As an investment banker in the mergers and acquisitions space, there are two things that one does – one is to pitch their bank to prospective clients and get business from them by engaging in the buy or sell-side M&A, and another is to execute the deals given by these clients.
Objective of the Investment Banker
The objective of the banker in sell-side M&A is to sell the target company for the highest possible valuation, as this is what the company pays bankers to do. Moreover, the banker’s commission is also dependent on the same, which ranges from 1% to 2% of the sale value.
Understanding the Role of Investment Bankers
In sell-side M&A, the investment banker takes on several roles, including:
Preparing the Teaser
Bankers prepare the teaser document, which provides the major highlights of the business, including the financials. It also includes the investment rationale and unique selling proposition (USP) of the company. However, it doesn’t disclose the identity of the target company. The banker tries to reach out to strategic investors who are in a similar business or even to private equity players who might be interested in the business. The objective is to maximize the number of participants so that the more competitive it becomes, the better valuation that can be achieved.
After looking at the teaser document, if the potential buyer feels interested in the business, they would definitely like to receive more information about the company. In such a scenario, the seller makes sure that the potential buyer signs the Non-Disclosure Agreement (NDA) clause so that they do not misuse information disclosed to them.
The NDA clause also restricts the potential buyer from soliciting the seller’s employees, customers, etc. Generally, the terms and conditions of the NDA vary from company to company in sell-side M&A. It is the responsibility of the banker to negotiate the same and make it favorable from the seller’s point of view.
Preparing the Confidentiality Information Memorandum (CIM)
The Confidentiality Information Memorandum (CIM) contains confidential information about the company. This document allows the potential buyer to understand the target in-depth and decide whether they would like to buy the business or not. They also decide on the valuation of the company by looking at the same. The CIM contains information such as an industry overview, company profile, financial statements, revenue profile, employee profile, products and service offerings, office locations, management structure, key customers, competitive strength, investment rationale, etc. The role of the sell-side M&A banker is to prepare a complete CIM and make the company look attractive.
Valuing the Business
The banker also develops its own operating model and does a complete valuation of the business. The objective of doing this is not to share with anyone, but to use it as a backup in case the question of valuation arises. It also helps the bankers understand the valuation range that they may receive from potential buyers.
Receiving the Non-Binding Letter of Offer
Once the potential buyer values the target company, they share the Expression of Interest (EOI) with the bankers. Sell-side M&A bankers receive the EOI from various potential buyers with their valuation quote. Once a quote is received by the bankers, they discuss it with the seller’s management and invite the top bidders (generally 4-5 companies) for the next round.
Opening the Data Room
It is very important for the buyer to conduct due diligence and satisfy themselves regarding the capabilities of the company, the financials, and legal contracts. The bankers upload all kinds of data for potential buyers to verify and discuss. Data uploaded varies on matters relating to corporate information, employees, material agreements, service agreements, financials, tax, regulatory issues, IT & system management, etc. If the buyer is looking for any specific set of data points, it sends a request to the sell-side M&A banker in a specific format. The banker coordinates with the seller and uploads the requested information.
Conducting Management Meetings
When the data room (a virtual space for housing and exchanging data) opens, there are many findings and analyses that the potential buyer would like to discuss with the seller. To make the meetings effective, the banker arranges calls and face-to-face meetings with the senior management of both the buyer and seller with a pre-defined agenda. The meetings organized by the banker help in clearing possible doubts by the potential buyer. It also helps in building a relationship with the management.
Visiting the Buyer’s Facility
In case the nature of the transaction is sell-side M&A, the seller may not visit the buyer’s facility, but in a case where it is a kind of outsourcing contract, carve-out of a division wherein the seller continues to be a customer to the buyer, they may like to see their capabilities. The banker makes sure that his client, the seller, is satisfied regarding the buyer.
One of the very important tasks of the banker is to negotiate with the potential buyer and maximize the valuation of the company. The banker arranges calls and meetings with the buyer and discusses various adjustments that should be done regarding the valuation. Needless to say, he acts from the seller’s point of view and pushes a higher valuation.
Signing the Definitive Agreements
Once the negotiation is completed and a consensus decision about the valuation and other key parameters is reached, companies sign the definitive agreement, which is prepared by the lawyers. The role of the sell-side M&A banker is to look for the purchase price, with a special focus on working capital requirements. As far as legal clauses are considered, the bank may form a legal team to advise the sellers, or the sellers may hire a law firm from outside to assist with the agreement.
Assisting in Closing the Transaction
Once the definitive agreement is signed, the buyer and seller may need to get approval from various regulatory bodies. In order to finalize the deal as soon as possible, the banker acts as an intermediary and gets all the necessary documents exchanged between all concerned parties.
Thank you for reading CFI’s guide to an investment banker in sell-side M&A. CFI is a leading provider of financial modeling courses for investment banking professionals. To help you advance your career, check out the additional resources below: