Investment bankers have spawned book titles such as ‘too big to fail,’ ‘masters of the universe,’ and even ‘other people’s money.’ These titles hint at a profession that yields the kind of power that has an influence that goes beyond corporate balance sheets.
FirmRoom's data room is a secure host to many investment banking specialist's deals and today, we look more closely at investment bankers, what they do, and the impact they have.
What is M&A Investment Banking?
M&A investment banking is the process by which investment bankers intermediate between companies in M&A transactions. The investment bankers are hired by companies to advise on the process, enabling them to take advantage of the investment bankers’ specialist experience in areas such as valuation, due diligence, negotiation, and deal structuring.
Understanding M&A Investment Banking
The term ‘investment banking’ on its own (without the ‘M&A’ prefix) can refer to a broad range of activities conducted by investment banks for client companies. These include the following:
Trading
Stock traders, working on behalf of corporate clients, are referred to as investment bankers. Suppose a large company wished to conduct a stock split. In such an event, they would turn to their investment bankers to coordinate and market the transaction.
Information Services/Advisory
Investment banks provide investment advice on companies that they ‘cover.’ The biggest investment banks employ large research teams that publish in-house reports on economies, industries, companies, and investments in equity, debt, and alternative assets.
Underwriting
The process through which investment banks fund companies listing on the stock market for the first time. Before an IPO, a company can never be 100% sure that their stock offering will be taken up by investors. Investment banks provide them with a guarantee that they’ll fulfill the purchase at a certain price.
Buy-Side vs. Sell-Side Investment Banking
The terms ‘buy-side’ and ‘sell-side’ investment banking are often used to refer to the two types of M&A investment banking.
As the names suggest, buy-side investment banking involves advising companies looking to acquire companies or assets, and sell-side investment banking involves advising companies looking to divest companies or assets.
The role of Investment Banks in M&A Transactions
M&A transactions are complex and often highly specialized.
Even companies with tens of thousands of highly skilled employees (think Google and Microsoft, among others) hire M&A investment bankers for their M&A transactions, having already closed hundreds of transactions since their foundation. This points to the important role that M&A investment bankers play in ensuring value creating transactions.
The role of investment bankers in M&A transactions includes:
- Company search: Not all transactions involve the acquisition of a company immediately familiar to the buyer. Sometimes, a company is looking to acquire a company that fits certain criteria - presence in a foreign market, for example - and an M&A investment banker can help to locate these companies.
- Due Diligence: Due diligence and the use of secure data rooms is now central to executing value generating M&A transactions. Without a thorough, well-planned due diligence process, it is now universally accepted that deals are destined for failure. Investment bankers bring expertise in this area.
- Valuations: While multiples of EBITDA provide a useful, if crude way to value companies, accurate valuation of large, complex companies with their multiple idiosyncratic assets and liabilities is often beyond anyone outside the quantitative experts employed by investment banks to conduct these valuations.
- Negotiations: M&A negotiation is quite a specific field of the genre that involves negotiating on a number of fronts - everywhere from company valuation to management compensation, deal structure, and in some cases, even negotiations with labor unions. M&A negotiations are a difficult labyrinth to navigate.
Investment Banking Fees
The biggest investment banks don’t come cheap. Mammoths in the world of M&A investment banking like Goldman Sachs, JPMorgan and Morgan Stanley generally compete with each other for the M&A processes of blue chip companies.
But there’s not a great deal of downward pressure on fees. If these investment banks offer a compete range of services, they expect to be paid accordingly.
Typical fees for M&A investment banks are structured based on general expenses (e.g. travel and miscellaneous expenses incurred as part of the deal), a monthly retainer fee running into the tens of thousands of dollars, and a percentage of the eventual deal consideration paid by the buyer, structured to be somewhere between 3% (for deals in billions of dollars) to 10% (for deals up ranging in the tens of millions of dollars).
Do Investment Banks Matter for M&A Returns?
It should come as no surprise that, given their expertise in the field, the hiring of investment banks generate positive returns.
A 2011 study conducted by academics at Penn State University, looked at M&A transactions in the United States over a 17-year period between January 1981 and December 2017.It found a positive return of around half a percentage point in value generated for those transactions that involved M&A investment banks.
Typical M&A Process of an Investment Bank
Each M&A process will be different to some extent, but there is a well established playbook for M&A investment banks which isn’t strayed from for most deals. In the subsections which follow, we look at each of these in some detail:
M&A Process Roles
M&A investment banking teams are generally composed of several team members, which enables them to leverage individual skills on a transaction. In order of seniority, these are:
- Research analyst/Junior analyst: A junior team member that works on research, production of documents (such as investment teasers) and valuations.
- Senior analyst: A junior analyst who has been at the investment bank for more than a year will be promoted to senior analyst, which may enable them to attend client meetings
- Junior associate: The junior associate will be involved in all stages of the deal, and oversee the work conducted by the analysts.
- Senior associate: The senior associate will be highly involved in client sales and negotiations in a role which is very much front office.
- President: The president is responsible for deal flow (bringing deals to the bank), negotiating on fees, and will be highly involved in bigger deals.
M&A Process on the Sell-Side
On the sell-side of a transaction, the process for the investment bank usually includes the following steps:
- A due diligence process whereby the sell-side investment bank learns about the company or asset being divested.
- Construction of the sales documents (one-page confidential teaser, investment memorandum, etc.).
- Marketing of the company through the network of the M&A investment bank and other channels.
- Discussions (and later negotiations) with interested parties.
- Agreement of terms.
- Co-operation with potential buyers during the due diligence process.
- Review of the letter of intent on behalf of the selling company.
- Closing of transaction.
M&A Process on the Buy-Side
The buy-side process, similar to that one the sell side, tends to follow the following pattern:
- The M&A investment banks establishes the criteria required in a target for the buy-side company (if they haven’t already identified a particular company to acquire).
- A long-list of companies is developed, which is soon reduced to a short-list of suitable candidates.
- The M&A investment bank makes contact with these companies on behalf of the buying company.
- The M&A investment bank advises the buy-side on valuations and terms for the companies which are attractive to them.
- An LOI is sent to the sell-side outlining the terms of an offer.
- If an offer is accepted, the investment bank begins due diligence, often gaining access to a data room provided by the sell-side. Due diligence can last for up to 3 months.
- If the company passes due diligence, a firm offer is made and the transaction draws to a close with the approval of both sides.
Example: Engaging an M&A Investment Bank
The decision to engage an investment bank begins with the decision to make M&A a part of the company’s growth strategy. This decision may have been prompted by a forecast of sluggish organic growth, a close industry competitor making an acquisition of its own, a surplus of cash on the company’s balance sheet, or there simply that it was part of the company’s long-term strategy all along.
At this point, the executive team at the company faces a ‘catch 22’ situation: The companies that they do know may be unwilling to share information without the presence of an investment bank, and the companies that they’re not aware of are best identified using an investment bank.
So, inevitably, the decision to bring an investment bank on board is taken. Having spoken to a few, and received their pitches, the company decides on one.
At this point, the company will have an in-depth conversation about the company’s strategy. It may be that the investment bank is already aware of some companies for sale that fit the strategy, or can discuss a slight deviation from the company’s initial thoughts on an acquisition by suggesting alternatives (for example, an alternative geography or acquisition size to those initially proposed by the company).
The investment bank will now begin the process, building a shortlist for the company based on the criteria discussed. At pre-agreed intervals, it will return to the company with suitable target companies that at least loosely fit the criteria. With the company’s agreement, the investment bank will then try to engage with these companies’ executive teams, investigating their willingness to discuss a sale.
It’s at this point that the process outlined in the heading above begins.
This is how a buy-side company engages an investment bank. And the sell-side? It’s quite similar with the prompt being a decision to sell rather than a decision to buy. Again, the company should receive various pitches from investment banks. After one or more has been hired to begin the process, they send a non-confidential teaser to potential buyers, gauging their interest.
For those that show an interest, the investment bank can send a more detailed confidential investment memorandum, which may lead to negotiations and ultimately, a sale.
Tools Used in M&A Investment Banking
When Covid-19 brought the world to a standstill, M&A activity continued apace thanks to the high levels of technology now used by M&À investment bankers. The entire M&A process can now be maintained almost entirely through technology.
Examples of tools used in investment banking include:
- Slack: For maintaining ongoing in-team dialogue and collaboration.
- FirmRoom: A professional data room used for document exchange between buyers and sellers.
- DealRoom: An M&A project management platform which streamlines sometimes highly complex deal processes.
- S&P Capital IQ: A deal database giving investment bankers access to the details of previous deals (and typical transaction structures used in the same industry).
M&A Investment Banking Careers
The salaries available in M&A investment banking make it a highly desirable destination for business school graduates.
Competition for places is high. An often-cited statistic is that one in 2,000 applications to Goldman Sachs receives a job offer, and this figure is thought to be rising. An opening position at an investment bank (Junior Analyst) can expect to yield $70,000 in salaries, rising to $100,000 at blue chip investment banks.
When commissions arise at the associate level, salaries extend to between $200,000 and $500,000. Presidents can be expected to earn salaries into the millions of dollars.
On average, investment banking compensations are typically as follows:
- Analyst: $90-100k; bonus up to $100k;
- Associate: $100-125k; bonus up to $150k;
- Vice President: $150-200k; bonus up to $250k;
- Managing Director: $250-$1M; bonus of $2M+
Investment Banking Courses
With so much competition for places, it follows that candidates are keen to brush up on the skills which will make them attractive to the HR departments at investment banks.
A supply of high quality courses has arisen to meet this demand. In a previous article, DealRoom looked at Top 9 Investment Banking Courses in 2023, their costs, and what candidates can expect to add to their skillset by taking each course.
Whether you have previous investment banking experience or not and considering a career in investment banking, there’s probably a course to fit your requirements.
