The type of buyer you choose will drastically impact the way your company is run post-acquisition
Owners of technology and digital media companies must carefully consider the type of buyer to whom they sell. Financial buyers and strategic buyers have different goals and buy companies for different reasons. As a result, the type of buyer for a technology or digital media acquisition impacts future business models, possible buyer bid amounts, and time horizons. Understanding the two types of buyers and how their goals differ is crucial for the success of any technology or digital media deal.
Typically, strategic buyers are established businesses. They have experience or knowledge about the industries of their target companies and are exacting when assessing potential acquisitions. For example, a strategic buyer may be looking to neutralize competitive threats or take advantage of different synergies that may arise from an acquisition. In addition, strategic buyers look for acquisitions that will increase their market share, add vertical integration, expand geographically, bring in desirable technologies or employees, or diversify revenue streams.
Financial buyers are often private equity firms but can be hedge funds, family offices, and holding companies. As such, their goals differ greatly from those of strategic buyers. While strategic buyers evaluate potential acquisitions on how effectively those acquisitions will incorporate into their own businesses, financial buyers prioritize profit. Financial buyers approach acquisitions as investments for which they plan to arrange a subsequent sale, make an IPO push or pursue another exit strategy. The positive in dealing with a financial buyer is that they can provide additional capital to acquire more companies and provide additional working capital for expansion. This will prepare the seller to complete a second exit transaction at a higher multiple (with potentially a strategic buyer).
In the first quarter of 2016, strategic buyers completed 83% of control transactions in Software, Information and Business Services.
For the Marketing, Media and Media Technology segment, strategic buyers completed 96% of control transactions.
Data by Pepperdine University
The type of company your acquirer may be affects technology and digital media deals in the following ways:
Strategic buyers typically approach acquisitions with great specificity. They are often picky when selecting targets, but they are also more likely to pay a higher premium when they find an attractive potential acquisition. Conversely, financial buyers look at acquisitions as investments and thus evaluate a broad range of companies. They consider companies across segments–and industries–and perform extensive due diligence to determine which investments make the most sense at the given time and price.
Because strategic buyers are looking to integrate acquisitions into their company over the long term, acquisitions normally involve a period of adjustment for employees. There may be new protocols, new offices, and additional levels of bureaucracy to which your employees must acclimate. Similarly, financial buyers are often actively involved in supporting and modifying the operations of their acquisitions. Financial buyers ensure that their acquisitions meet growth goals by introducing new management and board members.
Financial buyers, often looking to minimize entry costs and later sell at a higher valuation, are less likely than strategic buyers to pay a premium on valuation to make acquisitions. Financial buyers consider an exit strategy for each company they acquire, and high valuations dissuade them from pursuing some deals. On the other hand, strategic buyers looking to fulfill a specific need are more likely to be willing to pay a premium on valuation in order to acquire a company that they believe fits with their company.
Strategic buyers look for synergies between their companies and acquisition targets. Strategic buyers might be looking to integrate horizontally or vertically in order to increase bargaining power or neutralize threats. On the other hand, financial buyers might have specific synergies in mind between their portfolio companies. Still, synergies usually are not a priority for financial buyers.
Financial buyers have an exit plan for each acquisition they make. In many deals, company owners are required to stay with their companies for an agreed upon amount of time to ensure growth. When financial buyers sell an acquisition, the former owner of the acquired company cannot control the outcome of the sale. Conversely, strategic buyers usually look to integrate acquisitions into their larger company over the long term.
Every deal is different, and having a relationship with an M&A advisory group that understands your interests—and the industry–will help you choose the right buyer. At Solganick & Co., we provide specialized M&A advisory to companies in the technology and digital media industries, and we use our expertise in these industries to provide a tailored advisory process. No matter whether your situation calls for a strategic buyer or a financial buyer, we can help you understand current market trends and valuations to ensure that you sell your company to the right buyer.
If you are interested in or are considering exploring your tech M&A options, get in touch with our advisory team.