Strategic buyer
M&A / Merger ModelAn operating company acquiring a business in or adjacent to its own industry, buying the combined entity rather than the target alone.
Also written: strategic, trade buyer
A strategic buyer already runs a business. Its objective is what the two look like together: costs removed by eliminating duplication, revenue gained by selling across both customer bases, capability acquired faster than it could be built.
Because it can realise synergies no passive investor could, it can usually justify paying more than a financial buyer, which is why an LBO analysis sits below precedent transactions on a football field.
Its constraints are different too. It cares about the effect on its own earnings per share, about integration risk, and about competition clearance, since buying a direct competitor is exactly what antitrust regulators examine most closely.
It also typically intends to hold indefinitely, so it is not solving for an exit in five years, which changes how it thinks about price and about what happens to the target's management and brand afterwards.
Worked example
A competitor and a sponsor both bid for a business earning 100 of EBITDA.
The sponsor solves back from a 20% IRR and can justify 900. The competitor identifies 25 a year of cost synergies worth about 235 after tax and integration, so it can pay up to roughly 1,135 and still be no worse off.
That gap is why strategics usually win competitive auctions, and why an LBO analysis sits at the low end of a football field.