Financial Buyer

Categories: Banking, Investing

People have different reasons for doing things.

You give the homeless guy on the corner a dollar. You might do it a) to make yourself feel better, b) to impress other people with your generosity, c) to stop the guy from bugging you, d) out of genuine charity, e) because that particular dollar was recently cursed in an unspeakable ceremony of dark magic, or f) any number of other reasons.

Similarly, when one company buys another (or buys some other kind of asset), there exists a host of possible motives. One of these is strictly financial speculation. The buyer judges the asset to be undervalued, so they buy it at what they deem is a bargain. Then, sometime in the future, they plan to sell for a profit.

This kind of purchase is done by a financial buyer.

The most common alternative is a strategic buyer. These folks purchase an asset to fit into their strategic plans.

You have a paper company. To ensure you have a steady supply of wood pulp for raw material, you buy a lumber company. That move makes you a strategic buyer.

Meanwhile, if you own a casino and buy a lumber company because you think wood is going to be an expensive commodity 10 years from now, then you’re a financial buyer. You just think there's a cash payoff down the road. It doesn't have any relation to your main business, except as a place to park your money.

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