Strategic buyers acquire businesses that help them expand, while financial buyers acquire businesses to grow and sell. An experienced advisor can determine whether a strategic or financial buyer will achieve the best outcome. Let’s explore factors that maximize deal value for strategic acquirers.
Adding value through Revenue Synergies
Strategic buyers first look to increase revenue. They want a company that will expand reach, optimize costs, or eliminate a barrier to growth.
The ability to cross-sell to a larger customer base significantly increases a deal’s value. Disney’s 2009 acquisition of Marvel Entertainment introduced Marvel characters to Disney theme parks, films, merchandise, and streaming services. Disney leveraged its existing customer relationships to generate additional revenue from Marvel IP and drive revenue growth.
Strategic acquirers also identify opportunities to introduce new lines to customers. For example, Amazon’s 2017 acquisition of Whole Foods Market granted Amazon Prime members discounts at Whole Foods and introduced Whole Foods’s organic products on Amazon’s e-commerce platform.
Additionally, gaining a foothold in new geographies enhances the strategic acquirers’ market reach prospects. When AB InBev, strong in Europe and North America, acquired SABMiller, it moved into that company’s established distribution networks in Africa and Latin America.
Finally, strategic buyers also want cheaper capital. Larger companies can access more favorable financing options and raise capital at lower costs. This access fuels previously unattainable growth opportunities.
Adding Value through Cost Synergies
A profitable deal also decreases costs . By consolidating functions like marketing, human resources, and finance, the acquiring company reduces overall operating expenses. An acquisition also enables strategic buyers to negotiate lower vendor rates thanks to combined spending power. Just recall how AbbVie‘s $63 billion acquisition of Allergan projected $2 billion in annual savings in overlapping manufacturing and research and development.
Integration Costs and Risks Shrink Strategic Deal Value
Optimizing deal value is not just about value-added opportunities. Strategic buyers also investigate scenarios that limit a deal’s value.
If key leaders and personnel are critical to the target company’s success, strategic buyers will create contingencies designed to transfer knowledge, build capacity, or retain staff before, during, and after closing. In 2016, Dollar Shave Club’s founder and CEO, Michael Dubin, left just 18 months after a $1 billion acquisition by Unilever. This impacted innovation and growth.
Strategic buyers will begin discussions early to encourage integration alignment and limit risk. Case in point, Dell’s 2015 acquisition of EMC aimed to transform Dell into an enterprise storage leader. However, integration challenges across product development, sales, and support led to lost customers and increased employee attrition.
There is also a risk of losing customers during an acquisition. Strategic buyers should identify customers at risk for attrition and plan joint outreach to retain them. Remember when Bayer’s 2018 acquisition of Monsanto merged two agricultural giants? Concerned about price hikes, many customers proactively switched suppliers.
The acquisition may necessitate security upgrades and legal approvals, which could increase compliance costs. Strategic buyers also incur additional labor costs when acquiring new employees. Protect the deal’s value by identifying significant costs and providing transparency to buyers upfront.
The value of a strategic deal depends on an interplay of positive and negative factors. Carefully evaluate key value drivers and engage with advisors as you navigate the transaction. Understanding an acquisition’s impact on revenue, costs, talent retention, and customer relationships is essential to making informed decisions about the best buyer.
Justin DePardo, Director of Corporate Development at Embarc Advisors About the Author: As the Director of Corporate Development at Embarc Advisors, Justin delivers end to end M&A expertise to clients and supports them throughout the journey while strategically planning for the future.
Prior to joining Embarc Advisors, Justin spent 10+ years working in increasingly complex roles within Corporate Development and Private Equity. He brings additional value to our clients as a result of his experience in a multitude of industries including Industrial, Insurance, and Financial Services; this allows him to adapt quickly and utilize different perspectives in order to find the only the best outcomes. Justin is also very familiar with engagements of all sizes; one of his many noteworthy achievements involved closing a $265M acquisition and successfully integrating the business to generate $30M+ in EBITDA.
Justin’s educational accomplishments include a Bachelor of Science in Finance from Bentley University.
Based in East Hampton, Connecticut, Justin is a big Boston sports fan–and we aren’t bluffing when we tell you that he also previously played in the World Series of Poker.
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