M&A Investment Banking: The Best Group Ever?

Ask anyone about the “best” group in investment banking, and one name will come up repeatedly: Mergers & Acquisitions (M&A).

It’s so mythical that we even used a slight variation for the name of this website.

People often argue that M&A investment banking offers “the most intellectually challenging tasks” and “the best exit opportunities.”

These claims present a few problems: for example, is aligning shapes on a PowerPoint slide ever an “intellectually challenging task”?

But there’s another problem as well: most people making these arguments don’t understand that working on deals is often boring and repetitive.

M&A investment banking has some benefits, but the hype is far ahead of the reality:

What is M&A Investment Banking?

Definition: In M&A investment banking, bankers advise companies and execute transactions where the companies sell themselves to buyers, acquire smaller companies (targets), and divest or acquire specific divisions or assets from other companies.

The two broad categories are sell-side M&A deals and buy-side M&A deals.

In sell-side deals, you advise a company that wants to sell – either the entire company or just one specific division.

In buy-side deals, you advise a company that wants to acquire another company or another asset or division.

As an Analyst or Associate, you don’t “advise” anyone – you crank out Excel and PowerPoint, answer information requests, and keep track of potential buyers and sellers.

The experience differs for sell-side vs. buy-side deals, but also based on whether the deal is targeted or broad.

In targeted deals, the buyer and seller are often talking already, or a company wants to focus on just a few likely buyers or sellers.

In broad buy-side deals, you show a company dozens or hundreds of potential acquisition targets and try to find something that interests them; in broad sell-side deals, you run an “auction” where you pitch the company to (potentially) dozens of buyers.

Targeted deals tend to have less process work (contacting and tracking buyers and sellers, responding to their requests, writing the Teaser and CIM, etc.).

Instead, the senior bankers spend a lot of time negotiating, and the Analyst and Associate spend more time on Excel-based analysis and deal presentations.

Broad deals tend to have more process and research work, which could involve any of the following:

• Finding, ranking, and presenting potential buyers and sellers.
• Educating the management team on the deal process and preparing them for in-person meetings.
• Writing the Teaser, CIM, and management presentation for the deal, which are all used to pitch a company in a sell-side deal at different stages.

Why The M&A Group Can Be Dramatically Different at Different Banks

Larger firms – bulge brackets and elite boutiques – tend to focus on “targeted deals” involving huge public companies.

For many of these companies, there are only a few plausible buyers and sellers due to their size.

That means that you’ll spend far more time on the following tasks:

• Creating many different operational cases and deal scenarios for each company (e.g., different purchase prices, cost synergies, stock/cash/debt mixes, etc.).
• Building valuations and “value creation analyses” (e.g., Company A will trade at a higher multiple than Company B after it acquires it… for reasons).
• Reconciling numbers, such as data in messy options tables, customer contracts, and “adjusted” financial statements.

These tasks may sound interesting, but by the 117^th time you’ve done them, they can get quite repetitive.

You rarely get the time to learn an industry or company in-depth because you run the same analyses in Excel, make slight tweaks, and then re-run them with new companies or deal terms.

At smaller firms – middle market banks and regional boutiques – the process is more about learning a company, its strategy and industry, and positioning it for potential buyers.

Executives at smaller companies also tend to be less experienced with M&A, so you spend more time walking them through the process and explaining everything.

As an Analyst or Associate at a smaller bank, your tasks could vary wildly.

I’ve seen cases where junior team members speak with the CEO or CFO to answer questions, but I’ve also seen cases where they write the CIM, track buyers/sellers, manage the data room, and do little else.

But it’s fair to say that you will not get as much exposure to valuation and financial modeling if you’re at a smaller bank.

That’s because the financial analysis is often far less relevant for deals involving smaller companies; for example, think about Apple or Google acquiring a private startup for $50-$100 million.

For trillion-dollar companies, that type of deal is the equivalent of buying coffee.

The Sell-Side M&A Process

Broad sell-side deals are more common at smaller banks that work with smaller companies (<$1 billion market cap) where there might be dozens of potential buyers.

The steps in the process are as follows:

1. Meet the Client and Develop Marketing Materials – Usually, you hold a long meeting with the client to get details on its business, and then you start creating marketing materials, such as a Teaser or “Executive Summary,” the Confidential Information Memorandum (CIM), and a Management Presentation for use in in-person meetings. If the CIM is already in PowerPoint format, you might not create a separate presentation.
2. Build the Model / Valuation (Optional Step) – Not all banks and groups do this, but you may build a 3-statement model for the company, where you spend most of your time figuring out and justifying the revenue and expense projections. You may also refine the valuation you built for the pitch book.
3. Approach Potential Buyers – Senior bankers usually come up with a list of potential buyers, including “strategics” (normal companies) and “financial sponsors” (private equity firms). Then, they call and email their contacts at these firms to pitch the client. At this stage, they usually send the Teaser, which is a 1-2-page summary of the client with names and sensitive information removed.
4. Share Information with Potential Buyers – As potential buyers express interest, you execute NDAs (Non-Disclosure Agreements) with them – which are meaningless and very tedious to sort through – and then share more information, such as the full CIM, which might be 50-100+ pages. Some buyers might request more detailed information on the company’s customers, market, and financial results.
5. Set a Deadline and Collect Bids – After several weeks or months of this, you’ll set a deadline and say that interested buyers must submit their bids (“Indications of Interest,” or IOIs) by Date X. Bids must include the proposed price, or price range, and other terms, such as the percentage of cash vs. stock.
6. Pick Winners and Advance Them to the Next Round – If you’re using a 2-round process, you might pick the 2-3 bidders with the best offers and advance them to the next round. Price is obviously a factor, but so are terms such as the cash vs. stock percentage (sellers often prefer cash deals due to their speed and certainty).
7. Share More Information Over Another 1-2 Rounds – If you haven’t already set up a data room, it will definitely be up and running now. This “data room” lets potential buyers review legal, customer, supplier, financial, tax, environmental, and other information about your client all in one spot. There are sometimes thousands of documents here, and the buyers comb through all of it.
8. Conduct In-Person Management Meetings – This step sometimes happens earlier in the process, but it definitely happens by this stage because no buyer will submit a binding offer without meeting the top company executives first. The senior bankers often “train” the executives on how to present themselves, pitch the business, and answer questions.
9. Negotiate the Purchase Agreement with the Winning Bidder – After another bidding deadline in this round (to collect “Letters of Intent” or LOIs), you and the client select a winning bidder and negotiate the definitive agreement with this party. The senior bankers, lawyers, and company executives do most of this work.

Most of the technical work here happens in steps 2 and 7-8, where you may have to build an operating model, valuation, and/or merger model for the final buyer(s).

But beware: modeling work often represents a very small percentage of time in this process.

Completing the Teaser, CIM, and Management Presentation alone could take weeks because you’ll often go through dozens of revisions with the client.

If you look at the entire process, it’s rare to spend more than ~20% of your time on modeling-related tasks.

Oh, and one more thing: if the seller is a public company in the U.S., you will probably have to draft a Fairness Opinion before you can announce the deal.

Yes, this is “technical work,” but in my view, it’s tedious work that involves combing through filings and looking for obscure charges; it’s also not great to speak about in interviews.

Targeted Sell-Side M&A Deals

It’s harder to give the exact process here because it depends heavily on the context: how long have the buyer and seller been talking? Has the seller hired you to get a better price from this one buyer, or to find a better buyer altogether?

If we assume it’s a deal where the buyer and seller are in preliminary discussions, and the seller wants to do a “market check” with 4-5 other buyers, the process might look like this:

1. Develop Short Marketing Materials – You might write a 1-2-page Teaser and a 5-10-page Executive Summary… or maybe just the Teaser.
2. Reach Out to the Few Potential Buyers – The MDs or other senior bankers handle this part and use their existing relationships to pitch the client. There isn’t much “tracking” because there are so few buyers.
3. Run Analyses on Deals with Various Potential Buyers – Since these few buyers are presumably more serious, you as the Analyst will spend more time in Excel setting up merger models for deals with different buyers done under different deal terms – so you can report something to the client as the process is ongoing.
4. Keep Responding to the Original Buyer – And while this outreach is happening, you also have to keep up communications with the original buyer by sending information and responding to their requests.
5. If There’s Real Interest from At Least One Other Buyer, Set a Bid Deadline – And then repeat many of the same steps as above, with a data room, in-person meetings, more information sharing, and eventually picking a winner and negotiating the definitive agreement.

The main difference is that there’s far less process work here because you already have at least one seriously interested buyer.

This process is more common at large banks, and you will spend a lot of time on step #3: running analyses with different potential buyers and deal structures.

After you’ve done enough of these, you start forgetting specific company names, and everything starts to blur together.

The Buy-Side M&A Process

In a targeted buy-side M&A deal, the process is the reverse of the one described above.

Instead of developing short marketing materials and reaching out to other potential buyers, you’ll review the marketing materials and make recommendations to your client on the ideal purchase price and deal structure.

You might also find a few other potential targets, research them, create valuations and merger models, and propose them in case the original deal falls through.

A long time ago, teams often liked to work on buy-side M&A deals so that the DCM or Leveraged Finance groups could then provide financing for the deal, earning more fees for the bank in the process.

In the current environment (2020), though, that’s far less of a factor, and banks are more than happy to earn just the advisory fee if someone else is providing the financing.

As an Analyst in a targeted buy-side M&A deal, you’ll still spend a lot of time running different scenarios for the purchase price, deal structure, synergies, and so on, and looking at deals involving other companies.

In broad buy-side M&A deals, the process goes more like this:

1. Client Has a Vague Idea – Big Company X comes to you with the CEO’s brilliant new idea to acquire a company in “Hot” Space Y.
2. You Research Many Potential Acquisitions – You pore through tons of industry research, paid databases, and senior bankers’ relationships to come up with ideas.
3. You Present Detailed Profiles to the Client – Then, you create company profiles for potential targets and present them to the client. You may also do quick valuations or other analyses for a few of the best ones.
4. Client Gives a Vague Response – The client may ask you for more work/research on a few of these, or they may ask you to research a different market or do something else altogether.
5. You Keep Researching Ideas – See above: more research, profile creation, and quick valuation/analysis.
6. Client Finally Decides on a Company, or This Cycle Repeats Indefinitely – Once you’ve been through a few rounds of this, the client might decide on a company, execute an NDA, and start deal discussions. In that case, it turns into a process similar to the targeted buy-side M&A one above. Or, you might go back to step #4 and repeat this cycle.

Many bankers view broad buy-side M&A deals as wastes of time because they’re much less likely to close than other deal types, meaning the bankers won’t get paid.

However, I would argue that broad buy-side M&A deals are good to speak about in private equity interviews and corporate development interviews because they are close to the actual job in PE and CD.

Also, you could end up doing more modeling work than in broad sell-side M&A deals because you might have to value multiple companies and look at deals involving many of them.

Mergers vs. Acquisitions vs. Divestitures

We sometimes get questions about how mergers differ from acquisitions, and how buying/selling entire companies differs from buying/selling specific assets.

The short answer is that in any M&A transaction, there must be a buyer and a seller. The only difference is that in a merger, they are usually about the same size, but in an acquisition, the buyer is significantly bigger.

That creates other differences as well; for example, in mergers, 100% Stock or > 50% Stock deals are far more common because one company rarely, if ever, has enough Cash and Debt capacity to acquire another company of the same size.

Also, the Contribution Analysis and Value Creation Analysis are far more important for similar reasons; accretion/dilution matters less than changes in ownership and valuation in 100% Stock deals with similarly sized companies.

With divestitures – buying/selling a specific asset or division rather than the entire company – the main difference is that it’s much tougher to gather the information and produce a reasonable “standalone” model.

It’s not always clear how much of an independent entity the division is, or how much in additional expenses it would require outside its parent company.

Valuation and merger models are trickier for similar reasons: Do you discount the multiples? Increase the company’s expenses? Assume higher/lower synergies? Will integration costs be higher/lower than expected?

Buy-Side vs. Sell-Side M&A: Which Is Best?

Traditionally, many bankers argued that broad sell-side M&A deals were “the best” because:

1. You complete the entire process from start to finish.
2. You learn one company and industry very well.
3. And these deals have a decent-to-high chance of closing.

For senior bankers such as Vice Presidents and Managing Directors, these deals probably are the best because they need transactions that close in order to advance.

However, if you’re in IB because you want to move to buy-side roles – especially in private equity or corporate development – buy-side M&A deals may offer a better experience.

That’s because you have to think like an investor in these deals:

• What makes Company X appealing or not appealing? What are the risk factors?
• How does it fit in with another company’s goals?
• How could we improve it or make it more efficient?
• What’s the best deal structure to minimize risk?

Also, you’ll often get more modeling/valuation experience (not relevant for the senior bankers, but quite important for exit opportunities).

Your chances of closing buy-side M&A deals are lower, but with the earliness of private equity recruiting, I’m not sure that matters much anymore.

Almost everyone at large banks goes into the process with minimal deal experience, so in interviews, they need to spin pitches and early-stage deals into sounding more significant.

And I think it’s easier to spin buy-side M&A deals into sounding relevant for PE roles than it is to spin sell-side experience where you wrote a Teaser but haven’t done much else yet.

M&A Investment Banking Exit Opportunities

The exit opportunities here depend on the size of your bank more than on the group.

To have the best shot at PE and HF roles, you need to work in M&A at a bulge bracket or elite boutique bank; you can also do it from middle market banks and industry-specific boutiques, but it’s more difficult and will require a lot more networking.

Outside of those, corporate development is a good exit option, and probably the best one if you’re doing M&A at a boutique investment bank.

Venture capital is also a possibility, as is growth equity.

You would probably not be the best candidate for asset management roles coming from an M&A group; similarly, the corporate finance skill set won’t overlap that much with yours.

To be clear, though: your exit opportunities from M&A investment banking are not necessarily “better” than those from a strong industry group (see: industry groups vs. product groups).

If you’ve gained solid deal experience, and your group has a track record of sending Analysts to buy-side roles, these groups are not much different.

Mergers & Acquisitions: Pros and Cons

Summing up everything above, here’s how you can think about M&A investment banking:

Pros:

• You’ll have access to better exit opportunities than ECM/DCM bankers.
• At BB and EB banks, you will get exposure to a lot of financial modeling and valuation.
• You’ll learn a lot about deal processes, especially at smaller banks or in groups that work with smaller/private companies.
• You will work on fewer pitches and more live deals than in other groups.
• You’ll learn skills useful for buy-side roles if you work on buy-side M&A deals.
• As a career banker, you’ll earn more in M&A than you would in capital markets.

Cons:

• At larger banks, you probably won’t learn much about industries, company strategies, or how to pitch and negotiate deals.
• Also, at larger banks, running the same analyses constantly for slightly different companies/deals can get quite repetitive.
• The hours are often longer than in other groups, but the pay isn’t much different until you become more senior.
• You may not get much modeling experience if you’re at a smaller bank, or you work on a lot of broad sell-side M&A deals with auction processes.

The bottom line: Yes, M&A investment banking has some advantages, especially at larger banks, and it sets you up for exit opportunities more effectively than groups like ECM or DCM.

But it’s difficult to make the case that M&A is always “better” than a strong industry team, especially if you already have an industry preference or you’re at the MBA level, and you have work experience in a matching field.

If you want to be a career banker, the earnings potential is higher in M&A than in capital markets, but again: not necessarily more than Leveraged Finance or a good industry group.

So, I think it’s time for the hype around this one to die down a bit.

Especially since very few tasks in Excel and PowerPoint are “intellectually challenging.”