The merger/acquisition/buyout process begins with the development of a strategy. In this crucial phase, company leaders chart the future of the business with a plan that may include a future merger, acquisition, or divestiture. When thinking about M&A strategy and the rationale behind a particular transaction, a helpful starting point is to consider whether the buyer is a strategic acquirer or a financial acquirer—particularly as the two types of acquirers will typically have different motivations and objectives when evaluating an opportunity.
A strategic acquirer, sometimes referred to as a corporate buyer, is generally an operating company with at least one, and perhaps several, business lines that is considering whether to transact with another operating company to either grow or more narrowly focus the acquirer’s business. There are many reasons why a strategic buyer might pursue acquisition efforts; objectives might include strengthening the acquirer’s existing enterprise by purchasing one or more companies to build a portfolio of business lines; reducing costs, perhaps by spreading fixed costs over a larger number of sales units; increasing market share and therefore pricing power; and enhancing long-term value by securing one or more strategic “options” for the future. These four main M&A strategies will be detailed later with a strategic acquirer in mind.
The other kind of buyer is known as a financial acquirer—usually an investor group such as a private equity fund making an investment in a company with the specific intent of reselling later at a profit. Such a purchaser will focus principally on whether the company will either generate enough cash flow to handle the debt service requirements of the transaction or perhaps have sufficient severable assets that can be sold off piecemeal, while still representing an attractive whole-company sale candidate looking ahead three to seven years. Indeed, the eventual divestiture of the target—whether in part or in whole—is an integral part of a financial buyer’s plans from the outset, whereas most strategic buyers evaluate deals from the perspective of potentially managing the asset “forever.”
One might say, then, that a financial buyer is an “opportunity taker,” whereas a strategic buyer is an “opportunity maker.” Unless otherwise indicated, the processes described assume that the acquirer is an operating company buying another operating company with a plan to integrate it into its operations for the foreseeable future--aka, a strategic acquirer. For other scenarios (for example if the acquirer is a special purpose acquisition company transferring the target from private to public ownership, with no integration or divestiture planned) the processes may be modified accordingly.
The corporate acquirer reading this will receive guidance for M&A strategic planning—be it to diversify, save, grow, or hedge. Nevertheless, this planning is only the beginning because any decision to acquire means finding a willing seller, and any decision to sell means finding a willing buyer. Thus, strategy naturally influences the search process—that is, the would-be buyer’s acquisition criteria and means for screening the market, as described in the second section —whether that process is managed internally or with help from business brokers in the small and midsized market or, at the higher end of the market, investment bankers. Finally, all strategic planning requires attention to legal and regulatory constraints. The third and final section will address those necessary limits.
Let us now begin at the beginning, by getting acquainted with that somewhat mysterious activity known as strategy—or, more dynamically, strategic planning.