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Role of Investment Banks in M&A


Before diving into the process, let’s understand what is Mergers and Acquisition.

M&A is a financial activity that involves selling or buying of a company, division, business, or collection of assets. Investment banks advise on these transactions whether the transaction is right for the company and its shareholders. It is an intense, time-consuming process with high stakes usually spanning several months.

M&A process in Investment Banks-

M&A can be of two types based on deal specification- Broad and Targeted, the former is more common for small ticket sizes (<1Bn USD) as there are a large number of buyers for this kind of deals. However, Targeted auction focuses on a few clearly defined targets that can be identified as having a strong strategic fit and/or desire, as well as the financial capacity, to purchase the target.

The process listed below is that of a buy-side M&A deal

1. Understanding the requirements from the client:

The first step like any other profession is to understand what is the client looking for. This usually involves holding a meeting with the client to get details about the business, what kind of value creation is he expecting from this transaction and other information that is required to create the marketing material (Teaser, Executive Summary, and Confidential Information Memorandum). This material is created to reach out potential targets.

2. Setting the filter for your search criteria:

This step involves setting search criteria for potential targets. Some of the criteria can be based upon industry, geographic location, technology, and customer base. This is the job of the investment banker to figure out which target can be the best fit for the buyer and create synergies.

3. Start looking for potential targets:

Based on the search criteria, the bank reaches out to different targets with the teaser or the marketing material that have been created.

4. Setting the meeting:

This is the initial setting for an M&A process. Bankers try to understand if the contacted target company is interested to sell out its business or other opportunities that might be possible from that initial conversation. There is a follow on meeting set with the buyers and the interested target company to let both the parties have their initial questions cleared and set forward in the deal process.

5. Performing a valuation analysis

Once the meeting between the buyer and the seller has ended in a good note, and the buyer is interested to explore the target company, banks start with the valuation analysis. This involves scrutinizing the current financials, forecasting future numbers, and coming up with an initial value of the target. It helps the acquirer to better evaluate the target and set a ballpark number to start negotiating.

6. Negotiations:

After producing several valuation models of the target company, the IB presents the acquirer with sufficient information to enable it to construct a reasonable offer. Once the initial offer is made, two companies can start negotiating in detail.

7. Due Diligence:

Once the negotiation has ended and there is an agreement to a certain value by both the parties, the target company is sent for a thorough due diligence process. Due diligence is an exercise undertaken to make sure if all the facets of the business are in good shape or to better confirm the acquirer if the acquisition should be done or not.

8. Closing and Integration:  

Due diligence is the stage where majority of the deals are broken. Assuming the due diligence is completed without any major apprehensions, the next step forward is executing a final contract defining the type of purchase- whether it is an asset purchase or equity stake purchase. With this, the acquisition deal closes and management from both the companies work together on the process of merging the firms and realizing synergies. 

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