A strategic partner is one that acquires or invests in another company in the same industry in which it is already operating in order to increase its value by generating synergies. The investment is made because the strategic investor believes that the two companies combined will be greater than the sum of the two separate companies and seeks the integration of the acquired entity for long-term value creation.
Since more value is expected to be derived from the acquisition than the intrinsic value of the acquired company, the strategic partner may typically be willing to pay a higher price to close the deal.
There are many reasons for entering into a transaction with a strategic partner, but one of the main objectives is the maximisation of the value of the company, i.e. the creation of shareholder value. This can be achieved through the purchase of a company that together with the acquirer ends up having a value greater than the price paid for it in the acquisition.
The question arises: How can a company be worth more than what it cost to buy it? When the value of the new company resulting from the combination of two companies is greater than the sum of the two companies separately, a synergistic effect has occurred.
When studying a transaction of this type, the project is studied taking into account the synergy effects that are expected to be generated. It is therefore common for part of the value generated by synergy effects to be paid in the price as a premium. Therefore, by paying this premium, the acquiring company is already handing over part of the synergies that it expects to obtain, but does not yet have.
The value generated from synergies can come from these 3 main areas:
A financial investor, on the other hand, will never integrate the business into another company. He analyses the investment opportunity of a solitary company in which to make a minority investment. A financial investor is adept at creating long-term value for the company in the short term to ensure the profitability of his investment.
Both the strategic buyer and the financial investor analyse the business in detail, but the strategic buyer focuses more on possible synergies and integration capabilities and the financial investor focuses on the ability to generate liquidity and increase profits.
However, there are not only these two types, but sometimes a strategic buyer has more of a financial objective or the other way around, such as in the case of add-ons.
In the following, we will look at a number of economic reasons - which produce a synergistic effect with a high degree of certainty - for a merger or acquisition and thus reasons for a strategic partner to buy out:
Horizontal mergers or acquisitions are those in which the merging companies are in the same industry. Operational synergy is achieved through revenue enhancement, cost reduction or often a combination of the two.
In this case, as the companies are usually competitors, care must be taken as to how and when relevant information is shared.
In vertical integration, a distinction is made between fordward integration (the company moves closer to the final consumer) and backward integration (the company moves closer to the initial supplier). Mergers or acquisitions of this type are carried out for different reasons, for example:
When the acquiring company is interested in expanding into another geographic area by acquiring a company in the same activity/sector. In such cases, it is important to have a good understanding of the extent to which the local market requires a different approach.
There are companies that are not managed efficiently. If a company with an efficient management thinks that another company could be better managed, its objective might be to buy it in order to change the way it is managed and thus increase its value. The acquiring company will have to make sure that it is really poor management that is the factor leading to low profitability, because there can also be many other factors that do not allow a company to be profitable.
Tax synergies exist when the merger of two companies results in a reduction of tax payments. Thus, the tax burden of the two companies together is lower than that of the two companies separately. The most common tax synergies are:
There are companies that generate a large amount of funds and have liquidity available for investment, but lack opportunities to reinvest them profitably in their own business and do not want to distribute them as a dividend. In such a case, it may be worthwhile to undertake acquisition transactions if this can generate a return for the company's shareholders.
This type of acquisition refers to the fact that the development of the acquiring company requires something that the company to be acquired has or owns. This is the case of many acquisitions of small companies that have some kind of technology by large companies that find it easier to buy a company that has the technology they need than to develop the technology or product themselves.
There are also cases where such acquisitions have been seen due to the need to find good managers.
Selling to a strategic partner can have its advantages, especially for SMEs, for the following reasons:
If you are looking for a strategic buyer, you can count on our service of capital raising or strategic investor.