Recently had a conversation with a friend about banking’s usefulness and it got me thinking
Small businesses aside, what is the primary purpose for a firm to hire an investment bank?
Say, if a firm is looking to acquire or be sold, raise capital, etc. why wouldn't they run the process between themselves and the potential counterparty(-ies)?
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Uhhh They don’t know how to
What’s Corp Dev arm for then?
Trust me, they know how to. Many of the Corp Dev folks are former bankers. Know several in Strategic/ Corp Dev. They are working on many things simultaneously (considering buy / sell / divest/ restructure / best form of capital relative to the enterprise/ debt/ etc. They don't have the staff or the time to scour the landscape to see which players are interested and what it would take to get them to the table. They pick up the pieces when it gets to a certain level and give the real work to the DD guys. Essentially they have the bankers bird dogging for them, most of which will never get done but they have an eager party looking to fill that role and get paid once a deal reaches the end zone.
Because the amount of work that goes into running deals is a full-time job, and an extremely arduous one at that, ie 80 hour work weeks.
Funnily enough we are seeing the same dynamic play out in... the nursing space. The nursing shortage has gotten so bad that hospitals and other providers can't afford to retain 100% nursing capacity on their own payroll, and instead will contract out from third parties on a short-term basis.
All valid points on the above though only touching on M&A. Banks are also especially helpful in raising capital as they're able present the company's story to their network of investors who would invest in the funding round, whether its private or public. Often times banks have the highest degree of connectivity to these investors, not the company itself.
Re the capacity note - aren’t deal teams usually comprised of less than 8-9 people? Seems to be a rather affordable requirement for firms in the $1b+ EV range
A lot of peeps talking about capacity. Definitely valid, but think misses the bigger point - investment bankers act as the “referee” since they have long-term institutional relationships with all of the deal counterparties.
In a self-banked process there is little downside to your counterparty if they burn you. A reputable sell-side bank will have an institutional relationship with the counterparty, and any “non-kosher” behavior would risk that relationship. E.g., if you dip out of the process and then hire the target’s employees for your own PortCo, the bankers won’t ever share a book with your fund again, and word will travel about the bad behavior.
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