What is a '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.

BREAKING DOWN 'Strategic Buyer'

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.

Example of a Strategic Buyer

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.

RELATED TERMS
  1. Financial Buyer

    A financial buyer is a type of buyer in an acquisition that is ...
  2. Private Buyer

    A private buyers is an individual or organization that is purchasing ...
  3. Mergers and Acquisitions - M&A

    Mergers and acquisitions (M&A) is a general term that refers ...
  4. Strategic Joint Venture

    A strategic joint venture is a business agreement between two ...
  5. Buyer's Market

    A situation in which supply exceeds demand, giving purchasers ...
  6. Debt Buyer

    If a debt becomes delinquent and the lender sees few options ...
Related Articles
  1. Investing

    What Investors Can Learn From M&A Payment Methods

    How a company pays in a merger or acquisition can reveal a lot about the buyer and seller.
  2. Investing

    How Amazon Benefits From Lower Prices at Whole Foods

    There are three benefits to Amazon from its recently announced changes at Whole Foods.
  3. Small Business

    7 steps to selling your small business

    Selling your small business is often a complex venture. These seven considerations can help you build a solid plan for profit and lead to success.
  4. Investing

    Playing hardball when selling your home

    Are you planning on selling your house? Learn these strategies to help you get you a better deal in house sale.
  5. Personal Finance

    Home Buyers Jump Into Market Despite Mortgage Rates Rise

    Rising mortgage rates are forcing some would-be home buyers off the sidelines.
  6. Investing

    Wal-Mart Could Start Bidding War With Amazon for Whole Foods

    A new report states that Wal-Mart could spoil Amazon's party by placing a counter bid.
  7. Investing

    How Expensive Is Whole Foods, Really? (WFM)

    Learn about Whole Foods Market, Inc., and discover how Whole Foods pricing actually compares to that of other grocery store operations.
  8. Investing

    Amazon's Whole Foods to Meet with Angry Brands Next Week

    Whole Foods is meeting with key vendors early next week as it aims to ease frustrations that have risen ever since Amazon acquired it.
  9. Investing

    The Ins And Outs of Seller-Financed Real Estate Deals

    There's more than one way to buy or sell a house. Seller financing presents yet another unique option.
RELATED FAQS
  1. What are the Differences Between Ex Works (EXW) and Free On Board (FOB)?

    Although these terms are similar, responsibilities and obligations are delegated to different parties in EXW and FOB. Read Answer >>
  2. Who are Whole Foods' main competitors?

    Whole Foods' main competitors are Sprouts Farmers Markets and Trader Joe's. However, the recent acquisition by Amazon may ... Read Answer >>
Trading Center