Why do companies need Wall Street for M&A if they have corp. dev. arm?
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Some companies like Microsoft don't use bankers because they have a corp dev arm. otherwise, same reason why PE firms have them - they want financing and get m&a services as a bonus, or the banker has a relationship to a potential target
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This is a great question,
At my shop we use bankers for one main reason, access to capital (debt). The traditional analytical services (M&A, Val ) of the bank are rarely used. In an engagement we generally disregard all the info from the bankers, CIM, models etc. We perform our own due diligence, from site visits, model building to writing our own reports, utilizing our internal economists and tax advisors, etc.
We have found that most bankers only have a basic understand of the technicalities and complexities of some of the deals we are executing.
This is a fairly large shop with the resources, at a smaller shop it may be different.
Bankers also provide one extra benefit, access to relationships, i.e. book of business, additional bidders on a deal, etc.
A lot of large co.'s will use their corp strat team to handle most of the smaller transactions, but when companies finance their transactions with debt, they will need an investment bank to help finance the deal. Also, some transactions are complex and companies will want a third party adviser on the deal.
The number one factor everybody ignores is that getting an investment bank on a deal is a signal to the market that the deal is legit and priced correctly. Market signalling is so important when it comes to finding investors willing to pay a certain price.
typically the more deals you give to the bank the more they are willing to lend you at better terms
agree with the pricing & signaling comments. i think the main benefit would be the capital markets knowledge of the bank - wall st is much closer to the market than the corporate. and the company wants help financing the deal.
Many thanks for all of your insights. I more or less thought along the line of what you guys said but I def feel better to hear now.
In my company we use i-banks for 2 reasons 1. Financing - even if it is not for the deal per se, we would still need them for other greenfield transactions we do. So this is a relationship builder 2. Bodies on the ground - we cannot afford to have 10 people on our rolls if we do one acquisition transaction a year. So the bankers are the "sweatshop" workers for us, running comps, updating PPTs. updating the data room q&A list, updating memos etc
I would second the comment from Race above - bankers in general do not have a good understanding of the DETAILS of my industry (utilities). We have had to spend too much of our time checking the model INTEGRITY and all, and most importantly removing the fucking circularities. We also happen to control the DD process and adviser relationships (bankers would end up spending say 200K USD on the same lawyers, for which I will spend 100K USD because I will manage the interactions keeping in mind that the money is coming out of my company's pockets. The higher my company's profits, the greater my bonus - i wish)
At least in my company's context, "signalling" is not something we have used bankers for.
An important role that the corp dev team plays is checking and challenging the work - it does not happen in my firm where we control the financial model, but in some other firms the corp dev team which hopefully understands the nuts and bolts of finance AND the industry can challenge the assumptions and make the assumptions more realistic.
After all the banker bashing, the disclaimer is that I am moving back to banking. The bonus is an allure (my base is probably higher)
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