The financial buyer's win-win.

• Author: Muse, John R.

Although the merger and acquisition boom of the 1980s has largely subsided, many public corporations have put "for sale" signs on one or more of their operating units. They have done so for two principal reasons:

* They have determined - often after pursuing diversification strategies with mixed results - that long-term shareholder value is best built by focusing resources on core businesses and competencies.

* They see divestiture as an excellent way to monetize past investments in successful but non-core operating units.

But to whom should a corporation sell its non-core units? If the unit has a strong market position and solid product line, there may be considerable interest among would-be strategic acquirers. From such a buyer's standpoint, what better way to build one's customer base, market share, or product line with maximum speed and cost-efficiency?

Nevertheless, an increasing number of sellers are opting not to sell to such strategic buyers, preferring instead to deal with financial buyers whose interest in the unit is based on its growth potential and investment value as a stand-alone enterprise, not its strategic fit with the acquirer's existing businesses. And it's not hard to see why.

First a bona fide strategic buyer - like any other would-be acquirer - will generally undertake a duediligence process beginning even before a purchase agreement is signed and continuing until the transaction is consummated. This process involves the close examination of every aspect of the unit being sold: its financial condition, customer relationships, trade secrets, and business strategy. Such information is theoretically protected by non-disclosure agreements. But if, as often occurs, the transaction does not close, it is hard to imagine how an ex-suitor could "unlearn" all the information and fail to use it, consciously or inadvertently, to its own competitive advantage.

Second, if the would-be strategic buyer (or seller) is a public company, the purchase agreement is usually disclosable, with the announcement coming weeks or months before the actual closing. In the interim, every competitor of the unit to be sold will do its best to plant fear, uncertainty, and doubt in the minds of the unit's customers and suppliers - leading to the potential erosion of both of these key constituencies. Some customers may also give third parties a portion of the business they had divided between the buyer and the seller, just to avoid excessive dependence...