True or false: Strategic buyers are either top or bottom of the valuation range

In the world of mergers and acquisitions (M&A), the role of strategic buyers, also known as trade buyers, is pivotal and yet often misunderstood. 

While bids from these buyers can be found across the spectrum, it is true they are often found at the extremes, fluctuating between offering strategic premiums and presenting lower bids.

Able to extract synergies from a deal, benefitting from strategic control and often considered lower risk, trade buyers can be encouraged go high with a bid. At the same time, financial constraints, differing strategic priorities and integration costs can see bids lowered.  

What can drive strategic buyer premiums? 

Firstly, synergies. Trade buyers can leverage synergies by integrating the acquired business into their existing operations. This can include one-off cost reductions, such as sharing office space, but also increases in revenue through expanding product ranges or cross-selling. 

These synergies justify higher acquisition prices, as underlying profit is likely to be higher in the case of a merger. 

The strategic fit is also important. 

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The role of strategic buyers is pivotal and yet often misunderstood.

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Maximising potential

Hiring advisors to help navigate the sale process is vital. 

Clearwater can bring the greatest range of buyers to the table – both trade buyers and financial investors, allowing a seller to consider all possibilities. 

We can also advise on the different methods of interaction needed to deal with trade and PE buyers. It is crucial to tailor communication and engage with the right decision-makers. Understanding their strategic objectives and constraints can help entrepreneurs navigate negotiations effectively. 

For trade buyers, acquisitions are not just about financial returns; they are about long-term growth and competitive positioning. They may pay a premium to secure a target company that aligns with their strategic goals.

Similarly, trade buyers prioritise strategic control and integration, leading them to offer premiums compared to private equity (PE) buyers focused solely on financial returns. An acquisition may allow a strategic buyer to control another element of the value chain – a wholesaler purchasing a manufacturer, for example. 

Finally, there is a lower perceived risk from a trade buyer. With industry-specific knowledge and experience, trade buyers can justify higher valuations.

The reality of lower bids

However, trade buyers can also be low bidders. 

Financial constraints, such as limited capital or borrowing capacity, can restrict trade buyers’ ability to offer high prices. For this reason, strategic buyers may also be opportunists: if an asset is cheap, they will make an offer. 

Competing strategic priorities or investment opportunities may lead trade buyers to allocate fewer resources to acquisitions, resulting in lower bids. With less experience in these transactions, trade buyers can also be less confident valuing a company – and this can make them more cautious, lowering bids.

Finally, trade buyers also factor in integration costs, including restructuring and rebranding, leading to lower overall valuations compared to private equity buyers.

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We don't hide behind jargon and complexity. Instead, we aim to open up the black box of M&A, illuminating the path with clear insight, simplifying the process, and delivering valuable information.