PE vs. Strategic Buyers

Can Private Equity Can Outmaneuver Strategic Buyers

by Terry Stidham, President of Target Search Group

When strategic buyers are flush with cash and have identified an target that they've decided is a must have, private equity firms often talk about how they don’t stand a chance. These strategic buyers, with their lower cost of debt and equity capital and their typically deep operating expertise, often can outbid even the most aggressive private equity firms.  
 
So what’s a private equity firm or independent sponsor to do when facing these deal dynamics?

Middle Market Private Equity is able to beat out strategic buyers for deals when an acquisition target meets their investment criteria.  The key advantage they are finding in negotiations is that the strategic buyers can't or aren't willing to match the flexibility and upside for the current CEO/ business owner.  

With a sale to the strategic buyer, the current CEO (who owns the entire company) will often have to sell 100% of the company and likely assumes a middle management position inside a multi-billion dollar organization.

By opting instead to work with a private equity firm,  business owners are able to accomplish a few things that are big priorities for them:

1. Take some chips off of the table immediately
2. Roll a bunch of equity into the capitalization table of the newly formed company
3. Maintain the company’s independence while they shoot to take the company to the next level of scale



Contact Us to Discuss Your Sourcing Needs

If you’re in the private equity business and you’re finding yourself up against big cash-flush strategic buyers, offer the CEO a big equity opportunity (20% or more) tied to great performance in the new entity and you’ll figure out very quickly whether or not you've got a CEO who wants to go long versus sell out 100% and go home early.  If they take your offer, you've got a legitimate shot at beating out a strategic buyer at a price that still works for you and your investors.  If they don’t, then you probably didn't want to back them anyway.