Demystifying Investment Banking: Mergers & Acquisitions
What is M&A ?
Let’s face it, when most people talk about IBD, they are
usually thinking about doing big deals – buying and selling companies – the
very highest form of high finance.
Yes, Mergers & Acquisitions (M&A) may seem exciting
– the monster deals! The front pages of the Financial Times! The pay! The
closing dinners! However, the reality is unfortunately far more mundane,
especially at a junior level.
That’s not to say M&A isn’t an excellent proving ground
for graduates – you learn a lot, earn your stripes and are extremely employable
having done a few years at the sharp end of IBD.
But what is M&A, and what do analysts who work in
M&A do all day?
Let’s face it, when most people talk about IBD, they are
usually thinking about doing big deals – buying and selling companies – the
very highest form of high finance.
Yes, Mergers & Acquisitions (M&A) may seem exciting
– the monster deals! The front pages of the Financial Times! The pay! The
closing dinners! However, the reality is unfortunately far more mundane,
especially at a junior level.
That’s not to say M&A isn’t an excellent proving ground
for graduates – you learn a lot, earn your stripes and are extremely employable
having done a few years at the sharp end of IBD.
But what is M&A, and what do analysts who work in
M&A do all day?
Mergers & Acquisitions (& Divestitures)
In most deals, if a transaction doesn’t complete, bankers don’t get paid).
Mergers, acquisitions and disposals all have one thing in common: a buyer and a seller, which means there are at least two roles (buy-side and sell-side) for hungry M&A deal teams. The difference between a merger and an acquisition is to do with relative size. If the target is the same size (or quite similar) to the buyer, then it tends to be called a merger. Despite the name, the merger is usually instigated by the larger party, who will often pay for the target in their own shares.
There are lots of different flavours of acquisition, often depending on the type of buyer. For example, a strategic (company) acquiror might be pursuing a ‘buy and build’ strategy, seeking ‘bolt-on’ or ‘transformational’ acquisitions in support of their strategy. A sponsor (Private Equity firm) completes ‘buyouts’ and ‘take privates’ if the company was previously listed on a stock exchange.
A divestiture, or spin-out is the sale of a particular division within a larger company to a willing buyer. Divestitures often result in messy transactions as the unit needs to be independently valued and dislodged from its parent.
In most deals, if a transaction doesn’t complete, bankers don’t get paid).
Mergers, acquisitions and disposals all have one thing in common: a buyer and a seller, which means there are at least two roles (buy-side and sell-side) for hungry M&A deal teams. The difference between a merger and an acquisition is to do with relative size. If the target is the same size (or quite similar) to the buyer, then it tends to be called a merger. Despite the name, the merger is usually instigated by the larger party, who will often pay for the target in their own shares.
There are lots of different flavours of acquisition, often depending on the type of buyer. For example, a strategic (company) acquiror might be pursuing a ‘buy and build’ strategy, seeking ‘bolt-on’ or ‘transformational’ acquisitions in support of their strategy. A sponsor (Private Equity firm) completes ‘buyouts’ and ‘take privates’ if the company was previously listed on a stock exchange.
A divestiture, or spin-out is the sale of a particular division within a larger company to a willing buyer. Divestitures often result in messy transactions as the unit needs to be independently valued and dislodged from its parent.
Investment Banks are required on both the buy-side and
sell-side of a transaction. Working on the buy-side is fun, as you get to think
like the buyer – trying to establish a price and value potential transaction
synergies, as if you were part of the buying company’s team.
Working on the sell-side can also be a great learning
experience. Senior M&A bankers also tend to like sell-side mandates as they
often turn into deals. If a company decides to sell, more likely than not a
deal will get done. Whereas a buyer might look at hundreds of potential
acquisitions before pulling the trigger on an acquisition.
For junior analysts, being on either side of the deal is a great learning experience and tends to be a lot more interesting than spending all day, every day, pitching for new business.
Broad vs Targeted Deals
A broad deal is when a company knows they want to buy (or sell), but doesn’t know who they want to acquire, or be sold to.
On the buy-side, you might be engaged to find suitable acquisition targets, spending months presenting options until you present a company that the acquiror likes the look of. On the sell-side, you run a process – presenting the company to tens, if not hundreds of potential acquirors, whittling down to the most credible late-stage bidders.
A targeted deal is the opposite. You might end up getting a mandate working for an acquiror who is clear on their acquisition target. A seller might also know the three or four companies that they would be willing to sell to.
In a targeted deal, the chances of success (i.e. a nice fee for the bankers) is much higher – which is why the bulge bracket (BB) and elite boutique (EB) tend to prefer working on these deals. broad deals, on the buy-side at least, can be like banging your head against version 50 of a pitch deck, however as an analyst, broad deals tend to provide exposure to lots of companies and a more rigorous M&A process.
A broad deal is when a company knows they want to buy (or sell), but doesn’t know who they want to acquire, or be sold to.
On the buy-side, you might be engaged to find suitable acquisition targets, spending months presenting options until you present a company that the acquiror likes the look of. On the sell-side, you run a process – presenting the company to tens, if not hundreds of potential acquirors, whittling down to the most credible late-stage bidders.
A targeted deal is the opposite. You might end up getting a mandate working for an acquiror who is clear on their acquisition target. A seller might also know the three or four companies that they would be willing to sell to.
In a targeted deal, the chances of success (i.e. a nice fee for the bankers) is much higher – which is why the bulge bracket (BB) and elite boutique (EB) tend to prefer working on these deals. broad deals, on the buy-side at least, can be like banging your head against version 50 of a pitch deck, however as an analyst, broad deals tend to provide exposure to lots of companies and a more rigorous M&A process.
What You Do All Day?
Hours do not need to be as long as they are and often juniors are staffed on projects that have little chance of resulting in a pay-day (just to keep them busy).
Unfortunately, in the early years, you will be up to your eyeballs in PowerPoint, Excel and any number of (extremely expensive) financial data products. If you are working on a deal, your role is largely administrative, blended with seemingly infinite revisions of valuation and merger models.
For larger transactions, you might be invited to some on the big meetings, however, speak at your peril! You will be in listening mode for the first few years, with company management tending to prefer interacting with a comparably senior banker. This isn’t the same at every firm. Smaller boutiques, working on smaller deals, will tend to give more responsibility to junior bankers.
Hours do not need to be as long as they are and often juniors are staffed on projects that have little chance of resulting in a pay-day (just to keep them busy).
Unfortunately, in the early years, you will be up to your eyeballs in PowerPoint, Excel and any number of (extremely expensive) financial data products. If you are working on a deal, your role is largely administrative, blended with seemingly infinite revisions of valuation and merger models.
For larger transactions, you might be invited to some on the big meetings, however, speak at your peril! You will be in listening mode for the first few years, with company management tending to prefer interacting with a comparably senior banker. This isn’t the same at every firm. Smaller boutiques, working on smaller deals, will tend to give more responsibility to junior bankers.
The verdict
M&A is still the most applied-for role in IBD, with
bulge bracket banks taking large cohorts of summer interns and graduates every
year. However, don’t let size impress you. Banks need legions of M&A
analysts to complete often repetitive ‘grunt’ work.
Yes, the pay is good, your learning is accelerated (in part due to the volume of hours you work!) and you have an anchor on your CV, however M&A is by no means the only right place to land within a bank. As we will see over the coming weeks, smaller product and sector teams might confer less status, but more responsibility and (whisper it) a slightly better work-life balance.
M&A is still the most applied-for role in IBD, with
bulge bracket banks taking large cohorts of summer interns and graduates every
year. However, don’t let size impress you. Banks need legions of M&A
analysts to complete often repetitive ‘grunt’ work.
Yes, the pay is good, your learning is accelerated (in part due to the volume of hours you work!) and you have an anchor on your CV, however M&A is by no means the only right place to land within a bank. As we will see over the coming weeks, smaller product and sector teams might confer less status, but more responsibility and (whisper it) a slightly better work-life balance.
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