Strategic Buyer

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What Is A Strategic Buyer?

A Strategic Buyer is a company that purchases another business with a certain goal in view, typically to integrate its operations and resources with the acquired company for business expansion. The company bought in this process is called the target company. The deal usually helps the strategic buyer eliminate competition, gain long-term advantages, and expand its market reach through the target company.

The strategic purchase generally helps reduce the competition the buyer faces in the intended markets and expand its product line to reach a wider customer base than before. Such deals may help the buyer access additional resources, extend operations to a new location, or create a new product line, among other reasons specific to accomplishing business objectives. Business expansion through such purchases usually occurs within the same or allied industry.

What Is A Strategic Buyer?

A strategic buyer purchases a business that benefits their existing business. It refers to merging operations and building strengths by buying another business in the same or related sector.
Companies buying other businesses in a strategic buy wish to leverage the combined strengths of each independent unit and accelerate growth.
Strategic buyers typically buy other businesses based on a set vision and plan. Acquiring new business or customers, capturing new markets, developing new products or services, harnessing technology in related sectors, etc., are strong reasons for a strategic buy deal.
Such business moves bring a mix of positives and negatives. While business expansion is the biggest advantage, disadvantages like high purchase costs, compliance issues, regulatory hurdles, etc., must be considered.

Strategic Buyer Explained

A strategic buyer is a business that buys another business intending to grow through the purchase. This is different from a business or company that acquires another business to take over its operations. These buyers typically operate in a similar or closely related sector. Recognizing the potential for accelerated growth through acquisitions, they buy other businesses rather than relying solely on business growth. Strategic buyers seek companies with similar products, services, and customer bases.

A strategic purchaser may already have the expertise to continue business operations. Their primary goal is to merge the acquired business into existing operations to expand product lines or boost reach within the same market. This approach allows them to incorporate useful aspects across operations, marketing, finance, and human resources of the acquired company into their business operations, facilitating further growth and market expansion.

There may be various reasons for businesses to make such a purchase. It may be to support new market entry strategies by tapping a new geographical market, dominating existing markets, leveraging new technology, gathering knowledge, or acquiring customers, among other possibilities. Another benefit companies may consider is cost reduction since they can use existing resources in the form of employees, space, equipment, etc. Similarly, additional benefits companies wish to cash in on are lower training costs. As the staff is already trained, the expenses on comprehensive training go down significantly. This makes post-purchase operations easier.

Examples

This section lists some examples that facilitate further discussion.

Example #1

Dan, a strategic buyer, and a fast-food restaurant chain owner, is considering acquiring a well-known local chain serving Indian delicacies. Dan’s market study has highlighted the increased demand for Indian food in the market. He plans to grow his fast food company into a new market niche by acquiring the local chain while using his current operational capabilities and infrastructure. He plans to broaden his consumer base and take advantage of the rising popularity of Indian food in the region.

By diversifying his product offerings through this strategic purchase, Dan plans to acquire new customers and markets. Additionally, Dan can gain synergies, streamline operations, and boost profitability, due to the target company's well-established brand, devoted customer base, and well-developed supply chain. Thus, such purchases can help enterprises increase business volume.

Example #2

Facebook (now Meta), a social media giant, acquired WhatsApp, a messaging platform, in 2014. WhatsApp was steadily expanding its market share, outpacing other well-known messaging apps. Recognizing the threats and opportunities, Facebook bought WhatsApp for $19 billion. This way, it also prevented WhatsApp from falling into the hands of rivals.

In addition, WhatsApp generates around $20 million in revenue annually by charging a $1 annual subscription in nations where credit card usage is prominent and billing-related telecom regulations are suitable. Through this purchase, Facebook (now Meta) became a global strategic buyer and gained extensive market share and users in nearly every imaginable market in the world.

Advantages & Disadvantages

There are many advantages and disadvantages to strategic buying. They have been listed below.

#1 - Advantages

Increased Value: Strategic buyers might benefit from the synergies created due to the purchase, i.e., resources of the acquired company are merged with their own. As a result, the value of the original business rises, and the owner receives a sizable sum of money they can use to fund other or additional business ventures. This results in cost reductions, enhanced effectiveness, and better performance. Small and medium-sized businesses get more returns than their initial investment.
Market Expansion: Strategic buyers can supplement their market presence by purchasing a business in the same or a closely connected industry. They can enter new geographic areas, approach new customers, and expand their market share and revenue.
Diversification: Companies entering into strategic buy deals can broaden their product and service offerings by acquiring businesses that offer complementary goods or services. This can improve their competitive position and help businesses reduce the risk of relying entirely on one product or market.
Knowledge: Many times, strategic buyers have the relevant knowledge and expertise about a certain business. They can benefit from the target company's intellectual property, industry experience, technology, or creativity by acquiring a business in the same or allied sector.

#2 - Disadvantages

Integration Challenges: Integrating a recently acquired business into current operations can be difficult and time-consuming. During the merger process, differences in work culture, management issues, and operations issues may surface, causing disruptions and possibly reducing the acquired value.
Employee Changes: A strategic buyer gains total authority over the target company’s operations, including HR ops. Based on this, a buyer can recruit new people or bring members from its original team to replace the existing staff; it could lead to unrest.
Overpaying for Acquisitions: Strategic purchasers might overpay for acquisitions due to aggressive bidding or high expectations. It can harm the buyer's shareholder value or financial performance if the acquisition cost exceeds the real value or benefits.
Limited Innovation: Such buyers may focus more on integrating and optimizing current operations than leveraging innovations acquired through purchase. This may hamper their capacity to adjust to market disruptions or employ new technology for growth.
Regulatory and Legal Risks: These acquisitions may come under regulatory scrutiny, especially if they lead to greater market concentration or antitrust issues. The purchase process might become more difficult and complex due to compliance issues.

Strategic Buyer vs Financial Buyer

The differences between strategic and financial buyers are as below:

Key Points	Strategic Buyer	Financial Buyer
Concept	An entity, often a company or corporation that purchases another business intending to achieve strategic goals is called a Strategic Buyer.	An organization that purchases a company purely for financial gain instead of strategic alignment is a Financial Buyer. Typically, financial buyers are investment funds, private equity firms, etc.
Industry Preference	They often work in the same or allied sector as the target organization. They look for acquisitions that align with their core business to boost their existing knowledge, skills, and market presence.	Financial buyers are frequently industry-neutral and may invest in businesses operating in other sectors. Instead of concentrating on industry-specific synergies, they find appealing investment possibilities based on financial reasoning.
Operational Involvement and Integration	These purchasers actively incorporate the acquired company into their current business. They combine resources, streamline procedures, and take advantage of synergies to maximize value generation.	They usually take up a less active role in business operations. Even though they might make modifications to boost financial performance, they often turn to the current management group or hire new management to make improvements.

Frequently Asked Questions (FAQs)

1. Why do strategic buyers pay more?

They might be willing to pay more for an acquisition due to the possible synergies the purchase is anticipated to create and the expected strategic value it brings the buyer. Buyers believe that by making the acquisition, they will be able to improve their operations, market position, and growth prospects, which justifies a higher price.

2. Are strategic buyers operators?

Strategic buyers might also be operators. Due to their involvement or presence in the market, they frequently already have operating businesses and look for acquisitions that support their strategic objectives. This enables them to use synergies and incorporate the newly acquired business into their operations.

3. Are strategic buyers asset managers?

Strategic purchasers may manage assets as part of company operations, but their focus is on acquiring firms that align with their strategic goals. Instead of concentrating only on managing assets for external clients, they incorporate and use the resources of the acquired business to further their existing operations.

4. How to find strategic buyers?

Strategic buyers can be found using various techniques, such as industry networking, industry conferences, and events, consulting with Mergers and Acquisitions (M&A) advisors, etc.