Monday, February 15, 2010

Strategic Vs Private Equity Interest in a business

Most businesses in India have at some point of time or the other experienced this conundrum of seceding stake to a Financial Vs a Strategic investor. Since there are plenty of definitions of a Strategic Investor floating around, for the sake of simplicity, we have to define this as someone who has an inherent interest in having a strong say in the day-to-day management of the business vis-a-vis a financial investor who is happy to be a navigator/co-passenger and not meddle with the details.

In most cases, a strategic buyer will offer a higher upfront valuation (because he finds use for a lot of intangibles that the financial investor often does not - not unless he is thinking of synergies within his portfolio). For eg., - brand, distribution channel, sales capabilities, products/IP which unfortunately are not worth much for a PE investor. However, what people often miss out on is the fact there might not be alignment between the entrepreneur's thinking and that of the strategic buyer even in the short term.



Not every strategic buyer wants to grow the business - case in point being disruptive acquisitions by Google, Microsoft to weed out potential competitors at a nascent stage or better still, Coke's acquisition of Thumbs-Up or Maaza (both the brands got nowhere after the acquisition). In a lot of cases, it might be the case of defensive strategy to kill a niche competitor before he even becomes a threat to the larger company. Even in the best case where there is alignment, there could often be a case of the acquiree being held captive by the whims and fantasies of the acquirer (who is often using the asset to promote his larger interest). For example, a backward integration strategy could give a larger lever to the acquirer by improving his margins (and hence might reflect in the price), but often could check-mate the acquiree in the medium term as most of its other potential customer might turn away because of softer issues (data secrecy, conflict of interest).

The message is simple - where you see a headroom based on your own capabilities to grow, go with a PE fund. If not, go with a Strategic buyer.


1 comments:

Unknown said...

Nice Article
I want a clarification Whether Coke has killed Thumbs Up brand i don't think so , they are hiring top Actor to endorse the product,many events they are sponsoring under this brand actually they are promoting better than their previous owners