How Bankers Add Value

This has been debated to high heaven on this site, but I wanted to simplify it in hopes of getting some current or former bankers to offer a clear response. Basically, on a sell-side M&A deal, what is the single (or 2-3) most important way(s) investment banks add value? Is it valuation guidance? Facilitating diligence? Advising on potential buyers? Negotiating on behalf of the client? Or something else...

I know these things are all PART of the process, but I'm looking for the thing/things that make an investment bank absolutely ESSENTIAL to the success of a large (let's say $1B+, so we can keep the conversation about BBs and EBs for the moment) sell-side M&A deal. 

Apologies if this comes out sounding ignorant. I do understand the process, I'm just looking for some subjective commentary on the most important part. 

Comments (22)

Jun 13, 2022 - 8:22pm
PeRmAnEnTiNtErN, what's your opinion? Comment below:

Imagine you have to hire someone to help you with some accounting at your company -  you have two candidates: one random person or a CPA.  Sure both people offer a extra help and may get the job done correctly, but you would probably feel much better about the quality of work from the CPA. This is pretty much banking - any old smuck can get through a deal, but I have seen some deals that are complete train wrecks.  Is it ESSENTIAL to closing a deal to hire a good bank - no but you will get a team that is typically much more experienced and can help get over some of the speed bumps with buyers. 

I think the other thing is a bank can tip the scales if you know the deals in the space - more comps - more accurate information - better negations 

  • Analyst 2 in IB-M&A
Jun 13, 2022 - 8:59pm

Buyer relationships are huge too. Let's say you're a privately held company, you can blast an email to a bunch of PE firms but most won't bite. My MD will know the best ~10 buyers based on their focus areas an get a partner on the phone immediately. Probably even more pronounced with strategics - having a direct line to the head of corp dev at a big public company is essential, and you probably can't do that without a bank.

Would honestly argue most of the rest of the work is stupid / could be done without bankers. Marketing materials are pure fluff, buyers don't need the nice looking slides. Models are just fancy versions of the company internal model, buyers are all building their own anyway. Diligence is a pain in the ass but a banker isn't essential here.

Valuation is interesting, I'm personally of the theory that buyers will bid what they will bid and sellers will take whatever off they'll take. What does the bank actually do here? Maybe in a competitive process the bank can squeeze out a bit more value but nothing ground breaking IMO.

So my personal opinion is banks do a ton to make the sellers life easier / let them maintain business operations but not a lot that actually shapes the outcome meaningfully. Buyer engagement is probably the biggest, maybe some value around process launch / timing / broadness of outreach as well

  • Associate 2 in CorpDev
Jun 13, 2022 - 11:31pm

This is a good take. Lot of the sellside junior banker process work that we kill ourselves over is commoditized work that IMHO adds little value besides the fact that it lets the client focus on running their business, but it's never a true differentiator in any way. 

Biggest value add I'd say (if we're talking sellsides) is senior bankers who know the relationships and who to approach, how to plan an overall process, who goes and calls potential buyers and can navigate through to the ones who make the most sense. And help negotiate terms towards the end when it comes to that.

Thats just for your generic MM sellside tho, when you're talking large multi-billion deals and different kinds of advisory with a lot of complex structuring considerations think bankers can add a lot of value with their experience.

  • Analyst 2 in IB - Cov
Jun 13, 2022 - 11:51pm

SBed. Agree with 100% of what's said here. Haven't been in the industry very long, but being at a (L)MM bank gives me the following insight regarding banking:

1. It really is a relationship business. Before you tell me how good you are with PowerPoint logo-aligning, Excel chart-churning, data room management, and financial modeling, we should first win the mandate. That usually requires relationships. It doesn't necessarily require all those skills listed above. 

2. If you pull deals in as an Analyst/Associate, you are a rising star. That sounds ridiculous but it happens, whether through family connections or whatever. be it IB or PE, one day sourcing will become your #1 priority. 

Jun 14, 2022 - 2:04am
CompBanker, what's your opinion? Comment below:

I'm unfortunately going to have to disagree with the relationship part. I'd argue that 99%+ of the time, it doesn't matter if the banker has (or pretends to have) relationships with the top potential buyer. What gets the buyer to pick up the phone is the fact that the seller is a reputable investment bank, not that it is "John Smith from Goldman that calls him once every six months to check in." Private Equity is in the business of buying companies … 99/100 times you are going to evaluate a new deal opportunity on its merits and the individual person who presents the deal doesn't really matter. That's part of the reason why many investment banks are comfortable having their junior staff do the initial outreach to the majority of the buyers (for MM deals). What is considered is the source of the deal. If a reputable investment bank is selling an asset, the buyer knows what to expect in terms of a process and can reasonably assume there is a dedicated seller (increasing the odds of a transaction getting done and having it be worth the time spent).

The other thing to keep in mind is that in any given sector, pretty much every single banker has some form of a relationship with the major strategic buyers. Some relationships are stronger than others, but when you're selling an asset and selecting an investment bank, it is almost impossible to know because every senior banker claims they know buyer XYZ very well (think Trump announcing how he is BFFs with certain people).

I'll need to dig up some old posts about how investment banks add value (in my eyes). There was one in the last six months I'm pretty sure.

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  • Director in IB - Cov
Jun 14, 2022 - 12:27am

I realize you are trying to understand what parts of the process add the most value, but running a process itself is by far the biggest and most important value driver. All of those elements you mentioned support driving a competitive process that inherently helps maximize value.

Having a rigorous schedule with deadlines, the right buyers involved and pushing the envelope by articulating and emphasizing certain business-related or macro tailwinds while minimizing risks is really the crux of it.

On top of that, there are plenty of other process items that banks can help with, such as those you mentioned. To add to those, providing guidance and monitoring buyer behavior helps to support negotiations and drive purchase price.

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  • Associate 2 in IB-M&A
Jun 14, 2022 - 9:35am

Copying a comment left the other week on a similar question - for context, I work at one of the EBs and have run a number of sellsides. 

You're coming to market that is rife with uncertainty and my sense is your bid-ask spread is going to be high. In this market, successful sellsides will be bought not sold. What does that mean? You need to find those buyers who want your asset and DD will be about a reason not to buy, not those who will bid whatever to get thru IoIs then need to use DD to convince themselves to buy.

Hence, your buyer list, and your approach is going to be absolutely critical. You are going to need to know that "Sixth Street will never do this deal". Your internal team is going to be doing a LOT of work facilitating due diligence, and it will be a massive waste of time if you don't have the right buyers in the 2nd round, especially when the market is looking worse by the day. 

So what does that mean for your bake-off? More than anything, you need the senior banker + team who is in the flow and has a lot of relevant experience in the subvertical. In my opinion it really doesn't matter that much how involved a senior will be in the blocking and tackling of diligence, what matters is a senior who knows and can place calls not to just someone at Blackstone, but the exact MD who wants this deal and is interested in your subvertical (deals get turned down by megafunds when the wrong person is contacted). Who realizes that all Apollo ever is gonna do is offer you some stupid instrument or not at all what you actually want out of this transaction. And who knows that mid-size strategic in your space with a new chief of strategy who will actually give you credit for synergies. 

There's other avenues of "value-add" detailed here that I agree with,  but this is what immediately pops into my mind. 

Jun 14, 2022 - 10:05am
Blue Horsehoe, what's your opinion? Comment below:

Great answer, appreciate the clarity.  

Jun 15, 2022 - 7:36am
maplesyrup334, what's your opinion? Comment below:

Great answer - but why do FB, AMZN, GOOGLE, Microsoft, Apple need bankers. I don't think they do and have their own internal M&A teams. 

Jun 15, 2022 - 9:39am
TimesNewMoney, what's your opinion? Comment below:

The same reason they hire lawyers despite having an internal legal department, or consultants despite having their own strategy & ops team. The same reason people hire RE brokers despite being able to list a home on Craigslist themselves, or use a wealth manager despite being able to invest in index funds through Schwab/Robin Hood, or go to a doctor despite being able to pop a cyst on their own. 

People will pay a premium to know that they're seeing a specialist so as to be over-prepared and over-protected from absolutely anything that could go wrong no matter how low the chance is. Could most deals get done without bankers? Yes. But if one out of ten goes off the rails in a way that a banker could have prevented and it happens to be a significant transaction you're fucked. Think of how many routine Dr. appointments you've gone to where the Dr. does absolutely nothing besides touch your balls, hit your knee and then send you on your way. You know why you still keep going back? Because of the minute chance that one day he'll recognize a weird mole on you and be able to diagnose it as cancer right away, saving your life. Vast majority of the time it's worthless, but when it isn't, it's massively valuable. 

Jun 15, 2022 - 11:49am
Deal Team Six, what's your opinion? Comment below:

Well said TimesNewMoney but to add on to this, when a decision is material in nature (e.g., selling a business / division / BU of an enterprise), you do not want to have folks involved in the process with strong biases.

maplesyrup334 I want to piggyback on your question about FAANGs and why they need bankers. Due to the nature of OPs post and how your question ties in, I would assume you are referring to a carve out SS M&A process. The reason for this inference is because quite frankly, from a buy side perspective, all Corp Dev teams have some sort of proprietary pipeline where they engage potential targets and try to get them to sell without IB involvement. From a buy-side M&A perspective, you are absolutely right, bankers are not required from a FAANG perspective. However, when working on a SS M&A transaction (a situation where FAANG would propose a carve out or divestiture), Corp Dev teams absolutely depend on IBs to help execute the transaction. 

Bit of a tangent, but a short overview on why third party services are generally required for important deciisons

A large corporation will always opt to have third party legal / consulting / IB teams working on any major decision that will have a meaningful impact on the future direction of your company. With respect to an  M&A transaction, your internal teams (e.g., legal, corp dev, strategy, etc.) will not be able to provide an impartial perspective on the business in which you are considering buying or selling. Sure your strategy team might ultimately be the ones to say "hey this division of our company is underperforming and our best move based on our analysis would be to sell it", but their involvement will mostly stop after they bring this proposal to the C Suite / Board.

Because this specific post is mostly about SS M&A, I want to add one more level of detail. I am not at FB / AMZN / GOOG but I am at a company with comparable M&A capabilities (e.g, well establish Corp Dev and Strat teams, extremely strong buying power if the right acquisition comes along, actively considering segments of our business model we should grow and cut).

When we sell off a division of our business (divestiture) we use a team of bankers for a few reasons: 

1. As M&A Assoc2 stated, they will know the EXACT (or as close to as possible) parties interested in that arm of our business. This is an extremely big value add and saves our M&A team tens (if not hundreds) of man hours on a lean team. For this expertise alone, we simply must utilize a third party. 

2. We want a sanity check on our valuation. Banks will have a better pulse for what segments of businesses go for, which is tricky stuff in nature. Sure, I may have looked at 100 acquisition opportunities and modeled / evaluated them, but how many times have I done this for one particular segment of a business? 1-2 times tops. I simply dont have experience in carve outs, and as I look around my Corp Dev team, I am realizing despite being a larger than average team, no one else does either. 

3. Every single time you use a third party service, it is to save time and effort, but also to SHIFT RISK. If we utilize a reputable bank in the space and the business doesnt sell, no one is going to point the finger at the Corp Dev / CFO of our company who ordered the sale. By hiring an elite IB, we COA and now the IB is held accountable for the sale. Lets say we try to save a few bucks (yes mms, but at this point it is essentially immaterial), and go establish an auction process for our divestiture without the assistance of an investment bank. Lets say we spend two years trying to bring this carve out to market and ultimately fail to attract buyers, get one below average bid, and they bail post LOI. We have now wasted hundreds if not thousands of hours, cost our own company hundreds of thousands if not millions (DD is expensive, and the bigger the asset / acquisition opportunity, the higher the costs associated with DD), and all the while held on to a portion of the business we were looking to sell because A. it was losing money, or B. it operates in a  mature market and its value is declining exponentially by the day. No matter how you look at it, we just absolutely blew it for our organization and were fools not to use an investment bank in the first place, who does this for a living and run a process 10x more efficiently than we could. Everyone loves to say how inefficient IB is, but you should see a company try to sell themselves internally, then you will understand what true M&A / DD inefficiency looks like. Last time I worked on a non-banker led transaction we were post-LOI for a year and then ultimately passed on the deal. 

Jun 16, 2022 - 4:41am
TheBuellerBanker, what's your opinion? Comment below:

For sell-sides specifically, the bankers add the most value at the senior level by creating a competitive atmosphere which in theory drives up TEV for the seller. That's the most significant one.

Otherwise, the hiring of a banker allows for the seller to continue on with their day jobs while the bankers help facilitate and orchestrate the process for them. Obviously that value depends on the seller and how robust of an internal corp dev team etc they have but more likely than not a banker can really help here.

On the buyside, if a banker is hired for a specific mandate and not just a tip type of fee, the banker can help provide industry-specific diligence insights during the process of helping the buyer formulate a bid. The banker can also help arrange or underwrite financing while helping streamline / facilitate the diligence process for the buyer. 

In terms of valuation guidance, I think the banker is a value add for the seller as it relates to providing realistic market expectation once the engagement letter is signed (vastly different to the pitch often times). The banker can help manage seller expectations and help negotiate on behalf of the seller if the bids for a sell-side is not within the expected range from the buyer universe. At the end of the day, the banker wants to get a deal done so one could definitely argue that interests aren't always aligned but that's why ratchets etc in the fee structure are built in. On the buy side, a good banker can help guide bidders to realistic bids and help in negotiating with sellers with regards to offers their clients put in. 

All these things can make an investment bank essential to a client, especially if the bankers are very close/familiar with the bidding/selling parties involved in the hope they can exert some kind of influence.

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