I argued yesterday that strategic buyers are often at a disadvantage when they are in competitive situation with financial sponsors. Ken Marlin, the founder of investment bank Marlin & Asssociates, has a different view, which I am passing along. Thanks, Ken. Here's his full email, which looks at the issue in the context of whether a strategic buyer has a chance of winning a bidding war for telecom equipment maker Avaya, should one erupt.
"I would think that this could be a private-equity play because these kinds of companies tend to have strong cash flows and leverageable assets. So, I would not be surprised to see someone like Silver Lake in the mix. But, Cisco and Nortel both would be potential strategic buyers. For two reasons, strategic buyers always can outbid the financial ones – if they want to. It’s a matter of how badly they want the company.
"Strategics can get the same debt leverage as the private equity players. But, also they can get synergies and have a lower hurdle rate. What I mean by synergies is that the strategics can reduce combined costs and thereby bring more cash flow to the bottom line, and also they may be able to leverage product lines to generate more revenue (or in some cases raise price.)
The second reason that a strategic can out bid the financial player is that the strategics have lower hurdle rates. The PE players typically need to earn an internal rate of return of at least 20%. The strategic just has to meet or exceed his own cost of capital which is probably closer to 8% these days. That too allows them to pay more."