The Buyer Hierarchy: why strategic acquirers can outbid private equity, and when they don't

Ask a founder who they would like to sell to and the answer is usually a household-name strategic: the category leader, the platform company, the big-tech acquirer. The assumption is that strategics pay more. The evidence largely supports that, but the useful question is why, because the reason tells you when the premium appears, how large it can be and how to make a buyer pay it.

The ordering is an average, not a rule. The final price depends on how many buyers of each type are competing, the state of credit markets and how much of its synergy value a strategic is forced to share with the seller.

• Public acquirers pay moreBargeron, Schlingemann, Stulz and Zutter, 'Why do private acquirers pay so little compared to public acquirers?', Journal of Financial Economics (2008). Target shareholders receive significantly higher premiums from public acquirers than from private bidders, and observable target characteristics do not explain the gap. The difference narrows sharply when the public acquirer has high managerial ownership, which points to incentives and governance as part of the explanation.
• But not uniformlyGorbenko and Malenko, 'Strategic and financial bidders in takeover auctions', Journal of Finance (2014). Strategic bidders do not always value targets more than financial bidders. Financial bidders' valuations rise and fall with credit market conditions, so in periods of cheap debt PE can match or exceed strategic bids.

The strategic does not need a higher multiple to pay more. It applies a similar multiple to a larger earnings base, because synergies only exist inside its business. The negotiation is then about how much of that synergy value it must hand to the seller to win. Competition, and specifically a credible PE bid, is what forces the handover.

A leveraged buyout funds part of the price with debt sized against the target's own EBITDA. In the US, the 2013 Interagency Guidance on Leveraged Lending issued by the Federal Reserve, OCC and FDIC states that total leverage above 6x EBITDA raises concerns for most industries. Private credit funds are not bound by that guidance and can lend more, but at a higher cost.

The equity cheque then has to earn the fund's target return over a set hold period. Put the two together and a financial buyer's maximum price is largely arithmetic: available debt, plus the equity the fund can commit and still hit its return. Search funds face the same arithmetic with tighter lending and a single asset, which is why their offers are usually the lowest and most structured.

1. 01Map synergies before approaching strategicsShow each strategic exactly where the combined business earns more. Buyers pay for synergies they can see, not ones they have to find.
2. 02Run both buyer types in parallelA funded PE offer sets a floor. It forces a strategic to share more of its synergy value to win.
3. 03Compare offers on risk-adjusted value, not headlineStrategics often pay more in stock or earnout. Use the LOI Value Decoder to compare certainty-weighted value.
4. 04Time the process against credit marketsWhen debt is cheap, PE bids rise. That narrows the premium, but it also raises the floor.

The matrix is a qualitative comparison. The academic findings cited come from studies of public-company takeovers, and we do not convert them into a precise premium for private businesses. The worked example uses hypothetical figures to illustrate the mechanism.

• Bargeron, Schlingemann, Stulz and Zutter (2008)'Why do private acquirers pay so little compared to public acquirers?', Journal of Financial Economics 89(3).
• Gorbenko and Malenko (2014)'Strategic and financial bidders in takeover auctions', Journal of Finance 69(6).
• Federal Reserve, OCC and FDIC (2013)Interagency Guidance on Leveraged Lending.