One question I’ve been getting lately is, “What do you actually do in XYZ group at a bank?”
And since everyone still wants to be in Mergers & Acquisitions, “M&A” is the most commonly requested group.
I had assumed that if you found a site like this, you would just naturally know what you do in each group.
But I was wrong – because I keep getting this question over and over.
So today, we’ll delve into this and answer definitively the following question:
What do you actually do in Mergers & Acquisitions?
Pitching vs. Execution
There are 3 things you do as a junior investment banker: pitching for deals (going to a prospective client and making a long presentation that says, “WE’RE GREAT, HIRE US!”), executing deals (taking a client to potential buyers and saying, “BUY OUR CLIENT, PLEASE!”), and completely random stuff that has nothing to do with anything (when your MD calls you to pick up his dry cleaning, for example).
Generally, you do more of the “execution” part in M&A and less of the pitching / random stuff.
You might think that would make your life less mundane, but that’s not quite true –there’s a lot of grunt work no matter what you do.
In M&A, the grunt work is more of the “Update our conversations with each buyer in this really long spreadsheet” variety rather than the “Make our bank #1 for EVERYTHING!” variety that you get when “crafting” pitch books.
The Role of the Executioner
If you’re working in an M&A group, there are two types of deals you’ll work on: sell-side M&A deals and buy-side M&A deals (executing your enemies is an entirely different line of work best left to Patrick Bateman).
Sell-Side M&A Deals
These happen when a client comes to you and says, “We want to sell our company and make a lot of money – can you help us?”
Sometimes they know who they want to sell to – while other times they have absolutely no clue and they are desperately seeking a means to avoid embarrassment or continuing to run the company.
If a private equity firm owns the company, the PE firm pulls all the strings and decides when to sell; otherwise, the Board of Directors is in charge (not the management team – except for the CEO, who may have some input).
Another common motivation to sell lately has been, “Help! We’re about to go bankrupt and cause a massive black hole to form in our wake – can you save us before we go belly-up?”
This is called a “distressed sale” and although it’s technically an M&A deal, it works a bit differently – so we’ll come back to it in future articles.
Buy-Side M&A Deals
In these deals, the client comes to you and says, “We want to buy a company. Can you help us do it / help us finance it?” (Most often they only care about the last part).
Sometimes they know exactly what they want to buy, or are already in discussions with the seller; other times they have no clue and just want you to search hundreds of companies for them and do all the work while they sit back and contemplate how to proceed.
This happens all the time with huge conglomerates where it takes 18 months to decide how to allocate the paper clip budget; smaller companies move more quickly, but they are also less inclined to acquire other companies in the first place – especially in the current market.
Lock Onto Your Target
So what do you actually do, and how does the entire process work?
It depends on whether the transaction is targeted (the buyer and seller are already talking, or they are focused on just 1 buyer/seller) or broad (they want to be shown to a large group of potential buyers or they want to look at a big group of potential acquisitions).
With a broad process, you go out to lots of different buyers/sellers and try to get interest from as many as possible – and then you run some kind of auction to get the best price possible for your client (in a sell-side deal, anyway).
When it’s targeted, you’ll still try to get bids from other parties (or multiple potential acquisitions lined up if it’s a buy-side deal), but there is less “process” work and more negotiating and back-and-forth with one party.
There’s always some overlap, and one type of deal can easily turn into the other.
When you’re dealing with huge ($10B+ market cap) companies, you’re more likely to see targeted processes because the pool of feasible buyers and sellers is very small; but when you’re representing a smaller company, or a private equity-owned company, it’s more likely to be a broad process.
Ok, But What Do You Actually Do As an Analyst or Associate?
As you might have surmised, there are 4 types of deals: targeted sell-side, broad sell-side, targeted buy-side, and broad buy-side.
Unless you want to read 30,000 words, I can’t go into each one in an extreme level of detail – but here’s a quick summary:
In this type of deal, the buyer and seller are usually talking – and your role as an investment banker is to get a higher price for your client.
How do you do this?
Well, you can try to argue really hard with the buyer and make some nasty threats. But that doesn’t work well unless you have actual leverage – namely, an offer from another party.
90% of the time with a targeted sell-side deal, you go out quickly and stealthily to a small number of other buyers and attempt to get a better offer on the table. So here’s what you’d do as an Analyst/Associate (usually the Analyst does the work and the Associate checks the work):
1. Make a short (5-10 pages) summary of your client’s key selling points (“Executive Summary”).
2. Watch while the senior bankers (usually the Managing Director) call the small set of potential buyers they’ve thought of or already know.
3. As they get back to you, you update a spreadsheet with their responses and send it out in periodic updates to your client. When the (new) buyers ask for material (“due diligence requests”) you send them what you have.
4. Meanwhile, you try to keep the original buyer at bay and give the illusion that nothing deceptive is going on – and you process their due diligence requests: the buyer asks for something, and you have to go through your client’s poorly organized files, find it, and then send it… or beg for it if it’s not there.
5. The senior bankers give the buyers you’ve contacted “a deadline” and to see if they can get a superior offer from any of them – if they get one, they then bring it to the original buyer and say, “We have another, better, offer – pay up or else!”
6. If your team manages to get multiple offers, the bankers lock the buyers in a bidding war until someone emerges victorious and proceeds with acquiring your client.
7. If not, your team continues talking to the original buyer and they try to negotiate improved terms (sometimes the buyer will cave on terms like reps and warranties and treatment of options, if not the price).
What type of work would you actually do as a junior banker in this kind of deal?
1. Update the buyer list with notes on what’s happening and the latest news. This is probably your most important duty.
2. Process due diligence requests from the buyers – this means you look for stuff when they ask for it, and if you don’t have it, you then ask your client for it… and then you get it, and send it back to the buyers. Efficiency at its finest!
3. Occasionally you’ll do some valuation and modeling work – most often you do this to “justify” what your MD thinks your client is worth, or to show how the acquisition would instantly double the buyer’s EPS. The numbers and modeling work you do here are somewhere between “complete lies” and “creative non-fiction.”
There’s less technical work than you might have expected – that’s just how banking is.
Despite all the hoopla over “learning financial modeling,” you don’t spend the majority of your time doing any kind of modeling work – even in a more technical group, like M&A.
And yes, I realize the irony of this statement given that I just released a financial modeling course – but it’s the truth.
Broad Sell-Side (Auction)
This is not too different from the targeted sell-side deal above. The main difference is that you go out to a broader group of potential buyers, and you do it much earlier on – you don’t wait until you have a potential buyer at the table first. Here’s a quick outline:
1. Meet with client and develop “marketing” materials. Every bank and group is different, but usually these consist of a “short” document (usually called an “Executive Summary”), a longer document (“Confidential Information Memorandum” or “Offering Memorandum”), and a PowerPoint presentation (“Management Presentation”).
2. Depending on the deal and client, you may develop your own operating model for it showing where the revenue and expense numbers in each year come from. You might also do a valuation as backup material in case the question of price arises.
3. Once you’ve finished at least some of the marketing materials, your team starts approaching the potential buyers – usually the senior bankers and client come up with this list, but sometimes you get to “contribute” (i.e. they tell you “Go find more buyers in such-and-such category”).
4. As the potential buyers start expressing interest, you execute NDAs (“Non-Disclosure Agreements” – this means sending a Word document back-and-forth until everyone stops arguing) and pass along information requests – usually the buyers want to see your client’s financial details, more about its products/services, and more on its customers.
5. At some point you set a “bidding deadline” and the interested buyers must submit bids with their prices and other terms. Usually the “other terms” are not well-defined at this stage.
6. The senior bankers and your client pick “the winners” (mostly based on price if it’s the first round), and they advance to the next round of bidding.
7. At each round, you share more and more information with the potential buyers, and narrow down the list. This can last for many rounds, but 2 rounds is probably the most common – more than that gets excessive, even for Patrick Bateman.
8. When bidding is over, the “winner” emerges and your team negotiates the purchase agreement that spells out details of how your client will be acquired.
So it’s not too much different from the targeted sell-side process, but it is more drawn out – you create more marketing materials, speak with more buyers, and do a lot more administrative work.
It’s hard to say whether there’s more or less modeling work; I would say there’s more administrative work and more modeling work, so basically there is just more work in general.
A targeted buy-side deal is almost the same as a targeted sell-side deal, except you don’t go out and solicit bids from other potential buyers… since you’re representing the buyer.
In many targeted buy-side deals, a bank is close to useless – because no matter how well your MD can “negotiate,” ultimately the seller has all the leverage.
In most targeted buy-side deals, the bank’s true role is to provide the financing. Here’s what a typical process might look like:
1. Client contacts your MD and asks him to represent them in an acquisition.
2. Your team goes in to “analyze” the situation and provide recommendations – these recommendations usually come in the form of how much they should pay for the seller and what kind of terms they should negotiate for – as well as what the financing should look like (how much debt they should use, the number of tranches, interest rates, etc.).
3. As a result, you as the junior banker will most likely do a valuation of the seller and a merger model for the combined entity.
4. In the background, your team starts communicating with the Leveraged Finance team and sending them information on the buyer and seller to see what kind of debt they could provide (Note: In the current market environment debt issuances don’t really happen except for small deals).
5. Most of the value your bank provides lies in the financing – so your team spends a lot of time communicating with the company telling them about the terms and advising them on what price they should push for.
6. If all goes well, the deal goes as planned and your client acquires the other company using the debt that your bank has raised.
Sometimes your bank doesn’t actually do a financing – in that case, you mostly just do valuations of the buyer and seller, and create “updates” showing what the acquisition would look like at different prices.
For a truly targeted buy-side deal, you do less administrative work because you are only tracking discussions with one party – the seller. There is some back-and-forth with the Leveraged Finance team as they request information, but it’s way less than in sell-side deals.
You’ll notice that I did not give much detail on the debt process, and that is because as an M&A banker you are usually not too involved with this.
Broad Buy-Side (Complete Waste of Time)
Otherwise known as a complete waste of time, a broad buy-side “deal” (and I use the term “deal” loosely) happens when a company – usually a large one – comes to you and says, “We want to acquire… something. Help us find it.”
So here’s the process:
1. Client comes to you with a vague idea of what they want.
2. You, as the junior banker, dig through mounds of information, research, and internal databases to locate potential acquisitions.
3. You create detailed “profiles” for each potential acquisition, and then show them to your client.
4. They give a vague response, and/or tell you to look for a completely different type of company.
5. You continue to pore through research and information, looking for the needle in the haystack – the one company that they might actually want to acquire.
6. This cycle continues indefinitely until your client decides that they actually want to speak with one of the companies you’ve found and/or possibly acquire them at some point in the future (the bigger your client, the longer and more painful this process is).
You’ll notice that I don’t have a “conclusion” here, and that’s because most broad buy-side deals turn into long, drawn-out processes that never go anywhere.
You will also notice that I have almost nothing about any technical work – and that’s because you very rarely do any “modeling” for this type of deal.
Sometimes, you may do a quick and simple valuation of one of these potential acquisitions or you might run a merger model to show what the combined entity would look like.
But you spend most of your time looking for that needle in the haystack – so it’s not a very fun process for you, unless you love to search through databases and read research.
I recommend that you stay far, far, away from these types of deals and gravitate toward sell-side M&A and targeted buy-side M&A.
Most senior bankers also know that broad buy-side processes are a waste of time, so they rarely take them on unless they’re doing someone else a favor (which is usually why they happen in the first place, of course).
Murders & Executions
So that is what you actually do in Mergers & Acquisitions: administrative work, research, sending updates to your team, and occasionally running some models in Excel.
If you’re really lucky and your deal actually closes when you’re still at the bank, you might also get to go to the closing dinner, which is the most fun part of the entire process.