Why Do Strategic Acquirers Pay More?

Strategic buyers can pay more for acquisitions because they can derive greater benefit from them. Key drivers are cost synergies (removing duplicated costs, thus making the combined entity more profitable), revenue synergies (opportunities to generate greater revenue from the combined entity than from the sum of its parts, for example through cross-selling), the acquisition of key intellectual property (including technology), and economies of scale (the increased buying power that comes with scale).

Multiple Arbitrage

Another important driver of strategic acquisitions is valuation multiple arbitrage. As we discussed in more depth in our blog post on acquisition mathematics, strategic buyers can acquire smaller companies at a lower PE multiple than the multiple that applies to their own company, and thereby immediately add more value to their own enterprise than the cost of the acquisition. For example, we showed how a company could add £120m to its own enterprise value through a £28m acquisition.

Sometimes acquirers can even achieve a greater valuation multiple for the combined entity once acquisitions are completed, by significantly growing in size. This PE multiple arbitrage is a major driver of value in strategic acquisitions by companies conducting roll-ups, such as brand aggregators and SaaS aggregators, whose models are a blend of strategic and financial buyer (see below).

Who Are Strategic Buyers?

Strategic buyers are companies in the same industry or a related industry to the target business. In online retail, this means another retailer or consumer brand in the same category, or a company with products in related categories but with a gap in their product offering that your brand could fill.

In the technology space, strategic buyers can be other companies in the same sector with complementary technology, or whose products address slightly different customers to yours. By acquiring your company they could use your technology to add value to their existing customers, to open up new markets, or both.

Note that in both e-commerce and SaaS, direct competitors can also be logical strategic acquirers. A larger firm acquiring a smaller competitor can benefit in all of the ways mentioned above, as well as the obvious benefit of instantly gaining market share by removing a competitor. With larger deals, regulators can sometimes block such acquisitions due to anti-competitive concerns. But at a smaller scale these acquisitions happen frequently.

Different Strategic Buyers For Each Business

Because each business is different, the list of suitable strategic buyers is different for each business. This means that a properly-managed sale process must involve research to identify the many potential strategic buyers for the business. Be wary of brokers who claim to have a “comprehensive network of strategic buyers on our list”. This is nonsense.

Size Matters

It’s important to target strategics of the right size. Acquiring firms must be larger than the target business (with rare exceptions), but not too much larger. An acquisition of a $5m consumer brand would not “move the needle” for a $50Bn behemoth like Nike. In other words, even if the acquisition was a complete success and they were able to grow the business 10x in the first year, adding $50m in revenue, this would only represent 0.1% of sales and would not have a substantial impact on the company. Unless there was another compelling reason, such as unique and important technology, the company would not commit resources to the acquisition.

Another principle to remember is that the larger a business is, the more likely it is that its acquirer will be a strategic buyer. The smaller a business is, the less likely it is to sell (at all) and the less likely it is to sell to a strategic buyer specifically. Companies for whom a $2m acquisition would “move the needle” may be as small as $10m themselves. These businesses will usually not have a lot of available time and resources to devote to making acquisitions and will not have a dedicated M&A team. However, strategic acquisitions of this size can and do happen. At Hahnbeck we’ve closed deals of this size with strategic buyers. But it is important to note that the smaller a business is, the less likely it is that the buyer will be a strategic (or a private equity firm for that matter). Smaller businesses are more likely to sell to roll-ups / aggregators and very small businesses are more likely to sell to individuals.

High Profile Strategic Acquisitions in the Consumer Sector

P&G’s $100m acquisition of Native only 2 years after it was founded and Unilever’s acquisition of Dollar Shave Club for $1Bn (more than 5x revenues) point to the value strategics place in finding and acquiring disruptive challenger brands. While the Dollar Shave Club acquisition was ultimately not considered a success for Unilever, there are many other examples of successful consumer brand acquisitions by strategics. The largest ever DTC acquisition was Petsmart’s $3.35Bn acquisition of Chewy in 2017. Like Dollar Shave Club, Chewy was not even profitable at the time of acquisition. But the acquisition was outstandingly successful for Petsmart and its owner BC Partners, who took Chewy public two years later and have since seen it grow to profitability and almost $9Bn in annual sales. Successes like this continue to motivate consumer M&A. Acquiring a brand on a trajectory for “rocketship” growth will continue to be alluring given how hard it is to build such a rocketship from scratch.

Publicly listed beauty & homeware retailer Helen of Troy acquired Curlsmith, a small independent DTC haircare brand, for a 15x multiple during the most cautious time in the M&A market in 2Q 2022. Many of Hahnbeck’s clients in same size range ($1m to $15m EBIDTA) receive susbtantial interest from strategic buyers, because of our focus on this buyer type.