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Investment Banker in Sell-Side M&A

What does an investment banker do in the M&A industry

Role of the Investment Banker in Sell-Side M&A

As an investment banker in the mergers and acquisitions space, there are two things that one does: one is to pitch themselves 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.

 

Sell-Side M&A

 

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 for. 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 that 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 can be achieved. 

 

Negotiating Non-Disclosure Agreement (NDA) Clauses

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 any kind of 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. The document allows the potential buyer to understand in depth and decide whether they would like to buy the business or not. They also decide on the valuation of the company looking at the same. CIM contains information such as 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 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 do a complete valuation of the business. The objective of doing the same 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 which 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. Bankers receive the EOI from various potential buyers with their valuation quote. Once a quote is received by the bankers, they discuss the same 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 of the capabilities of the company, verify the financials and legal contracts among others. The bankers upload all kind of data for the potential buyers to verify and discuss. Data uploaded varies on matters relating to Corporate Information, Employees, Material Agreements, Service Agreements, Financials, Tax, Regulatory, IT & System Management, etc. If the buyer is looking for any specific set of data point, it sends a request to the banker in a specific format. The bankers coordinate with the seller and upload the same. 

 

Conducting Management Meetings

As and when the data room (a virtual space for housing and exchanging data) opens, there are lots of findings and analysis which the potential buyer would like to discuss with the seller. To make the meetings effective, the bankers arrange calls and face-to-face meetings with the senior management of both the buyer and seller with pre-defined agenda. The meetings organized by the bankers 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, the seller may not visit the buyer’s facility or its capabilities, but in case 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 bankers make sure that his client, i.e. the seller is absolutely confident of the same, as in that case, money is not the only thing to be seen. 

 

Holding Negotiations

One of the very important tasks of the banker is to negotiate with the potential buyer and maximize the valuation of the company. The bankers arrange calls and meetings with the buyer and discuss various adjustments that should be done regarding the valuation. Needless to say, he acts from a seller’s point of view and pushes a higher valuation. 

 

Signing the Definitive Agreements

Once the negotiation is done and a consensus decision about the valuation and other key parameters is reached, companies sign the definitive agreement, which are prepared by the lawyers. The role of the bankers is to look for the purchase price with a special focus on working capital requirements. As far as legal clauses are considered, the bankers may form a legal team to advise the sellers or the sellers may hire a law firm from outside to assist on 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 documents exchanged between all concerned parties.

 

Other Resources

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