Financial Acquisition
In a financial acquisition, the entire return on investment to the buyer derives from the after-tax profits and cash flow that the seller provides as a separate and distinct entity. For example, big company A acquires small company B and sets it up as a wholly-owned subsidiary, which operates essentially as it did before it was sold.
Advantage Buyer: If you have any doubt that the financial
acquisition favors the buyer, consider this. It is the predominant method for
determining the purchase price in the context of a “roll-up” or acquisition
of multiple companies in an industry. The objective of the buyer is to put together
a group of companies that, together, are much more valuable than the sum of their
individual values. So, the buyer seeks to buy low, in a series of financial acquisitions,
and sell high as a large, attractive strategic acquisition.
Strategic Acquisition
In a strategic acquisition, the return on investment to the buyer derives from a number of sources, not just one, including:
1. The after-tax profits and cash flow described above;
2. The additional after-tax profits and cash flow the seller generates as a result
of the change of ownership;
3. Most importantly, the additional after-tax profits and cash flow that the buyer
generates because of the acquisition.
Advantage Seller: Why? Because of #3 above. Say, for example,
that the buyer is ten times the size of the seller. If the buyer increases earnings
by a mere 10% as a result of the acquisition, that would produce the same result
as doubling the seller’s earnings. This is where the real money is in selling
your company. If you can turn your company into a highly attractive strategic
acquisition candidate, you have the potential to increase the selling price significantly.
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