Module IV· Interview EssentialsIntermediate
Question
What is the difference between an LBO and M&A from the buyer's perspective?
Answer
What
LBO and M&A differ from the buyer's perspective across five dimensions:
- Buyer type: LBO: financial investor. M&A: strategic buyer (corporate).
- Financing: LBO: 50–60% debt. M&A: corporate balance sheet, often cash.
- Holding period: LBO: 4–6 years. M&A: permanent.
- Synergies: LBO: stand-alone. M&A: cost + revenue synergies (3–8% of revenue).
- Offer price: LBO limited by debt service (~10x EBITDA cap). Strategics pay 1–2x higher because of synergies.
Deep diveShow more details
Return metrics and risk profile
| Aspect | LBO | M&A (strategic) |
|---|---|---|
| Return metric | IRR (target 20%+), MOIC (2.5x+) | ROIC, EPS accretion/dilution |
| Risk profile | equity tranche highly risky through leverage | diversified across the corporate portfolio |
| Time pressure | fund lifecycle forces exits | strategically unlimited |
| Valuation discipline | strict (IC approval, lender tests) | broader (a strategic rationale beats pricing) |
Consequence in an auction process
Strategics pay the highest prices. PE has to be competitive through structuring, faster value creation, and speed-to-close. In the middle market, PE bidders often lose on pure pricing but win on process certainty.
Pitch tip
Question: "Why does a sponsor bid less than a strategic?"
Answer: "Three reasons: the debt-service limit (~10x EBITDA EV as a hard cap), no creditable synergies, and the IRR requirement (20%+ over the hurdle). The strategic can tap its balance sheet, credit synergies, and needs no IRR target — it argues strategically"