The M&A team will advise the prospective seller or buyer of a company. The responsibilities of each role (advising on the buy-side or the sell-side) are significantly different.
On the buy-side (advising those looking to purchase a company), the advice from a bank tends to be much more valuation-focussed as opposed to process-focussed. Potential buyers will often hire investment banks to help them value a potential target company (much like real estate agents are hired to value a house), as banks tend to have access to a significant quantity of data relating to previous transactions and other similar companies, all of which can be analysed to help inform a valuation. It is worth noting that investment banks typically only receive a significant fee when advising buyers if the deal is completed (a success fee).
On the sell-side (advising those looking to sell a company) the bank will help to prepare teaser presentations about the company, covering key selling points such as the company’s positive attributes and the potential benefits from the deal (the ‘equity story’). This will be followed by an Information Memorandum (IM), which provides significant detail on the operations of the business, the management team and the future plans or potential for growth. Although it tends to entail more work, advising on the sell-side is often seen as more profitable because as a bank, you are much more likely to complete the transaction (and thus get paid) when helping to sell a company (as opposed to helping to buy one) as there is only one seller but often multiple competing buyers.
The bank will proceed to invite parties that have expressed an interest in purchasing the company to submit an indicative or non-binding offer (NBO). Typically, 5-20 bids may be received. The bank will consult the client and invite around 3-5 of the bidders through to the second round in order to maintain competitive tension, with the aim of securing as high a price as possible for the seller. During this phase, these bidders will be invited to a presentation given by the management of the company being sold. The advising bank helps to prepare the presentation, which is then delivered by the management. This is a pivotal step in allowing bidders to learn more about the company and question those involved in its management.
Additional data is then revealed to the bidders using a Virtual Data Room (VDR), so they can create accurate valuation models based on company and broker forecasts of future financial performance. The bidders then submit final bids, which are legally binding but subject to the fulfilment of certain conditions (such as the receipt of consent from the competition authorities and verification of warranties given in the contract). Lawyers are heavily involved in this stage. Final price negotiation may subsequently take place in light of any additional circumstances that arise.
By Jake Schogger - City Career Series