Since M&A (Mergers & Acquisitions) is the core product of investment banking, discussions around investment banking typically relate to M&A. M&A is the selling of a minority or controlling interest in company.
Financial and strategic buyers have what is known as investment/corporate M&A mandates which detail the size and industry of prospective targets for acquisition. The investment banker takes these mandates and matches them with targets and takes a fee for doing so. Investment bankers typically focus on one industry and provide what is known as coverage by building an index of public companies and tracking changes in targets relative to the index in terms of:
The investment banker monitors trends in these variables and determines the optimal time to sell (when multiples are strong) or acquire (when multiples are weak) and advises target management accordingly. When a target agrees to sell via an investment banker, this relationship is known as a sell-side mandate and an M&A process will be led by the investment banker.
During the M&A process, there are definite steps and deliverables including a teaser, CIM, and management presentation. The M&A process can include many prospective buyers (broad auction) or few prospective buyers (targeted or negotiated sale).
The real work of M&A is origination, mandate/target matching and deal-structuring. Financial modeling and valuation is merely for decision support and deals often get done simply based upon precedent transactions analysis. Thus, the priority of the investment bankers is to obtain a base level understanding of financial modeling & valuation but then to immediately start originating sell side and buy side mandates.
Investment bankers explore strategic alternatives (value creation opportunities) with corporation’s CEO’s/owners according the company’s strategic priorities. Questions like:
● What businesses should we be in? (Answer: where multiples are higher and/or will be increasing in the future)
● What businesses should we not be in anymore? (Answer: where multiples are lower and/or will be decreasing in the future)
● Should we buy or build to enter those markets? (Answer: the result of a buy vs. build analysis)
● If we should buy, what are some acquisition targets in order to buy our way in?
● If we should sell, what are some reasonable acquirers?
Michael Herlache MBA
Michael Herlache was the Co-Founder of AltQuest Group, an SMB & lower middle market M&A advisory firm that he started while in business school at Texas A&M University after going through Investment Banking Institute & Wall Street Prep’s training programs. He lives in his home in Scottsdale, Arizona with his wife, Svitlana. Michael has an MBA in finance from Texas A&M University. He is passionate about progressive values like diversity, equity & inclusion as well as helping others find their own unique voice.