We caught up with Giovanna Burns of Meridian Capital to learn more about the basics of investment banking for the second installment of PitchBook's M&A 101 series. (Check out the first part here.) The interview below has been edited for length and clarity.
PitchBook: What is investment banking? How does it differ from other forms of banking?
Burns: "Investment banking" is a broad term that encompasses capital raising and strategic transaction advisory services for companies. It includes debt and equity issuances, private placements of capital and advisory on strategic transactions such as mergers, acquisitions and divestitures. That means we're different than other forms of banking because we don't act as a depository, and we don't directly lend to or invest capital in our clients.
By contrast, a retail bank serves individual consumers and small businesses, typically through the bank's branch locations and online services with checking and savings accounts, mortgages, auto loans, safe-deposit boxes and cashier's checks. Meanwhile, corporate banking (sometimes also referred to as commercial banking) largely resembles retail banking, with a corporate bank's customers being medium to large businesses. A primary function of corporate banks is to provide business loans. Beyond loans, a corporate bank may offer other capabilities geared toward handling the day-to-day financial concerns of corporations, such as treasury management, foreign currency exchange and retirement plan services.
What roles do investment banks play in M&A transactions? How do those services differ from, say, work on an IPO?
The roles of the investment bank will differ depending on whether the bank is representing the seller of a company ("sell-side") or advising a prospective acquirer ("buy-side").
On a sell-side engagement, the investment bank's responsibilities include:
- Keeping our fingers on the pulse of industry M&A trends to set valuation expectations for client companies and helping them plan their timing and go-to-market strategies
- Deploying our knowledge of the client and its industry to craft a set of key points that form a compelling investment thesis—then assembling marketing materials such as the "Information Memorandum" to convey these points
- Identifying and contacting potential buyers, managing information flow and holding strategic discussions with interested parties
- Establishing a formal bid process for the company, reviewing bids and helpingselect a buyer
- Setting up an online diligence "data room" and serving as the primary liaison between the buyer (and/or its advisors) and seller during due diligence
- Helpingnegotiate the final terms of the deal
On a buy-side engagement, the investment bank's responsibilities include:
- Evaluating the potential target and its industry to set a preliminary valuation
- Assessing the strategic fit of a potential target with the client; identifying and, to the extent that it's possible, quantifying synergy opportunities
- Crafting a bidding strategy and helping draft proposed terms of purchase
- Identifying potential issues in the diligence process and following up accordingly
- Analyzing the buyer's capital structure to determine the correct transaction financing; helping the buyer find financing
- Helping negotiate the final terms of the deal
On an IPO, the investment bank's responsibilities are very similar to those on a sell-side M&A transaction, insofar as it's responsible for positioning the company to prospective investors, drafting marketing materials, conducting investor outreach and determining a reasonable valuation. However, instead of appealing to only one buyer, there are several buyers, so a "road show" is conducted, where management meets with and presents to several potential investors.
Extensive buyer-seller negotiations characteristic of an M&A transaction don't happen as part of an IPO. There's also the extra step of the shares entering the market—they need to be distributed through the bank's sales desk. IPO candidates will often enroll more than one bank to complete the actual sales and distribution portion of the IPO process, thereby leveraging more investor relationships.
How does the size of the transaction impact the investment bank's role?
The responsibilities listed above will be the same regardless of the size of the transaction. From the banker's perspective, though, some subtle differences generally hold true for public versus private deals. For instance, on the sell-side of larger, publicly traded companies, there is a smaller universe of prospective investors because financing is a constraint. Another difference is that for middle-market deals, bankers rely a lot more on our industry connections to test the M&A market, while for public company deals, information regarding corporate strategy, terms of precedent M&A transactions, and financial performance are openly available and easily accessed via public filings and press releases.
As a banker working on middle-market transactions, you get to see and manage a greater part of the overall process. Because the deals we do at Meridian are typically for private or family-owned businesses, we're walking individuals through the process of selling a company that they built themselves. So, there's definitely a human aspect and a sense of a private deal's impact that is different from those involving publicly traded companies.
What are the different roles played by members of team as they work to source deals, perform due diligence and bring a transaction to the finish line?
It's always a team effort, so it depends on the particulars of the situation and the transaction. But generally, the division of work is as follows (in reverse order of seniority):
Analyst – the analyst is responsible for much of the legwork that goes into sourcing and executing transactions. This includes putting together PowerPoint presentations and Excel models, organizing files and information, doing industry research, taking notes on calls and meetings, and tracking and recording sourcing and execution activity
Associate – the associate is responsible for checking the analysts' work, coordinating the creation of PowerPoint presentations, talking to clients and executing on day-to-day transaction tasks
Vice President – the vice president supports business development efforts and manages deal execution. They take the lead on shaping messaging for pitchbooks and deal marketing efforts, and help handle communications with clients and prospective investors
Managing Director – the managing director is responsible for business development and sourcing deals, and also helps guide deal execution. Most of an MD's time is spent building relationships, meeting with potential clients, and staying abreast of industry and transaction trends
How and why do firms come to specialize in certain sectors, such as aerospace, for example?
Sector-specific firms are formed based on the same logic that all businesses are: Somebody recognized a market need and set out to fulfill it. Usually, these firms are founded by individuals that worked within an industry group at a larger investment bank for several years and saw an opportunity to provide better services that larger investment banks cannot offer. These firms differentiate themselves based on independence, senior-level attention and thought leadership, among other factors.
What are the most commonly overlooked items by business owners when preparing to sell their companies?
- Keeping good records. Due diligence is a key part of a transaction, and the ability to fulfill requests and address potential issues will make the process go smoothly and could even increase transaction value. First, financial records should be accurate and transparent. Identify and document any material one-time fluctuations—for example, nonrecurring expenses related to opening a new facility. Keep track of off-balance-sheet and contingent liabilities. It's also a good idea to have your financials reviewed or audited by an accountant at least annually to verify their accuracy. Second, keep all records and paperwork organized and in a safe place. As part of diligence, buyers will often ask to review legal contracts, tax returns, patents and copyrights belonging to the business, and insurance policies, among other items.
- Defining and being able to explain company strategy. The value of a business in a sale is based on the buyer's expectations of future profitability, so it's important to showcase the company's potential. It's helpful to have a roadmap of company strategy for the next few years. The plan should include realistic opportunities to grow the business and increase profitability. It must also consider current industry trends and competitive backdrop. Some of the opportunities within the roadmap may be immediately actionable; many will require additional capital and resources to implement. To increase value, a business can take steps to implement some of these strategies ahead of a sale. For instance, could the company decrease raw material costs by switching suppliers? If so, switch suppliers now—a forecast is more credible if there's tangible evidence of results. For the initiatives that can't be implemented now due to resource constraints—such as acquiring a competitor or building another factory—have a defensible estimate of how this would impact the financial statements and how much up-front capital is required.
- Building a team of trusted advisors. Numerous professionals are involved in an M&A transaction, including investment bankers, lawyers and accountants. A business looking to sell should start assembling a team a couple of years in advance. Select an investment banker based on industry expertise, advisory experience, and personal chemistry. It's essential that an advisor is trustworthy and committed to a company's success. Even if a business is not yet ready to sell, a good investment banker will still help prepare for a successful exit by providing insights on important considerations such as valuation, transaction structure, timing, and go-to-market strategy.
- It is also important to have an investment banker ready to engage in case the company receives an unsolicited acquisition offer. If this happens, it's a bad idea to negotiate with the potential buyer yourself because you will almost certainly leave value on the table. If you're serious about accepting a potential offer, your investment banker can evaluate the offer, help manage the diligence process including confidentiality concerns and, most importantly, create a competitive process to ensure that your business gets the best possible valuation. Another reason that it's not too early to start building a relationship with a banker is that we are paid when we close transactions and not by the hour – our up-front advice is free of charge and our goals are completely aligned with yours.
What one thing, above all, does an investment banker do that's indispensable on every single M&A transaction?
Everything we do on a transaction is carefully designed to optimize the outcome for that particular client. With sell-side M&A, that largely translates to obtaining the best sale price, but of course there are other considerations with selecting a buyer that we help our clients weigh as well.
Giovanna Burns, a VP with Meridian Capital, plays an essential role in transaction execution and supports the Seattle-based firm's business development initiatives. She has provided advisory services to middle-market companies across various industries on transactions including buy-side and sell-side engagements, IPOs, debt issuances and growth equity raises.
Check out other contributions to
The difference between mergers and acquisitions
How to achieve sound valuations in mergers and acquisitions
What antitrust law means for mergers and acquisitions
FAQs
What is M&A investment banking? The role of bankers in M&A deals (M&A banking) is to advise other companies and execute transactions where the owners sell their business to buyers, acquire smaller companies (targets), and divest or acquire specific divisions or assets from other companies.
What do investment bankers do in M&A? ›
What is M&A investment banking? The role of bankers in M&A deals (M&A banking) is to advise other companies and execute transactions where the owners sell their business to buyers, acquire smaller companies (targets), and divest or acquire specific divisions or assets from other companies.
How do investment banks work on mergers and acquisitions? ›
Facilitating mergers and acquisitions is a key element of an investment bank's work. The investment bank estimates the value of a potential acquisition and helps negotiate a fair price for it. It also assists in structuring and facilitating the acquisition to make the deal go as smoothly as possible.
What is the difference between M&A and investment banking? ›
In general, investment bankers earn the majority of their paycheck from a success fee. This fee usually establishes the value floor below which they will not work. M&A advisors act as deal partners, and often work with clients to prepare them for their exit.
What interests you about working in M&A? ›
Pros. M&A can be an attractive career path, not only because it's lucrative but also because you play a role in significant financial decisions. M&A professionals are often intermediaries in decisions involving big industry players, which means you might have a hand in deals that go into the billions.
What are the three main functions of an investment banker? ›
Key Takeaways:
Roles of investment banks include the underwriting of new stock issues, handling mergers and acquisitions, and acting as a financial advisor.
Is M&A investment banking or consulting? ›
M&A is traditionally the more prestigious role within investment banking because you get the opportunity to work on some of the biggest transactions that can often make headline news. You also get to learn key skills like understanding corporate finance and you will likely have exposure to senior executives.
What do investment bankers do on a sell-side deal? ›
Sell side refers primarily to the investment banking industry. It refers to a key function of the investment bank — namely to help companies raise debt and equity capital and then sell those securities to investors such as mutual funds, hedge funds, insurance companies, endowments and pension funds.
What is the M&A process? ›
What Is a Merger and Acquisition Process? The phrase mergers and acquisitions (M&A) refers to the consolidation of multiple business entities and assets through a series of financial transactions. The merger and acquisition process includes all the steps involved in merging or acquiring a company, from start to finish.
What is investment banking in simple words? ›
Definition: Investment banking is a special segment of banking operation that helps individuals or organisations raise capital and provide financial consultancy services to them. They act as intermediaries between security issuers and investors and help new firms to go public.
There are four main types of acquisitions based on the relationship between the buyer and seller: horizontal, vertical, conglomerate, and congeneric.
What is M&A for dummies? ›
Mergers and acquisitions (M&A) is a catch-all term referring to the friendly or hostile merging of two or more businesses.
What are the two sides of M&A? ›
In terms of M&A, the buy-side means working with the buyers and finding opportunities for them to acquire other businesses. Sell-side M&A, on the other hand, means working with the sellers who are trying to find a counterparty for the sale of a client's business.
How do you ace an M&A interview? ›
Essential Interview Preparation in M&A
In particular, be prepared to provide detail on your contribution to every part of the process, and the value that you added. Like any 'fit' style questions, think about aspects of the deal that challenged you, obstacles you had to overcome, and what you learned from the deals.
What skills do I need for M&A? ›
Practicing mergers and acquisitions requires a strong proficiency in accounting, finance, law, strategy, and business. While it is not necessary to have an advanced degree, many M&A professionals have MBAs, and less frequently, law degrees.
What is the best qualification for M&A? ›
Formal education is non-negotiable. A bachelor's degree in business, accounting, finance, economics, or other related fields is essential to perform the job at the highest level. Other companies even require candidates with master's degrees in business management or finance.
What are the 4 primary roles of investment bank? ›
The primary goal of an investment bank is to advise businesses and governments on how to meet their financial challenges. Investment banks help their clients with financing, research, trading and sales, wealth management, asset management, IPOs, mergers, securitized products, hedging, and more.
What are the core skills for investment bankers? ›
Investment Banker Qualifications/Skills:
- Strong communication, networking and interpersonal skills.
- Ability to work in a fast-paced environment.
- Skilled in research and analysis.
- Effective presentation skills.
- Ability to manage time and projects.
- Knowledge of relevant regulations related to securities and M&As.
The four main areas of investment banking activity are Capital Markets, Advisory, Trading and Brokerage, and Asset Management.
Who facilitates M&A? ›
Investment banks also facilitate corporate reorganizations, including mergers and acquisitions. The finance division of investment banks manages the merger and acquisition work, right from the negotiation stage until the deal closes.
M&As can be paid for by cash, equity, or a combination of the two, with equity being the most common. When a company pays for an M&A with cash, it strongly believes the value of the shares will go up after synergies are realized. For this reason, a target company prefers to be paid in stock.
Who is involved in M&A process? ›
Every M&A transaction involves at least one purchaser, or buyer, the party that will be making the acquisition. This is the person (i.e., individual or company) that signs the purchase agreement, pays the purchase price and which, after closing, directly or indirectly, owns or controls the target company or its assets.
What are typical M&A advisory fees? ›
M&A advisors work with businesses to develop a strategy for their transaction, identify potential buyers or investors, and negotiate the terms of the deal. M&A advisor fees for small business transactions typically range from 1% to 3% of the total transaction value.
What is the difference between buy-side and sell-side diligence? ›
Whereas buy-side refers to the buying side of a transaction, sell-side due diligence outlines the process that sellers and those looking to sell their business to a potential buyer must conduct prior to making a sale.
What is buy vs sell-side M&A? ›
Buy-side refers to individuals or companies buying securities, including pension funds and hedge funds. Contrarily, sell-side refers to companies that issue, sell, or trade securities. The types of firms on the m&a sell-side typically include investment banks, advisory firms, and corporations.
What are the three stages of M&A? ›
Mergers & Acquisitions: The 5 stages of an M&A transaction
- Assessment and preliminary review.
- Negotiation and letter of intent.
- Due diligence.
- Negotiations and closing.
- Post-closure integration/implementation.
The three stages in question are pre-combination, combination (involving the integration of companies) and solidification and advancement (which forms the new entity). Pre-combinationrefers to processes that take place before the M&A is completely legal.
What is the basic structure of M&A? ›
There are three basic structures we will cover here: Asset Acquisition: the buyer buys the assets of the business. Stock Purchase: the buyer buys the stock of the business. Merger: the buyer merges or “combines” with the business.
What do investment bankers do for dummies? ›
In general, investment banks assist clients with large and complex financial transactions. This includes underwriting new debt and equity securities, aiding in the sale of securities, and helping to facilitate mergers and acquisitions, reorganizations, and broker trades.
What are the three types of investment banking? ›
The firms engaged in the investment banking industry are commonly classified into three categories: bulge bracket banks, middle-market banks, and boutique banks.
Examples of investment banker employers are Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan Chase (JPM), Bank of America Merrill Lynch (BAC), and Deutsche Bank (DB).
What is the hardest part of M&A? ›
Technology decisions are one of the most obvious and biggest challenges of the M&A process. Each company will have specific technological requirements that they need to consider. Following an M&A deal, it's likely that you will have different platforms or applications that perform the same function.
Which Big 4 is best for M&A? ›
PwC tops big four consulting firms for most M&A work.
What is the biggest M&A deals? ›
As of August 2022, the largest ever acquisition was the 1999 takeover of Mannesmann by Vodafone Airtouch plc at $183 billion ($321.5 billion adjusted for inflation). AT&T appears in these lists the most times with five entries, for a combined transaction value of $311.4 billion.
What is an example of M&A strategy? ›
Example. The most common and famous example of merger & acquisition is Google and Android. Google is the master company in the IT industry and search engine, whereas Android was a start-up company struggling to exist in the mobile phone market. Android was also not much known in the telecom or IT industry.
What is the difference between a merger and an acquisition? ›
Unlike mergers, acquisitions do not result in the formation of a new company. Instead, the purchased company gets fully absorbed by the acquiring company. Sometimes this means the acquired company gets liquidated. Acquiring a business is similar to buying an existing business or franchise.
What is difference between merger and acquisition? ›
A merger occurs when two separate entities combine forces to create a new, joint organization. Meanwhile, an acquisition refers to the takeover of one entity by another. Mergers and acquisitions may be completed to expand a company's reach or gain market share in an attempt to create shareholder value.
What ratios to look at for M&A? ›
The financial ratios that will be used are as follows: Return-on-Asset, Debt/Equity, Current Ratio, and Price-to-Earnings Ratio.
What are the two types of synergies in M&A? ›
Different Types of Synergies in M&A Transactions
- Revenue Synergies. A revenue synergy occurs when two companies are combined and as a result can sell more products &/or services in total than they would have otherwise achieved separately. ...
- Cost Synergies. ...
- Financial Synergies.
Unlike an asset purchase, where the buyer simply buys the assets of the company, an equity purchaser actually buys the company itself, which can be beneficial if the company is performing well or has additional value as a going concern.
Good candidates should have only one class of common stock and little debt; what debt they have should be able to be refinanced. A potential takeover target should have consistent revenue streams, steady businesses, experienced management, and the capacity to increase margins.
What makes a good M&A advisor? ›
A good M&A advisor will know about industry trends, current market activity, average multiples and other valuation factors so as to be able to provide a ballpark figure for what your company is worth. If that valuation assessment is not in line with internal expectations, feel free to disagree.
What are all the important questions to be considered answered before an M&A? ›
Is the company considered a market leader? Does the product or service have a life cycle, or seasonality? What would your customers and competitors say this business does best? What are the possible implications on your business a year from now if you don't make the acquisition?
How do investment banks make money from M&A? ›
Investment banks charge fees to act as advisors for spinoffs and mergers and acquisitions (M&A). In a spinoff, the target company sells a piece of its operation to improve efficiency or to inject cash flow. On the other hand, acquisitions occur whenever one company buys another company.
Do investment bankers do mergers? ›
Investment banking activities include underwriting new debt and equity securities for all types of corporations. Investment banks will also facilitate mergers and acquisitions, reorganizations, and broker trades for institutions and private investors.
How do I become a M&A banker? ›
An entry-level M&A analyst needs a bachelor's degree in accounting, economics, finance, or mathematics. In addition, they need to have some prior experience in investment banking. Many M&A professionals, especially at higher levels, have MBAs. Some have law degrees.
What makes an M&A successful? ›
Create synergies
The joining of two companies should give rise to values greater than the sum of each party's value. This concept is called synergy, which drives M&A activities. For example, a merger between two firms might create efficiencies in production or allow for greater economies of scale.
Do M&A bankers add value? ›
A recent survey concluded that engaging a M&A Advisor or Investment Banker adds significant value to the seller during the business sale process.
Why are investment bankers so rich? ›
For a hefty fee, they bring industry, financial, and transactional expertise. They are basically gatekeepers — a company that wants to issue stock, issue debt, buy other companies, or sell itself has to engage with an investment bank (though some tech firms are working on ways around this).
Which investment bank has the best M&A? ›
Best M&A Companies
- Goldman Sachs.
- Morgan Stanley.
- JP Morgan.
- Bank of America.
- Credit Suisse.
- Citi.
- Barclays.
- Lazard.
Our firm is a longstanding market leader in providing advice on a broad range of M&A transactions, including company sales, divestitures or carve-outs, acquisitions, raid and activism defenses, cross-border M&A, special committee assignments and other complicated merger transactions.
How does M&A process work? ›
The merger and acquisition process includes all the steps involved in merging or acquiring a company, from start to finish. This includes all planning, research, due diligence, closing, and implementation activities, which we will discuss in depth in this article.
Which major is best for M&A? ›
Generally, colleges and universities that excel in fields such as economics, finance, banking, or business provide top-quality education in mergers and acquisitions.
Does M&A pay well? ›
How much does a M&A make? As of Jun 4, 2023, the average annual pay for a M&A in the United States is $115,296 a year.
What is the difference between buy-side M&A and sell-side M&A? ›
In terms of M&A, the buy-side means working with the buyers and finding opportunities for them to acquire other businesses. Sell-side M&A, on the other hand, means working with the sellers who are trying to find a counterparty for the sale of a client's business.
