This was part of my $250k notebook. It sounds so simple... but the implications, at least for me, were valuable. Before b-school, I don't think I'd spent as much time thinking about M&A from the biz dev point of view as I should have.
The challenge of most big public companies is that investors want steady exponential growth of X% every year, and it doesn't usually happen that way. In terms of dollars, organic growth typically slows as companies get bigger, rather than speeding up. So investors want to see steady exponential growth, companies deliver steady linear or logarithmic growth, and everybody is sad.
The plug is inorganic growth... or M&A. It's like crack. Companies start off smoking it to get through some tough quarters, but once you start, you're on the path to addiction. You start buying stuff when you don't need it. You don't even really want it. You definitely can't afford it. Soon you're going into debt, breaking into people's metaphorical houses, and spending most of your days in sketchy meetings with the scum of the earth, after which they are richer and you are poorer.
After five or seven years of snapping up every piece of crap these scumbags pitch to you, you're fit for the junk heap. You wake up in the morning and you're like, "What did I do last night? Why do the equity analysts say we're entering the telecom market? And what are all these legal bills from Turkey and Pakistan?"
Two questions for you guys: first, what does this say about the usual relationship between bankers and clients? Second, if you were a senior banker, would you do things differently or would you deal them the junk they're willing to smoke until they go belly-up and the cycle restarts?
This is both really funny and, in most cases, spot on. However, sometimes M&A is almost a requirement.
If companies A, B and C only sell widgets that go into a machine. Once companies B and C develop the capability to produce that machine, company A sure as hell better go acquire that technology otherwise they won't be selling any more widgets.
If these widgets happen to be healthcare widgets Company A might have invested $200M+ in them if they sell them on a global scale with approval from every Ministry of Health. Now a $75M M&A deal that will help grow the top line and save your widget business looks pretty damn appealing, even if it's not Accretive.
pretty damn funny. usually the best humor is because it contains some truth...this is a bit of a hyperbole, but yes, some companies definitely do fall into this addiction for sure.
Excellently executed anaolgy.
The banker's job in M&A is to do their client's bidding in the best way they see fit. While I agree with the premise of your post, I think you are somewhat misconstruing the role of the banker. Bankers are rarely deep enough within a given company to have a strong grasp on strategy decisions being made behind the scenes. While those relationships do occasionally exist, it is the exception and not the norm.
If you are on the sell-side of a M&A deal, you are typically looking to get the highest price for your client (although occasionally other factors are at play, like what happens to the company after acquisition, do people lose their jobs, can management take a role in the acquirer). The sell-side banker's job isn't really to tell the buyer whether or not they should buy; it's more about getting them to consider why they might want to buy. You are primarily focused on maximizing the number of options for your client (the seller); the buyer's decision process is their own (assuming the banker validates that they have a reasonable ability to follow through on their bid).
If you are working on the buy-side of a M&A deal, there are two tracks 1) managing a pre-negotiated deal or 2) the fishing expedition. In the first case, your job is to help the buyer process DD and make sure that the companies don't get in their own way and screw things up. You are also tasked with making sure nothing smells funny. The companies have already made the decision to get into bed together so the banker has little input in this case. In case two you are trying to help the company find the best fit at the best price; this is the one place where a banker should have some input on whether or not it makes sense for a client to pursue an acquisition. I have been involved with deals where we told our client that they were better off by not pursuing a deal.
Outside of the one case mentioned above, in my opinion bankers aren't supposed to help a large company analyze whether or not they are making too many acquisitions or the wrong kinds of acquisitions. Management of the company should have a strategic plan and roadmap for what they want to do. That is their job. Bankers just help them execute. If the management of a company is operating without a rudder, it isn't really their banker's fault.
I'm really ignorant. How does buying up companies help you get through tough quarters or help you keep up exponential growth?
No worries. Here's the way I see it.
Let's say you screw up a quarter and it looks like you won't produce as much income as the investors are expecting.
When you buy a company, it presumably has positive income. You add that company's income to your income, resulting in more income. Meanwhile, if you're clever, the money you spent to buy that company doesn't (usually) do much damage to your income for that quarter. Thus, you get more income, and keep the shareholders off your back for a little while longer.
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