When Private Equity Is a Bad Deal
In the world of middle-market investment banking, there are generally two kinds of buyers. Financial investors, like private equity groups, are in the business of buying and selling companies. A strategic acquirer, on the other hand, is another company in your industry that thinks your business would be a great addition for them.
When you’re ready to sell, a strategic acquirer can be the best match for you, but it takes a little more work to get to them. Here’s why:
1) Buying companies is not a strategic acquirer’s primary focus
Financial acquirers are in the business of investing in companies and seeing a return on that investment. Day in and day out, they look at confidential information memoranda, send out indications of interest and letters of intent, and negotiate the purchase or sale of portfolio companies. The process flows (comparatively) smoothly because financial acquirers literally exist only to find companies to buy and sell.
Strategic acquirers, on the other hand, have plenty of other things to do. Their primary purpose is to maximize shareholder value. They're busy developing new product lines, growing their customer base, coming up with new advertising campaigns, conducting market research. They're spending their time trying to make their quarterly reports look good, not focusing on buying and selling smaller companies, so it’s harder to get their time and attention.
2) It's hard to find the right person to talk to
Take a look at the website of any private equity group, and within 30 seconds you'll be able to find full contact information for each of their partners. If you’re lucky, the partners will be neatly sorted by industry specialty. And you can get them to take your calls and look at your confidential information memo without too much hassle. After all, that's what they're there to do.
By contrast, reaching out to a strategic acquirer can be extremely difficult. Let's say your company does precision metals machining for the aerospace industry. You want to sell the company and you’re pretty sure that Boeing would want to take a look at you. Where do you start?
Well, Boeing has divisions for commercial airplanes, defense and government contracting, space, security, missiles, satellites, and technology solutions, to name a few. Each department is autonomous and has its own goals, strategies, business development teams, relationships with corporate management, and political maneuvering. And each division may approach acquisitions differently. In one department, the business development people may be actively charged with seeking new companies to buy; in another, they may be limited to managing the process.
It takes a lot of research and legwork to drill down into each of these departments, determine your best contact points, and try to actually reach those people. Three VPs may slam the door in your face, but the fourth could be looking for a company exactly like yours.
Then you get to do it all over again for Lockheed Martin, Raytheon, GE Aviation, and anyone else you think might be interested.
The extra work is worth it. Here’s why.
1) You’re much more likely to get a deal completed
Once you’ve developed a strong relationship with the right person at a strategic acquirer, you instantly have the best internal flag-carrier you could ask for. This person will be an extraordinarily strong champion for you, and for this deal. He or she had to convince the higher-ups this deal is absolutely essential. If the deal falls apart, your flag-carrier’s managers are going to be asking what went wrong: “Didn’t you tell us four months ago that we just had to buy this company before one of our competitors did?”
A private equity group, by contrast, will look at many companies, and start discussing what a deal might look like with quite a few of them. But they’ll only close a small number. They know that there’s another company, and another deal, right around the corner. Once a strategic buyer starts a process, they have a very strong incentive to see the deal through.
2) The strategic acquirer is likely to pay more
The best way to get a premium price for your company is to put buyers in competition with each other. A private equity group certainly doesn’t want to pass on a golden investment and then see one of their competitors take advantage of it, but they know there will be plenty more companies to look at. By contrast, if both Boeing and Lockheed Martin need the exact kind of metals machining you do, and both want to bring that capability in-house, they’re not going to have that many options. Rather than being a commodity, your company is a unique service provider that is going to give one player a competitive advantage over the other.
The bottom line is that a bigger player in your industry is likely to care more about your particular company, and this particular deal, than a financial investor would. Private equity groups are more focused on the numbers: They want a profitable company in a good industry, and that’s about it. A strategic acquirer knows your product, sees the synergies between what you do and what they do, and wants to make the deal happen because of what it can do for their strategy and bottom line. They want to integrate you into their business model. All that means a higher price, a better chance that the deal will close.