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FINANCIAL BUYERS
A financial buyer is usually a small group of seasoned financiers that have much experience in the M&A process. For example, one of the best-known financial buyers, Kohlberg, Kravis & Roberts (KKR), has 39 investment professionals.
A typical financial buyer has two types of members:
Analysts. These professionals will research different industries and track a variety of companies that may be possible buyout opportunities.
Partners/associates. These are the deal makers who use the analysts' information to pursue, negotiate, close, and manage buyout deals. Associates' compensation includes salary and bonuses. But partner compensation usually is salary plus 20% of the overall profits on the deals.
In addition, most financial buyers work with outside advisers, such as attorneys, CPAs, and investment bankers.
And the main reason for buying? It is to make money for the investors – known as limited partners -- who put money in the buyout fund. Typical investors include state and corporate pension funds, banks, insurance companies, and university endowments. To provide some degree of diversification for their investors, financial buyers typically manage a variety of deals at all times.
Here's a look at the KKR mission statement:
KKR's business is making equity investments for long-term appreciation, either through controlling ownership of a company or strategic minority positions. As the general partner of the KKR Funds, we make our money just as our investors do, by the increased value over time of our stake in the Funds' investments. Our business is not selling securities to the public or generating fees by providing merger and acquisition advice. Rather, we have a significant portion of our personal assets committed to these investments, and we share the risks of ownership.
KKR's average holding period for owning a company is about eight years. The firm eschews a dogged focus on short-term quarterly results. Instead, KKR is intent on developing the company's long-term prospects, through improving the product line, investing in R&D, seeking efficiencies, and even buying other companies with strategic fits.
Moreover, financial buyers generally don't run a company's day-to-day operations. Rather, they offer the company's managers equity incentives to meet performance targets. The financial buyer usually occupies several seats on a company's board. But they are hardly passive bystanders. In fact, they sometimes become highly involved directing company strategy and tactics -- especially for those in trouble. Reputation is vitally important to financial buyers.
Example: Ted Forstmann is one of the original financial buyers. Since he started his firm in 1978, Forstmann has invested more than $15 billion in 27 deals, including such big names as Ziff-Davis Publishing, Dr. Pepper, Topps, and McLeodUSA. Perhaps his most memorable deal was acquiring Gulfstream, a company that was founded in 1958 to build luxury private aircraft and that has passed through a string of owners. In 1978, the well-known airline entrepreneur Allen Paulson bought Gulfstream from aerospace giant Grumman for $52 million. In 1985, he sold the company to Chrysler for a whopping $637 million. In 1990, Forstman arranged with Chrysler CEO Lee lacocca to buy the company for $850 million. When the economy hit the skids in the early 1990s, Gulfstream went into a tailspin, and by 1993 it was nearly out of cash. Forstmann became de facto CEO. He cut costs, instituted budgeting, and set sales goals. In his most ingenious move, Forstmann decided to buck the decades-old tradition of pitching sales to corporate airline pilots and started to sell directly to CEOs -- Gulfstream's true customers. That did the trick, and by 1994 the company was profitable again. When Forstmann took Gulfstream public a few years later, the original investors made 13 times their starting outlay. When General Dynamics bought the company in 1999, Gulfstream had captured more than 50% of the market and had a $4 billion backlog of orders. Profits were about $225 million.
