Andrew Greta's Business Development Blog
Business development tips, advice, and observations including mergers & acquisitions, joint ventures, divestitures, and strategic partnerships. © Andrew Greta 2008
Wednesday, July 9, 2008
Deal Rationale - Strategic vs. Financial
According to Reuters, merger activity in the United States dropped 29 percent in the second quarter as financial deals driven by leveraged private equity shops dried up from lack of lender liquidity. Meanwhile, strategic investors are seeing opportunities to snap up cheap assets, bidding for stalwart consumer staples like Anheuser-Busch Cos Inc (BUD) and Wm. Wrigley Jr Co (WWY).
But what’s this distinction between financial and strategic acquisitions? Aren’t all deals just deals and shouldn’t they all be driven by financial returns at the end of the day? After all, we don’t want to be like the misguided company president I once heard describe an acquisition that, “isn’t expected to make any money… it’s strategic”. Yes. Good deals create real economic value for the participants, but the distinction is often how that value is realized.
In the most general terms, financial investors tend to be hands-off money. They invest in opportunities at an arms-length and expect to reap their gains in a future sale, or recapitalization of their holding. Any Joe on the street who buys stock online through his internet broker is the epitome of a financial investor, as are Wall Street firms and other investment funds.
Financial Deals
| Type | Buzz Words | Description | Example |
| Growth | Venture Capital, Angel Funding | Buying an emerging business or technology expected to be on the verge of explosive growth or breakthrough. | |
| Cash Flow | Leveraged Buyout (LBO), Management Buyout (MBO), Private Equity | Leveraged financing of assets with stable cash flows used to pay down debt and build shareholder equity. |
Strategic investors, on the other hand, are more like the Monster Garage mechanics of the financial world. Their interest is in buying up businesses, properties, assets, and technologies they can integrate and use to build something better. Typically these are operating companies pursuing corporate and business development activities on their own behalf.
Strategic Deals
| Type | Buzz Words | Description | Example |
| Consolidating | Roll-Up, Synergies, Rationalization, Headcount | Combining back-office economies of similar businesses to reduce op expense of combined entity. | |
| Expansion | Global, Distribution, Internationalization, Brand, Channel | Acquiring a new distribution network or brand for an existing network to expand sales. | |
| Technology | Patents, Licensing, Intellectual Property (IP) | Acquiring a new technology to complement or add to an existing offering or defend against competitive infringement. |
This is clearly a gross simplification and deals can involve complex hybrid approaches (e.g. it’s not uncommon for a private equity LBO shop to take an active role in a company’s operational turnaround after an acquisition) but it provides a general framework to understanding where deals touted in the press fit in terms of rationale.
We’ll cover each of these deal types in greater depth on future posts.
Labels: Business Development Basics, Strategy
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