There it is. The age-old question that continuously pops up, especially when it comes time to sign an engagement letter. I know what our seniors say, but am more curious to hear what you think the value is that M&A bankers actually add.
Is M&A advisory dead? A dedicated corporate development team is much cheaper than a banker. I don’t need your comps that were spread to perfection – I have yahoo finance, close enough. I don’t need your precedents – Edgar is free and I have monkeys that work for me. A DCF? Youtube.
If I am a potential M&A client, especially if I’m a PE shop that is unloading a portfolio company, what are you going to do for me that justifies your fee? What value do you actually add? What do you know that I don't? I already steal your top talent. The same goes for buyside engagements (shops still do these, despite having a better chance of winning in Vegas).
Are you really just an overpaid realtor with a few industry contacts from when you got your Masters in Porter’s Five Forces? Or, are you just my 1st world outsourcing shop to do the crap that I don’t want to do/deal with during a process? Do your random analyses actually add value or are you doing them just to "show that we did work?"
Simply put - justify your existence. Start singing for your supper. Dance monkey. Dance.
I weep for your analysts.
Just because anyone can calculate the value of a company doesn't mean it's the optimal price to make an acquisition. A banker has continuous dialogue with sponsors and corporates and can tell you what price you need to pay to win a deal, and what price you should be willing to accept if you're for sale. M&A advisory goes so much further than valuation excercises which you are describing. Deals also get very complex between corporates when you think about the opportunity cost of a competitor acquiring a target that you're looking at.
Great investors aren't necessarily great negotiators, and paying an M&A advisor $5m to save you 2% on a $500m deal is obviously valuable. Similarly, great entrepreneurs aren't necessarily great negotiators, and paying an M&A advisor $5m to get you a 2% bump on a $500m purchase price is obviously valuable.
If you want a more relatable example, when I was in ib, we helped a Sponsor win with their offer of 9x EBITDA, when their comps, precedents and DCF said 13x. We knew no one else was going to pay up. Don't you think you would want to pay us for this kind of advice?
Not every firm has an internal corp dev team. In fact, many don't. Corp dev teams are extremely expensive and completely unnecessary for firms that do not regularly acquire or divest. So, in that sense, your value is rather simple: you're performing a service that the company itself cannot do.
Now, assuming the firm has a corp dev team, your value is two-fold. One, you provide expertise on highly complex transactions. We in corp dev are not exposed to the ever-changing M&A landscape like you in IB are. So, if we are undergoing a complex transaction or one that we have never seen before, we will happily pay your fee. In many of these instances, we don't have a choice because we lack the knowledge necessary to complete the transaction. We either pay the M&A advisor's fee or we don't do the deal.
The second, and most important, value-add is rather simple: our fiduciary responsibility to our shareholders. Simply put, you are the punching bag where we send our lawyers when investors sue us. Whether we raise capital or divest an asset, we need someone to blame when things go south. No investor will care what Sil's DCF told us our subsidiary is worth, but that same investor certainly will care what Goldman Sachs or Morgan Stanley said. Ya, my modeling might be as good or better than your analyst's, but your firm looks a lot more credible as a whole than I do.
Now, does any of that above mean that your value-add exceeds your cost? The jury is still out on that one.
These are good points - especially the punching bag language. Very true.
However, not sure I agree with the exposure to the "ever changing M&A landscape" (what banker deck have you not seen this on?) We all get our precedents from the same place. If not, it's insider information... A good corp. dev. individual should know the space inside and out and track relevant deals religiously.
Haha. I added the punching bag language because I figured you'd appreciate it.
I probably should have worded my "ever changing M&A landscape" phrase differently. We do track deals (my unfortunate job...), but our space is very nichey and full of smaller players. One way a banker might add value is by getting us a way into a company so that we can have an (almost) principal to principal transaction. We have several opportunities in our pipeline where a banker got us in, and now the company is only negotiating with us. Your banker fee in this sense is earned by helping us avoid an auction.
Gotham's Reckoning I get where you're coming from but think about this. Unless Company XYZ is highly acquisitive from my experience the internal M&A team is full of very smart, highly paid people who may see through a handful of acquisitions.
Most people in these roles are not permanent hires but a stop gap before they go back to managing an engineering division, working on other special projects, or waiting to move into a VP role where they manage an entire division.
You still need banks because its cheaper in the sense that you can take your most valued talent and have them focus on the core business areas that make you money rather than mundane M&A-type work as far as due diligence from a numbers perspective is concerned.
Another area to consider (correct me if I'm wrong) don't company's need investment banks if they want to raise capital or need financing? Its not like they themselves can line up investors and facilitate that process (again we're getting further away from the core business area of focus).
Same thing can be said for consultants who IMO are a waste of money. Even the MBB types recommend ideas that are not even implemented or if they are, are half-assed and the whole process turns out to be a waste of money.
In short, another value IBs and even consultants bring is a "unbiased" outside authority that is supposed to objective in their fact finding mission and recommend solutions or provide financial advise based on their respective experience.
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This.
Totally agree here. Unfortunately, I have seen $500MM-$xBN EV deals with just as many problems.
Yes we are their outsourced help for diligence, analyses, calls and questions
The market sets the price - a good entrepreneur should know that this principle applies to their business and the actual product/services that they sell
This is common in enterprises both large and small
It's interesting that despite all of the marketing majors out there, so many companies cannot properly tell their story
This is probably the most important reason to hire a senior banker
I understand the PE deal sourcing very well but other than recommending an idea to me and getting me an introduction to the company, what value can you provide (talking $100MM-$750MM deals not $BN deals here where you almost have to have an advisor)? The argument that PE folks aren't good negotiators simply is invalid. We negotiate with them on a daily basis and clearly most of them are smart guys that are aware of what's going on in the market.
I work in FDD, mostly within the MM space, and I can also confirm ALL of these points, especially if you're working on sell-side deals. Our role in FDD isn't as important as the investment bankers' is, but it still amazes me how many CFOs/Controlers managing the finances of smaller enterprises can't even get their trial balances to tie to their financial statements or can't give us good data to help calculate the EBITDA and ultimately sell their business.
Even though they can be frustrating at times, I actually really like sell-side deals because you add a lot of value in coaching up a business to help the shareholders exit their business, which can feel really rewarding once it's completed. As you gain experience, you also learn how to play the negotiation game and figure out what information you need to give out in order to maintain some sense of credibility/objectivity, but also what potential deducts you should allow the other diligence team to figure out on their own in order to sell at a potentially higher value than what the owners would otherwise receive. I'd imagine investment banking has even more of this since they advise the entire deal as opposed to just a certain portion of it.
+1 turn of EBITDA on your valuation
I work in PE and companies that hire bankers will almost always sell at higher multiples. I remember this one particular proprietary deal where we offered around 6x to the company and they were very close to accepting the deal. However, the company decided to hire a banker just in case and ended up selling to another sponsor for around 9x. Needless to say, we will always try and buy companies that don't hire bankers in order to try and get them at a discount.
So far some good content on here. I'm liking most of what I'm reading!
As far as unbiased opinions are concerned - let me pose this question... At the end of the day, don't senior bankers chase fees and want to get deals done? Every year they start at zero from a revenue perspective.
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M&A advisory is most certainly not dead, and the fact that the first counter point mentioned is about valuation should tell you how misguided the discussion is. Valuation is one small part of investment banking, but it is far down the list of value-add provided by hiring a sell-side or buy-side advisor. In my experience even many of the most inexperienced financial operators have a general sense of how much their business is worth. They may not have all the comps and DCF spread out but rarely have I ever had a client think their business is worth $200m and it's actually worth $1bn (though I will say many have lofty expectations the other way around). Bankers set the valuation expectations at the beginning of a process, but the client is not hiring a bank to tell you the value of the company - they are hiring the bank to actually achieve that value for the shareholders.
Believe it or not there are $1bn+ companies that would have no idea how to run a proper sell-side process on their own. It's simply not an area of expertise for them and they heavily rely on advisors to properly prepare the financials, draft the offering memorandum, and package everything together in a way that makes sense to investors/buyers. It's also an issue of time - it would be almost impossible for most companies or even private equity owners to manage a full sell-side process while also still running the business successfully/diligencing other businesses. There's a reason bankers work so many hours during during a live deal, and despite all the rhetoric on this forum about wasted time running pointless analysis, there actually is a ton of work steams to manage and execute on during all stages of a deal.
The direct value of M&A advisory on the buy-side is less clear and often it'll feel weird getting paid a similar fee for a 2 month buy-side deal as for a sell-side where we spent 6+ months crafting materials and marketing a company. However, you have to consider the fact that for every buy-side deal that closes there are another 5 that did not close but expended as much effort (and with no fees). For what it's worth, client loyalty is a real thing and they will often feel like they 'owe' an advisor if a significant amount of work is expended with no result. Relationships are everything in this business and time spent showing companies ideas and working through their business strategy will often result in business down the line ("worth it" to the company or not). Again you'd also be surprised at the lack of sophistication of corp dev/executive management teams even at large public companies with this stuff.
Finally you have to consider that M&A advisory fees are often paired with capital markets fees as a goodwill gesture. Yes, the M&A component has value, but companies need the capital raising services as well otherwise the deal isn't possible. I would be surprised if there were many companies out there that could independently raise $2bn+ dollars to do a deal on their own without the help of an investment bank.