I decided to answer a very basic, but important question about M&A, given that we often talk about strategic acquisitions.
Q: What’s the difference between a financial and a strategic buyer?
A: A financial buyer brings little inherent value to the transaction. Typically they bring capital and capital allocation knowledge, but usually no specific knowledge about the technology, application, or customers of the seller.
On the other hand, strategic buyers do have specialized knowledge about a particular market or product that will add value to the transaction, or what we call “synergies.” Synergies typically come in two forms – cost reduction or increasing revenues. Acquisitions that bring real value are focused on the revenue growth side rather than on cost-cutting. You can only cut costs once, but done right you can continue to grow revenue for years to come.
For example, although a strategic acquirer may be able to cut costs by consolidating overhead and admin expenses, that hopefully is not the only reason for the acquisition! It might be that the seller’s technology is complementary to the buyer’s and can be used to grow market share through cross-selling. In a recent example, Verizon just closed on its acquisition of AOL for its mobile advertising technology. Verizon is a huge mobile carrier and has expertise with mobile phones and an understanding of the technology and business. Adding mobile advertising is another way it can increase revenues with its current customer mix, especially as more and more people acquire smartphones.
For strategic acquirers, the focus of the acquisition should be on long-term growth for the entire business. Most strategic acquirers will buy a company and keep it rather than sell it after a few years to make a profit, as private equity groups tend to do.