So let’s look closely at the differences between the institutional investor and the strategic one and the link with your transaction goals.
Understandably, most entrepreneurs want to obtain when the moment of selling arrives the highest price possible for their hard work during the years in which they have built the company. If the most important goal for you is the highest price possible, the choice of a strategic buyer is probably the best. However, you should take into account that a strategic investor will analyze in great depth the target and, because they do not have all the modi operandi in place, the process is likely to last longer with a buyer from your own industry.
If the goal of striking a deal quickly is more important, probably the best choice would be a financial investor.
With an institutional investor the process will be shorter, because they have a streamlined buying process, given that they are specialized in buying and selling companies. In the same time, a strategic player knows exactly at what KPIs and indicators to look in order to understand how well the business is actually doing.
But if you are going to be acquired either by a strategic or financial player, consider a multiple of variables such as integration and streamlining, redundancies cuts, new position in the market, cultural fit, which could delay the process more. There could be exceptions, when the players know each other very well and the acquisition was expected to happen sometime in the future. This means that the players have followed the evolution of each other over the years and already know very well the market context because they competed and shared the same market until the transaction moment.
Returning to the point that the strategic buyer will often pay more on a company than a financial investor, the obvious argument for this is the synergic effects from the acquisition made by a strategic buyer of a company from the same industry.
For example: economies of scale in non-core businesses like human resources, financial department, legal department, also down size of the operational costs etc. In the same time, acquiring a company from the same industry will lead to increase of market share, implying better negotiation power with suppliers and clients. For this kind of advantages a strategic investor will be inclined to value the target more than the private equity house.
However, you must also take into consideration the possible negative synergies, not only the positive ones, that could spring from your acquisition made by a strategic buyer.
The acquiring company could divest business lines considered not competitive or not business wise from the market context perspective. Also, because of their better know-how in the business and strong team, at the extreme, they would not consider the value of the company as a whole, but only of the plant and equipment. If this is the case, the acquiring company will actually be willing to pay less for the discussed target than a private equity house.
You should also consider the exact dimensions and the strategy of the buyer. It may be the fact that the Romanian market is very important for them or not very relevant. In the first instance, the buyer will accept paying a premium, while in the latter they will not.
With the acquisition made by a reputable player, consider also the access provided to other markets. You could enjoy increased footprint in markets from Romania that would otherwise remain closed because of too high barriers to entry. Also, consider that this type of acquisition could mean easier access to foreign markets because of the gained financial and strategic power.
As the company is the result of your sustained efforts over the years, most probably you are very motivated in its thriving in the years to come, even if you do not remain involved in the business. If you stay in the company, you will be even more motivated to develop efficient and visionary business strategies. From this point of view, keep in mind that a strategic buyer with more powerful resources than you, with a stronger market presence and a longer business history will bring in the new venture incredible know-how and experience on which your company will leverage strategically.
The more experienced company will bring into the business operational specialists which will transfer valuable processes, best practices, maybe software programs that the acquired company could not have afforded otherwise, making it more operational efficient. In the same time, the integration of the processes and the increase of the pooled resources of fixed assets will increase the competitiveness of the acquired target.
Last, but not least, you should consider how the set of values of your company will cope with the acquirer’s, most importantly if they are compatible or not. Another important aspect would be if the people of your team will be kept in the business or not after the takeover.
When looking at the difference in strategic objectives of strategic buyers versus private equity houses, the strategic objectives are the increased value for their shareholders (potential rationale: acquiring Romanian market share), while PEs are focused on increased short-term IRR, in general obtaining an IRR larger than 25% p.a. in 3-5 years. This means that PEs will require fast results. If you will remain with the company after the acquisition, this could mean high pressure for results. This is not always the case, though. We know entrepreneurs that developed great relationships with the private equity fund’s representatives.
Going back to the time argument, the private equity (PE) houses have business savvy specialists that can close a deal fast, but who know very well how to analyze from a financial point of view the company’s data. This could be an advantage if you are in a hurry.
You should consider when thinking at a private equity as a possible buyer for your company the fact that, in general, there are fewer transactions closed by private equities in Romania and the trend is downward. According to The Ernst & Young M&A Barometer Romania 2012, the share of financial investors decreased from 35% in 2011 to 18% in 2012 on the Romanian M&A market, signaling PEs difficulty in finding interesting Romanian targets to match their portfolios and their focus on selling companies held for a long time in the portfolio.
You should take into account the financial advantages brought by a financial investor. This investment will most probably facilitate access to financial resources to accelerate the development of your company. Also, a private equity will ensure better bankability to your company and a strong partner for negotiations with banks and other business partners, as PEs have strong negotiations and financial skills and developed relationships with banks.
Also, be prepared for high corporate discipline and an efficient management after the acquisition. But also, if you start negotiations with a private equity house, pe prepared to be asked to remain in the business, as PEs do not have an industry know-how as well developed as a strategic buyer. This point is the more relevant for industries where people running the business are paramount for its success, for example industries relying on business relationships.
In conclusion, keep in mind that a financial investor can possibly mean a very thorough investigation, as the private equity house is a demanding buyer, with complex information requests and an accelerated process. Also, as their objective would be to maximize return on investment, be prepared for a lower indicative price offer from PEs.
There could arise also the situation in which a strategic buyer has as main shareholder a private equity house. If this is the case, the strategic buyer is used by the PE as an acquisition platform: the strategic buyer will try to increase the market share through the acquisition of other players in the market. In this situation, we should think the transaction from a strategic buyer’s perspective.
Read the full report in the attached pdf document
the full report in pdf document attached.