Upcoming Webinar:
Top 10 Best Practices for More Successful M&A
Wed, Oct 16 – 6:00 PM CEST

Private Equity Vs. Strategic Buyers

Public companies are traded on the stock market, while private companies are not, therefore, private equity refers to investments based on the capital that is not public. In private equity, investors invest in private companies. 

Private equity also relates to the buying out of public companies and making them no longer public (removing their stock). 

Historically, deal-making with a private vs. public company depended greatly on the type of industry you were in; however, private equity funds are an increasingly large part of current M&A discussions. As sellers broaden their scope, they will have private equities interested in them.

How is Corporate Development M&A Different From Private Equity M&A?

So let's start with the definitions of corporate development M&A and private equity M&A.

What is Corporate Development M&A?

Corporate development teams work to utilize mergers and acquisitions in order to generate growth, new opportunities, and value. Additionally, corporate development teams may turn to M&A when looking to move into new markets and reach new client populations. This is first tackled by developing a M&A strategy that aligns with the company’s overarching goals.

These goals, or value drivers, may be internally or externally motivated. An inward focus often means the company is turning to M&A in order to improve itself (i.e. expand its technology or fill in missing pieces), while an outward focus means the company is turning to M&A relationships in order for financial gain. 

What is Private Equity M&A?

Private equity M&A is when a private equity firm buys or invests in a company. These companies the PE invests in become a part of the PE’s portfolio. Often the private equity will hold on to the portfolio company for a few years in hopes it will grow and the synergies will increase. 

While corporate M&A practices will have many similarities to private equity practices, there are a couple of key differences. They include:

  1. Controlling Interest. When a strategic buys a company, it buys a hundred percent of it forever. However, a private equity will want to control a company and often have an idea of how to enhance it, but realistically will probably sell it in a few years. Additionally, when a strategic pays the seller for stock, that is essentially what the strategic will get - a one-time payout. With a private equity, some money, some liquidity, is taken off the table, and then often the seller works with the private equity to “follow on exit” afterward. 
  2. Integration. The second major difference comes into play in preparing for integration. When a strategic is looking at a company, it is  going to really investigate the company’s operations. Consequently, it is imperative that the strategic understand the culture of the target and determine if it is an appropriate cultural fit. On the other hand, when private equity is looking at a company, the PE is planning on taking the company and making it a part of the PE’s portfolio, but the target company will still run independently. Obviously, therefore, with a PE, there is not much to discuss in terms of integration (which means things tend to move faster), while with a strategic, integration and culture are of the utmost importance as poor integration practices tend to ruin deals and lead to lost synergies. 

How Can Both Strategics and Private Equity Maximize Retention Rate?

When you are a PEO you are acquiring IP, but when you are a strategic buyer, you are acquiring talent, I.e. people. Obviously, it is in your best interest to keep the people who have made the company you are acquiring successful because you want continued success whether you are merging or acquiring.

Specifically, you want to maintain key members of the management team. Here are some tips on how to maintain these critical team members:

  1. Communication. When employees take flight, it is most often because their expectations are not being met. This often translates into a lack of communication; both sides need to clearly communicate what they are looking for, as this ownership change takes place. 
  2. Analyze the rate of retention. Post-closing, it is essential to closely examine your ability to retain employees. If you do not have a strong rate of retention, your deal takes a major hit as synergies are put at risk.

Final Thoughts

The way M&A is executed, the technology behind it, and the types of deals taking place are all changing as more and more M&A activity floods the economy. This means we will most likely continue to see more private deals. 

While the basic process remains the same for both strategic and private deals, what you will spend the majority of your time on will vary depending on the deal type.

corporate development

REcommended articles