Strategic buyers
I came across the term "strategic buyers" in a recent Wall Street Journal article entitled "Global Deals Market Is Being Transformed By 'Strategic' Buyers" (8/18/2005).
The story talks about the way in which, in a number of recent deals, equity firms have been trumped on acquisition deals by companies in the same business as the target. These same-industry buyers are termed 'strategic buyers", an odd term. Does that make the equity firms "tactical buyers?"
It is strange that the seemingly more natural process of buying companies similar to or complementary to yours in order to expand your business, as opposed to those who are simply buying an asset as middlemen.
Two recent examples are cited in the article:
- The seller is J.P. Morgan Chase's private equity group. The target is South Korean auto parts company Mando. The losers are some of the biggest equity companies: Carlyle Group, Newbridge Capital, Goldman Sachs Capital, and Bain Capital. The winner has not been determined, but the remaining bidders are car parts maker: Germany's Robert Bosch, Germany's Continental AG, American TRW Automotive and South Korea's Hyundai (for whom Mando is a big supplier).The deal is estimated to be world $2 billion.
- The other example is France Telecom's buyout of Spanish cellphone company Amena, beating out several equity firms (see here)
Many companies are flush with cash, and they are willing to pay a premium for companies that will help them expand. The figuring is that the right buy can worth more than the added income, to a company whose overall position in the industry can be improved by the deal. As the article notes:
These buyers can cut costs and enjoy greater economies of scale, and thus they often are willing to pay more in an auction than an investment firm.
The equity companies have lots of money. But there are limits to what they can bid. Their investors demand superlative return on investment in double figures and not the low double figures annually. That limits the amount they are willing to invest against an in-industry company which would be happy with a far lower return in exchange for market power.
And the phenomenon of strategic buyers beating equity firms seems to be gaining steam, the WSJ article notes "Last year, private-equity firms won a quarter of all deals, according to data from Morgan Stanley. This year, the percentage has fallen to 15%, though the volume of deals has increased."
