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Essential Aspects to Know About M & A Investment Banking

Nov 22, 2022| Article
Essential Aspects to Know About M & A Investment Banking

Most corporate name changes are the result of mergers and acquisitions. But these tend to be unimaginative.

- James Surowiecki

Mergers and Acquisitions (M&A) are usually high-value and greater stakes transactions with a lot present. The process of M&A is intensive. The process will alter based on the size, complexity, and kind of M&A deal. The words "mergers" and "acquisitions" are usually interchangeable, but they vary in meaning. They refer to the consolidation of organizations or their high business assets with financial transactions among the organizations. An organization will buy and absorb another organization outright, merge with it into making a new firm, acquire a few or all of its major assets, give a tender offer for its stock, or create a hostile takeover. All of these fall under M&A activities.

Overview of M & A in Investment Banking

The role of investment bankers in cracking the M&A deals is to suggest other firms and execute the transactions where the business owners keep on selling their business to buyers, obtain smaller targets, and divest or get certain divisions or assets from other firms. They execute sell-side and buy-side deals of M&A.

In other terms, investment banking (IB) is the industry that fuels the engines of M&A. The merger of two or more firms via M&A is a process, which is quite complicated as there are a lot of areas that are moving. It demands certain expertise in fields like valuations, capital raising, communication with investors, deal negotiations, and many more.

Investment banking professionals make sure to gain enough specialization in all of these fields, enabling them to act as intermediaries for firms that want to get or merge with other firms.

M&A group in investment banking

The US investment banking industry is estimated to be the home to around 3,000 firms, earning about $140 billion. It is massive and has a great role in the biggest transactions that take place across every other industry.

M&A is the main subset of IB. Where most of the 3,000 investment banks in the US function with M&A process and capital raising. However, the investment banks offer a diversified service scope, which consists of:

  • Underwriting for IPOs.
  • Sales & Trading
  • Equity & industry research
  • Advisory services

Investment Banking Mergers and Acquisitions Process

The M&A process possess the ability to reshape firms and their industries like no other corporate action. In any M&A process, obtaining the right timelines is very essential. Larger deals may not mean more time but might require more resources.

Let's have a closer look at the M&A process from the investment bankers perspective:

  • Build an acquisition or exit strategy - The M&A criteria, analysis of trends, and appropriate targets as well as the acquirers. This can be done for a certain organization, or the investment bankers may start the process and then reach out to prospective buyers/sellers.
  • Connect to the buyer or seller - The investment banking professionals usually work with Corporate Development to get through gatekeepers and start a fruitful conversation with the C-suite executives or with the business owners on the opposite side of the deal.
  • Perform a valuation analysis - Once a connection has been done among the organizations and both parties have chosen to continue down the M&A path, they will continue to review the prospective targets. 
  • Start the negotiations - If working for the buy-side, they will help the buyer to develop as well as deliver an appropriate offer.  
  • Assistance with diligence - During diligence, the investment bankers continue to dig deeply into the financials and usually serve as one of the great sources of communication between the buy-side and the sell-side.   
  • Settling of the final terms - They are majorly responsible for negotiating the final terms of a deal.  
Investment Banking Mergers and Acquisitions Process

Role of Investment Banking Professionals in M&A

Based on the previous section we can clearly understand that investment bankers make sure that the deals happen. The top leaders of any organization often have at least a shortlist of organizations that interest them.

However, to convert them into deals, they are required to hire professionals, who are keen to grow in their investment banking career that have a cerctain set of skillsets needed for cracking the deals. This gives them to get the maximum value from the work they perform as part of their mandate from the organization. 

The roles professionals take for M & A investment banking are too many. Some of them are:

Investment Banking Mergers and Acquisitions Process
  • Giving industry overviews Giving overall information related to the industry is the job of IB, and also informs the decision about which organizations are most relevant for the process of M&A. For instance, the retail industry, it’s about the scramble for e-commerce. The oil and gas industry, it’s all related to the energy transition.
  • Deal origination Investment bankers initially find the organizations, which are suitable and attractive, and then narrow this down to the organizations that can be either acquired or merged with. 
  • Valuation of the firms Valuing the firms, public and private, is the basic need of IB. It will often build a valuation with the help of a complex financial model that considers the account of all of the target firm’s current and projected financial results. The investment bank’s responsibility is to give proper suggestions to the firm on any deviations from this valuation.
  • Negotiation The investment banking professionals act as the intermediary, so from their side, they are sure about the transaction of some form, and want to be transparent about it. If this leads to some form of negotiation, they will be considered to help their client in the process.
  • Due Diligence The expertise that investment banking career offers will be highly useful to be an active intermediary on dozens of deals. This also makes them have far more potential of knowing the aspects to seek out at the due diligence step comparatively than the average business owner. The IB also has its legal team to take care of regulatory and compliance aspects that are relevant to the deal.
  • Deal Closing Deal closing is not an easy task like signing on a document and walking away with the ownership of a firm. It consists of a careful final assessment of all the terms and conditions involved and accounting for contingencies. Investment banking professionals are more potent when compared to the standard business owner in ensuring that nothing is missed while closing any deal.
  • Post Merger Integration Post Merger Integration (PMI) or simply ‘integration’ is something that adds or destroys the value that happens after the transaction has closed. The larger consulting industry has built the playbook, which enables them to advise firms on the integration, of the newly acquired firms into their own.

Investment Banking Career

Investment banking is the perfect career choice for professionals who are seeking a growing job profile and the benefits that come along with it, such as compensation. With so high financial rewards, it is not a surprise that careers in IB are the most coveted of all jobs. A professional often spends between 2 to over 5 years as an analyst, sometimes earning close to USD 200,000.

Salaries are one of the top post-MBA career options, in the US, the average starting base salary for analysts is between USD 75,000 to USD 96,000 per annum. If one considers other perks like bonuses, signing, and stub bonus earnings, these can be around USD 150,000 or more, also for first-year analysts.

Apart from, great salaries and bonuses, an investment banking career also offers perks like vacation, health insurance, profit-sharing, and retirement packages.

Entry-level analysts in IB often take care of excel and PowerPoint work, track buying and selling, handle the documentation, and correspond with clients. The progression of the career from an analyst to a managing director often takes more than 12 years.

The table below gives the career progression in the IB industry if an individual passes all the standards by excelling in their performance.

From To Average Period
Analyst Associate Associate
Associate (typically MBA) Vice President 3 years
Vice President Senior Vice President 3-4 years
Senior Vice President Managing Director 2-3 years

However, USA and UK are housing the top banking companies like JPMorgan Chase, Goldman Sachs, Citi, Wells Fargo, Bank of America, and more, which pay the highest salaries in the industry. Others like India and Canada consist of a smaller industry and pay lesser than the USA and UK.

Summing up

The least preparation period of any M&A transaction is 2 to 3 months if there are no substantial alterations to the sell-side business or its reporting structure. If there are then both internal and external advisors may require 6 months or longer for deal preparation. Once the deal moves, the IB plays an active role in the negotiation of the terms of the deal.

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