Strategic Buyer

What Is a Strategic Buyer?

A strategic buyer is a company that acquires another company in the same industry to capture synergies. The strategic buyer believes that the two companies combined will be greater than the sum of their separate individual parts and aims to integrate the purchased entity for long-term value creation.

Because a strategic buyer expects to get more value out of an acquisition than its intrinsic value, it will usually be willing to pay a premium price in order to close the deal.

How a Strategic Buyer Works

Suppose a food manufacturer that has made processed foods for decades wants to jump-start an effort to offer organic products. It becomes a strategic buyer when it acquires an organic food company to serve the same market.

Post-acquisition, the combined company will not only benefit from this top-line synergy, but it will also create production and distribution synergies as well by increasing factory utilization rates and using the same channels to deliver products to customers.

Throughout the cost structure of the combined firm, overlapping costs can be removed, such as a redundant factory or office space and external services. With opportunities to increase total sales and enhance productivity at the same time, the strategic buyer stands a good chance of turning two plus two into five.

The value-creation from these combinations will mostly be seen in sales synergies in the early stages — other synergies generally take longer to come to fruition.

Criticism of Strategic Buyers

A strategic buyer often generates a large portion of cost savings by laying off workers. When two companies operating in the same market combine, a lot of positions begin to overlap or overfill, leaving some employees surplus to requirements.

For instance, there is no need for two chief financial officers (CFOs), selling and marketing staff can be reduced, and a layer of mid-level management is no longer necessary. Dismissing these staff makes sense for the strategic buyer, helping them to trim costs and boost efficiency, though not everyone is so understanding.

Concerns over potential job losses can spark outcry from the public, trade unions, and the government. Negative publicity might end up damaging the company’s reputation. In some rare cases, it may even lead to the acquisition being vetoed, particularly if the strategic buyer is a foreign one with the bulk of its operations located abroad.

Example of a Strategic Buyer

In 2017, Amazon.com Inc. (AMZN) made headlines when it bought grocery chain Whole Foods for $13.7 billion. Amazon was a strategic buyer with two major goals: instant and far-reaching penetration into the grocery business, and a network of brick-and-mortar locations that serve many of the same types of customers who shop online at Amazon.

One of Amazon’s first missions was to boost Whole Foods' revenues by making the organic grocer’s products “affordable for everyone.” Amazon didn’t waste any time leaving its mark, offering its subscriber base discounts in stores and free two-hour deliveries.

So far, price cuts and other new services haven’t translated into Amazon stealing a significant chunk of grocery market share from industry giants Walmart Inc. (WMT) and Kroger Co. (KR). It’s worth remembering, though, that this is a long-term project and one, like any other major acquisition, that was bound to experience some growing pains. The new venture is still a work in progress and immediate success wasn’t expected to be achieved overnight.

Another example of a strategic buyer is T-Mobile's acquisition of rival Sprint in 2020. The deal between America's third- and fourth-largest wireless carriers at the time was valued at $26.5 billion, and the combined company covers about 127 million customers, according to The Wall Street Journal. The telecom companies indicate that the merger has created a much "fiercer competitor" to AT&T Inc. (T) and Verizon Communications Inc. (VZ).

Strategic Buyer vs. Financial Buyer

Acquirers are often described as either being strategic or financial buyers. Unlike the former, a financial buyer’s goal is to buy businesses for as little as possible, with the hope of selling them at a profit five or ten years down the road. The sector the target operates in isn’t necessarily important and stakes big enough to be influential are usually preferred over full-scale takeovers.

Financial buyers look for potential bargains that can be improved and eventually net their investors a decent return. Often they will be interested in what cash flow the investment will generate, as well as the kind of exit strategies it will offer in the future.