Private Equity's Impact on Mergers & Acquisitions

Legal Alert

A correlate of the notably significant global increase in the volume and value of merger and acquisition (M&A) transactions since the 1990s has been the marked increase in related private equity (PE) purchases. Although initially dominated by industry or sector focused enterprises pursuing expansion, diversification or regeneration, private equity purchases are a significant part of the M&A industry.

Private equity firms and industrial or trade enterprises are the two primary types of acquirers involved in M&A. However, both maintain different approaches toward ownership based on distinct goals which affect how a transaction may unfold and what may happen after a transaction is completed.

Industrial or sector focused buyers operate as organizational integrators of multiple businesses seeking to expand profits based on realizing growth primarily through some divergence of products or services. In contrast, private equity players are simply professional investors whose goal is simply to resell the entity and realize a substantial profit. Each has a clearly distinct business model with different approaches and procedures toward acquisition.

Private equity firms have a different business model

The operating model focuses on making a smart purchase and then increasing the acquisition's value over an established time frame to realize a financially lucrative exit. While industry buyers seek some long-term, infinite growth from a new enterprise, private equity owners have a shorter plan of business development and transformation.

Private equity firms have a different strategy before and after the deal

Because they are in the primary business of buying and selling, making the correct purchase is a preeminent concern. Thus, private equity firms act with a centralized, disciplined and relationship-oriented approach to making future acquisitions that may begin years before the actual acquisition of a particular business. Paramount to achieving such an approach is the performance of painstaking due diligence.

Once a deal is finalized, in contrast to a focus on organizational integration by an industry trade acquirer, private equity firms focus on governance and ownership of the acquired entity.

Private equity firms have a finite timeline

They have a finite goal when acquiring a new business. Industrial buyers purchase with the goal of ongoing ownership with permanent results through organizational integration. When a private equity investor makes a purchase, it already has an exit goal established within some estimated time frame.