There can be extreme competition in mergers and acquisitions, especially in hot markets and industries that are experiencing consolidation. Take the recent CSRA acquisition for example. Following the announcement that the company would be acquired by GDIT, CACI made a competing offer that was ultimately unsuccessful.

Even in industries that aren’t experiencing the incredible consolidation that we’ve seen in the government contracting space over the past few years, there can still be a lot of competition for acquisition targets. This is especially the case when both corporate and private equity bidders are competing for the opportunity to add an acquisition target to their portfolios.

At this year’s Mid-Atlantic Growth Conference, a panel of experts sought to help members and guests answer this question by shedding light on the differences between corporate buyers looking to make a strategic purchase and private equity buyers, looking to sponsor and grow an acquired firm. The panel discussion was moderated by Frank Walker, a partner at Baker Tilly, and included:

  • Joe Burkhart, Managing Director & Head of Business Development, Saratoga Investment Corp
  • Michael Lewis, EVP Chief Development Officer, CACI
  • Robert George, VP Corporate Development, SOSi
  • Jeff Kelly, Partner, OceanSound Partners

During their discussion, they shared tips for companies trying to determine which type of buyer they should consider, which type of investor makes the most sense for the management team and, more broadly, what makes the most sense for their companies. What they ultimately determined was that the answers to these questions depend on the company’s goals and objectives.

Corporate Buyers

When corporate buyers look at a potential acquisition target, they are usually doing so strategically, as part of the company’s larger, pre-defined growth strategy. As we discussed at a recent monthly member meeting, corporations acquire companies in order to open new markets or sectors to their business, gain market share or add new capabilities to their portfolio.

This means that corporate, strategic buyers are oftentimes more deliberate about what they are willing to initiate an acquisition for compared to private equity firms, even to the point that the price of a transaction is not as important as where the acquired company fits into their overall growth strategy. “Whether a company has five million, 50 million or 500 million dollars in revenue,” Mr. Lewis explained, “we’re going to spend the same amount of time [on that deal]…because that company serves a very, very specific purpose in our portfolio.”

Therefore, corporate, strategic buyers look for a very specific type of business when they are buying and are willing to take the time to make sure that their prospective acquiree lines up well with their growth objectives. Making a strategic transaction delivers assets to the company that it can leverage for the long haul. This means that the selling company may need to be more patient and need to pitch sellers differently – carefully positioning their company as one that would fit into a potential acquirer’s growth objectives.

In fact, Mr. Burkhart pointed out that some of Saratoga Investment Corp.’s “best strategic deals” evolved out of longer-standing relationships in which Satatoga acted as a serial investor. This extended relationship gives the acquiring company the time and transparency needed to conduct due diligence make an informed decision.

Private Equity

In contrast, private equity buyers usually look at an acquisition as a “sponsor” relationship and not as a growth opportunity the way that corporations typically do. This leads to a profound difference in how private equity firms evaluate acquisition opportunities.

“We have the ability to look at a broader range of companies,” Mr. Kelly explained, “because we can build a strategy around any particular asset” and don’t need to adhere to a preexisting strategy like a buyer looking for a strategic acquisition would have to.

Unlike a strategic buyer, a private equity investor can take this approach because their aim is to use their experience in the marketplace to help the acquisition target’s management team aggressively grow the value of their asset and resell it at a higher price, rather than try to plug it into the growth program of a larger organization.

With these two very different approaches to identifying and closing acquisition opportunities, potential sellers need to consider how they want to fit into the post-acquisition picture.

As part of a strategic purchase by another corporation, an acquired company will have to be folded into the structure of a bigger organization. Mr. Lewis noted that at CACI, “we will make sure that [the leadership of an acquiree] will want to stay” after the transaction has been completed and try to make sure that there are incentives in place. However, the fact remains that the management of an acquired company will be reporting to up to someone else.

On the other hand, a private equity acquiree will generally be left to run their business, but they will have to run it with the understanding that they are preparing it for a resale somewhere down the line.

If posting a company for sale, it’s essential that business owners consider what both private equity and corporate buyers are looking for in a new asset, which works best with the company’s goals and culture, and what the management team is looking for post-acquisition By contemplating these things, companies can make a better, more informed decision about which buyer works best for them.