that the strategic buyer may not have the same resources or capabilities as a financial buyer, and therefore would not be able to realize the same cost savings.
  • Finally, there may be an inherent conflict of interest between the strategic buyer and the target company. This could lead to potential issues with the transaction, as the strategic buyer may be more focused on its own interests than the interests of the target company.

Other approaches related to Strategic Buyer

  • Market Expansion - A strategic buyer may look to acquire a target company in order to expand into new markets. This allows them to tap into a larger customer base and increase their overall market share.
  • Synergy - A strategic buyer may also be looking to acquire a target in order to benefit from synergies. This could mean that the combined assets of the two companies could be more valuable than the sum of their individual parts.
  • Cost Reduction - Additionally, a strategic buyer may be looking to acquire a target in order to reduce costs. By combining resources, the two companies can become more efficient and reduce the cost of production.
  • Competitive Edge - Lastly, a strategic buyer may be looking to acquire a target company in order to gain a competitive edge. By acquiring a target, the buyer can secure access to new technology, products, or services that will give them an edge over their competitors.

In summary, a strategic buyer may look to acquire a target company for a variety of reasons, including market expansion, synergy, cost reduction, and competitive edge. By understanding the strategic buyer’s motives, companies are better able to determine the value of a potential acquisition.


Strategic Buyer — recommended articles
Tuck-In Acquisition — Horizontal diversification strategy — Lateral integration — Diversification in business — Related diversification — Inorganic growth — Imitator strategy — Organizational strategy — Conglomerate diversification

References

Footnotes

  1. ↑ Malino N., (2008), page 7
  2. ↑ Malino N., (2008), page 7,8
  3. ↑ Grebey J., (2018)
  4. ↑ Snow B., (2011), point 75
  5. ↑ Grebey J., (2018)

Author: Klaudia Kazienko

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