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Rise of Strategic Buyers May Bench PE Funds

Strategic buyers are back at the negotiating table for middle-market deals with a serious appetite, as they closed 1,251 deals valued at $144.4 billion in the first three quarters of 2014.1 This is an 8 percent increase from last year in terms of the deals closed and a 12 percent increase from $129.3 billion in the first three quarters of 2013. This was driven by multiple factors, including the availability of debt financing, companies having significant cash on their balance sheets, and executives viewing mergers and acquisitions with a boost of confidence.2 Moreover, deal value for transactions increased by more than 11 percent in the first eight months of 2014 compared to 2013.3 This is the highest it has been in M&A in three years as “corporations have the cash to do deals and spend [and] they don’t have to borrow it; they can finance it internally and they’re much more willing to take risks.”4 In addition, M&A deals are picking up as there is a “favorable backdrop of low interest rates, a slowly improving economy and an abundance of cash on hand . . . .”5

It is interesting to note that certain industries are faring better in the current market. For instance, corporations with a manufacturing component are in high demand. As corporations strive to meet development needs, they are choosing to grow their corporation through strategic buyouts rather than “bolstering in-house research and development departments.”6

This increase in strategic buyers obviously affects targets, which now have a bigger pool of suitors to choose from. This increase also may affect private equity funds, which have been able to consistently engage in deals at a high rate.7 As strategic acquirers enter the field, sponsors may be at a competitive disadvantage because “strategic capital tends to be cheaper than private equity capital.”8 Specifically, borrowing costs are very low and financing is relatively cheap that strategic acquirers can successfully outbid private equity funds for the same assets.

Moving forward, there is a lot of optimism for dealmakers. Polls showed that the dealmakers have predicted that the increase of M&A in the retail sector “would outpace activity in the overall market in the short term.”9 Moreover, the economy is improving, valuations have been continually increasing, and there are more potential sellers who may not have thought that it was a possibility before.10 Deal makers and onlookers should watch the market closely in the upcoming quarters, as the recent rise of M&A deals may sidelines private equity acquisitions.

  1. Anthony Noto, Strategic Buyers Beat Private Equity Firms, Mergers & Acquisitions (Oct. 22, 2014), 

  2. Id. 

  3. Id. 

  4. Id. 

  5. Middle-Market M&A Update, BNY Mellon Wealth Mgmt. (Aug. 15, 2014), 

  6. Noto, supra note 1. 

  7. Id. 

  8. Id. 

  9. Id. 

  10. Middle-Market M&A Update, supra note 5. 

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Paul Kim

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