how do M&A advisors add value?
given that many large companies already have large in-house corp development teams, what's the point of spending millions to hire 1, 2, or 3 advisors (e.g. kraft hired BOTH Lazard and centerview)?
kraft knows much more than these guys about their financials. why would they spend so much to get these banks to spread comps with public info their in-house guys can do themselves (many of whom are probably ex-bankers)?
A) for fairness opinion (putting a stamp on the deal to shareholders etc saying the price is right...ie giving the Board and management a seal of approval that they're acquisition price isn't purely hubris...which 90 per cent of the time it is) B) for incremental value (can use the banks as pawns in the negotiation) - agreed that the real value is prob generated in house C) to extract points on debt negotiations if any D) relationships (if XY bank has provided good service/target in the past but wasn't on the deal, they at times whine loudly until the company finally acquiesces and lets them be one of the advisors)...
A lot of times hiring an advisor is just a signal to the market that the process isn't full of shit from the start. No one is going to share the level of info you need to share to consummate a deal if they aren't reasonably sure the intention is to close the transaction. Also, if Kraft does it alone and fucks up they have no one to blame but themselves. Also, the corporate development dept. of these big companies are always generating ideas and making recommendations, but the amount of work that is necessary to close a deal can be too much for them to handle all at once (not the complexity of the work, just the sheer volume). Also, having 3rd parties involved makes negotiations less personal and more arm's length. Also, the Kraft people have only closed the deals that Kraft has been directly involved with. The bankers have advised on probably 200 deals between them - you understand what can go wrong and what can go right a lot better with that kind of experience.
Manpower. Think about it this way, hiring a bank allows you to access a huge pool of talent and resources in a way that you can't with an in house team. A bank will throw an entire team of bankers at the deal, who will work non stop for a weeks or months on your behalf. These people will include industry and product guys. There will be guys with more M&A experience than you can possibly hire in house. Also, the industry coverage bankers will have as much experience in the industry as you, but give you yet another perspective.
If the deal goes through, you will need financing in the form of both debt and equity. You will pay fees on these capital raises, however usually you can convince a bank to net the M&A fees against the capital raising fees if they go through you. The capital raising fees are far higher (up to 7% for equity), so the banks are happy to give up the 50-75bps of m&a fees.
Best part, if the deal fails, you don't have to pay the bankers anything (unless they negotiated a small retainer, which is fairly rare). Whereas a large in house team has to be paid.
Does this have anything to do with some of the larger banks like BAML, Citi, JPM "using their balance sheet" and adding value in that regard? I've never quite understood what using their balance sheet means.
What might one find on a balance sheet? Assets perhaps? Using your balance sheet means putting your own cash into a deal.
More specifically, using cash from deposits as a source of lending.
corp dev people are idiots, that's why
it's also possible that, much like a real estate broker, an M&A advisor doesn't add any value and siphons off nice fees for itself. but you've got to use one because it's the posh thing to do.
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