Understanding Strategic Buyers in Mergers and Acquisitions

hi this is Brett Sanctus I'm an M&A lawyer and M&A broker and today we're talking about M&A buyers so mergers and acquisitions buyer certain types of buyers so in a previous video I talked about financial buyers or private equity firms it's the classic kind of financial buyer they have their own types of motivations and unique prose and columns from the standpoint of a seller doing a deal with the financial buyer is different than doing a deal with a strategic buyer the strategic buyer is usually a competitor in your industry so if you're a seller and a competitor wants to buy you that's a strategic deal so moving to strategic buyers now and we just talked about how private equity will generally be a little bit tougher on price but it does depend strategics are generally viewed as being a little bit a little bit loose or wound pay a little bit more because they've got synergies they want to unlock now whether that's cutting employees whether that's cross selling products those are two big things that M&A deals will will tell you know we're gonna save money because we have all this overlap and then you see people losing their jobs unfortunately but that's kind of a cost savings is one reason to do an M&A deal to be able to eliminate some overhead and still have the same revenue a tougher one to capitalize on but still often touted an M&A Dioses cross selling you know hey we sell we sell pencils this company sells erasers man you know like we're all selling we're selling the same customer let's just do a deal and then are so people could sell both things and only one sales people person so or also if people could sell twice as much product historically that's very difficult to capitalize on but that's those are synergies and a competitor of yours is definitely going to almost always unless they're kind of in a tangential space if they're exact same space as you are and or if they're in a different market than you but they're in the exact same spaces you they're probably gonna be looking at synergies and those synergies may allow them to pay if they are in a different market they're not in your market or the what the space they're in is a little different than what you do there may not be as much synergy there you might find them being even you know more difficult than profit firm Sun on price but generally speaking expect them to pay a little bit more on the positive side they probably don't need you know again that could be negative for you it depends but most sellers of my experience are pretty flexible about moving on it's ready they're ready to sell and if they got to stick around for a year or two or something hey that's fine but most are ready to do something different now if that's not you you're just looking to do a deal because you think it's gonna be hard for you to survive without it being part of a bigger company or you want more resources or there's all sorts of motivations to sell if it's not just to cash out you may view this as a negative but generally speaking they're gonna need you less they're gonna know your business it doesn't mean they're gonna cut everyone right I mean it depends on the business it depends on what the synergies that are forecasting are and how independent the business is and how much redundancy there would be among the organizations but generally speaking you're probably gonna be a little bit less important to them on the negative side of the cons with competitors with strategic acquirers there's a lot more mismanaged expectations in my experience so it's not to say that private equity buyers won't Oh paint a rosier picture than how things will be promised you something they really know may not last Oh course yeah you'll do exactly what you're doing oh no they won't cut any people and things like that I mean sometimes things are said during a deal it doesn't justify it but it's just the reality people get deal heat they want to close a deal they say something that they should know maybe isn't true or maybe it won't be true forever or maybe they should have some responsibility to think this may change in the future but they just say yeah of course you'll be left alone to run the company no problem and then six months later it's like yeah we're gonna need you to do a B and C so again some of that might be nefarious they're purposely misleading and other times it's just things changed but there's a lot more room for mismanaged expectations in my experience with with strategics because they know your business and they have a way of doing things they may tell you hey we're gonna let you do what you want but then they're gonna get in and humans be humans they're gonna start looking at it and thinking oh we could do that better you should do this the way we do it it's just you know you could see a lot more promises that all of a sudden things have changed in strategic world that's pretty common another negative with strategic buyers is you're opening up your whole business your books and everything to them now you're gonna have a non-disclosure agreement that says that they can't share that information they can't use that information other than for purposes of closing the deal but it's you know it's you can't unscramble the egg kind of thing I mean once they know what they can't don't learn it however you want to put it the point is you're gonna let them know certain things about your business that you really can't ever take back and that may be certain competitors you're doing business with or so that we price certain deals so there's more sensitivity around those things with a strategic because if the deal doesn't close then you've exposed your business a little bit so there are ways to mitigate that non-disclosure agreement is one it's kind of a rudimentary way because again you can't stop them if they just learn how you price deals they're gonna know that there's gonna be no way you're gonna be able ever say that what they're doing now is because they have your information it's just not gonna work no matter what your non-disclosure agreement says you're not going to prove that we're doing the deal right now where my seller is very sensitive because he's got extremely important to like great supplier relationships we're not going to disclose those to the day of closing or after the closing we're giving anonymized data here's the number of suppliers we use last year here's the average amount here's what we spent with this one you know supplier one supplier two suppliers three will give that information to you after we close now not every buyer will accept that and that's a reasonable position and I think a lot of buyers would and most life selling clients are aren't as so sensitive one reason rather they trust the process just gonna stop short well short of saying this would never happen but the idea that someone is out there going through this whole process signing a letter of intent tapping lawyers involved getting under the hood all that money all that time all that stuff to find out some things about your business it's just not really realistic but those competitors might show up out of curiosity to see what they can find out in the early stages of a deal just to kind of kick the tires and get a look at what we call the teaser or something like whatever they can get without going too far but to get really far down the court I mean negotiating documents and all that sort of stuff it's not very likely that they're doing that just to siphon information just to steal information that said sometimes deals don't close so there's more sense it to be around that with a strategic thing compared to a private equity firm though again like kind of like with price the example there if the private equity firm is is it's rolling up that industry buying a lot of companies in that industry yeah you might have to fear this issue as much for them is with the strategic so thanks for joining today if you have questions about strategic buyers drop a comment if you enjoyed what you heard today check out my other videos previous video about financial buyers in the next video about individual buyers and drop a comment subscribe share preciate you stopping by