These two kinds of buyers have fundamental different goals. In the M&A world, strategic buyers often pay higher multiples than financial buyers. In many instances, strategic buyers are looking at different elements of the acquisition and they may have different mechanisms in which to generate a healthy return on their investment.
Strategics often have an existing customer base and relationships they can leverage with acquiring a company. They want to acquire customers to rapidly increase their market share. One of the largest synergies that companies seek to formulate is a one stop shopping scenario.
When a financial buyer acquires a standalone company as a new platform there isn’t an existing business in which they can merge anything together so there are no economies of scale for efficiency. There are two fundamental reasons why financial buyers tend to be unable to pay as much as strategics.
The financial entities are under pressure to hit a target return percentage on their investment. The three main drivers of returns are entry price, exit price and leverage. Therefore, financial buyers are focused on pricing for a certain rate of return during the acquisition process.
Secondly, financial buyers usually can’t benefit from operational synergies like a strategic buyer most often can.
For those reasons, synergies usually result in strategic acquisitions and are the driving force that determines how much a buyer is willing to pay.
For financial buyers these synergies don’t exist unless the deal is an add on of an existing portfolio, they can’t benefit from operational synergies.