There are two basic types of business buyers. The financial buyer are private equity groups, individuals or company that buy companies for the investment, under the age-old, universal but sometimes elusive money-making principle of buy low and sell high. I will call them PEGs. There is also the strategic or corporate buyer that buys (maybe not even at the lowest price) under the premise that the acquisition will enhance in some way what they already have.
The PEGs are certainly active and I talk to some every day, but they are not closing as many deals. I’ll be writing about them in a few days, but basically they are taking a break until the financial markets loosen up a little.
The corporate buyer, on the other hand, is still active for the following reasons:
- Less Competition. The loose credit policies of a few years ago led to a surge of highly leveraged acquisitions which more conservative companies couldn’t compete with. Companies with strong balance sheets are now able to acquire good solid companies without as much competition from PEGs.
- Growth. When organic growth stalls, companies are still under pressure to grow – especially public companies – so they turn to growth by acquisition.
- “Accretive”. For many companies it is all about earnings and unfortunately many are seeing their earnings weaken. When you can acquire a company for a price to earnings multiple that is less than your own price to earnings multiple, it can enhance your value and is referred to as “accretive”. For some, in this economy, the word accretive has a nice sound to it.
- Retooling. This is a time when many companies are regrouping, retooling and strategizing for the period ahead. A few years ago it didn’t matter much if there was a hole in the product line. Now it does.
In other words, the corporate take-over is back, and strategic buyers are getting more deals done than the financial buyers. But as I’ll write more about next time, the PEGs are not dead. In fact there is an enormous amount of committed capital out there ready to be deployed.