Strategic Buyer

A strategic buyer acquires another company in the same business to capture synergies so that the whole becomes greater than the sum of the parts. Such an acquirer has the intent to integrate the purchased entity for long-term value creation, which may entail certain cost cuts in overlapping areas. Because a strategic buyer expects to get more value out of an acquisition than the intrinsic value of the company being acquired, it will be willing to pay a premium price in order to close the deal.

A strategic buyer is invariably a competitor in the same industry as the target. The "strategy" part comes into play when the acquirer sees an opportunity to expand product lines in the same market, land in new geographical markets, secure additional distribution channels or generally boost operational efficiencies.

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 redundant factory or office space and external services. Unfortunately, cost synergies impact employees. A large portion of cost savings results from laying off staff; there is no need for two CFOs, selling and marketing staff can be reduced, a layer of mid-level management is no longer necessary. 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.

In a deal that reverberated loudly throughout corporate America in 2017, Amazon bought Whole Foods. 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. As conceived, it is expected that the value-creation from this combination will mostly be seen in sales synergies in the early stages and then both sales and distribution synergies over time.