As an M&A Investment Banker, What Value Do You Actually Add?

There it is. The age-old question that continuously pops up, especially when it comes time to sign an engagement letter. I know what our seniors say, but am more curious to hear what you think the value is that M&A bankers actually add.

Is M&A advisory dead? A dedicated corporate development team is much cheaper than a banker. I don't need your comps that were spread to perfection - I have yahoo finance, close enough. I don't need your precedents - Edgar is free and I have monkeys that work for me. A DCF? Youtube.

If I am a potential M&A client, especially if I'm a PE shop that is unloading a portfolio company, what are you going to do for me that justifies your fee? What value do you actually add? What do you know that I don't? I already steal your top talent. The same goes for buyside engagements (shops still do these, despite having a better chance of winning in Vegas).

Are you really just an overpaid realtor with a few industry contacts from when you got your Masters in Porter's Five Forces? Or, are you just my 1st world outsourcing shop to do the crap that I don't want to do/deal with during a process? Do your random analyses actually add value or are you doing them just to "show that we did work?"

Simply put - justify your existence. Start singing for your supper. Dance monkey. Dance.

Comments (41)

Best Response
Mar 20, 2017

I weep for your analysts.

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Mar 21, 2017

Instead of feeling bad - any words of encouragement for them? What gets you up in the morning to do this job? I think you're missing the point of my discussion topic.

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Mar 20, 2017

Just because anyone can calculate the value of a company doesn't mean it's the optimal price to make an acquisition. A banker has continuous dialogue with sponsors and corporates and can tell you what price you need to pay to win a deal, and what price you should be willing to accept if you're for sale. M&A advisory goes so much further than valuation excercises which you are describing. Deals also get very complex between corporates when you think about the opportunity cost of a competitor acquiring a target that you're looking at.

Great investors aren't necessarily great negotiators, and paying an M&A advisor $5m to save you 2% on a $500m deal is obviously valuable. Similarly, great entrepreneurs aren't necessarily great negotiators, and paying an M&A advisor $5m to get you a 2% bump on a $500m purchase price is obviously valuable.

If you want a more relatable example, when I was in ib, we helped a Sponsor win with their offer of 9x EBITDA, when their comps, precedents and DCF said 13x. We knew no one else was going to pay up. Don't you think you would want to pay us for this kind of advice?

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Mar 20, 2017

.

Mar 20, 2017

Not every firm has an internal corp dev team. In fact, many don't. Corp dev teams are extremely expensive and completely unnecessary for firms that do not regularly acquire or divest. So, in that sense, your value is rather simple: you're performing a service that the company itself cannot do.

Now, assuming the firm has a corp dev team, your value is two-fold. One, you provide expertise on highly complex transactions. We in corp dev are not exposed to the ever-changing M&A landscape like you in IB are. So, if we are undergoing a complex transaction or one that we have never seen before, we will happily pay your fee. In many of these instances, we don't have a choice because we lack the knowledge necessary to complete the transaction. We either pay the M&A advisor's fee or we don't do the deal.

The second, and most important, value-add is rather simple: our fiduciary responsibility to our shareholders. Simply put, you are the punching bag where we send our lawyers when investors sue us. Whether we raise capital or divest an asset, we need someone to blame when things go south. No investor will care what Sil's DCF told us our subsidiary is worth, but that same investor certainly will care what Goldman Sachs or Morgan Stanley said. Ya, my modeling might be as good or better than your analyst's, but your firm looks a lot more credible as a whole than I do.

Now, does any of that above mean that your value-add exceeds your cost? The jury is still out on that one.

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Mar 21, 2017

These are good points - especially the punching bag language. Very true.

However, not sure I agree with the exposure to the "ever changing M&A landscape" (what banker deck have you not seen this on?) We all get our precedents from the same place. If not, it's insider information... A good corp. dev. individual should know the space inside and out and track relevant deals religiously.

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Mar 21, 2017

Haha. I added the punching bag language because I figured you'd appreciate it.

I probably should have worded my "ever changing M&A landscape" phrase differently. We do track deals (my unfortunate job...), but our space is very nichey and full of smaller players. One way a banker might add value is by getting us a way into a company so that we can have an (almost) principal to principal transaction. We have several opportunities in our pipeline where a banker got us in, and now the company is only negotiating with us. Your banker fee in this sense is earned by helping us avoid an auction.

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Mar 20, 2017

@Gotham's Reckoning I get where you're coming from but think about this. Unless Company XYZ is highly acquisitive from my experience the internal M&A team is full of very smart, highly paid people who may see through a handful of acquisitions.

Most people in these roles are not permanent hires but a stop gap before they go back to managing an engineering division, working on other special projects, or waiting to move into a VP role where they manage an entire division.

You still need banks because its cheaper in the sense that you can take your most valued talent and have them focus on the core business areas that make you money rather than mundane M&A-type work as far as due diligence from a numbers perspective is concerned.

Another area to consider (correct me if I'm wrong) don't company's need investment banks if they want to raise capital or need financing? Its not like they themselves can line up investors and facilitate that process (again we're getting further away from the core business area of focus).

Same thing can be said for consultants who IMO are a waste of money. Even the MBB types recommend ideas that are not even implemented or if they are, are half-assed and the whole process turns out to be a waste of money.

In short, another value IBs and even consultants bring is a "unbiased" outside authority that is supposed to objective in their fact finding mission and recommend solutions or provide financial advise based on their respective experience.

Mar 21, 2017

I agree with these points - although raising money actually happens quite often without a banker. That being said, we have also come across many failed processes where the company tried to do it by themselves. I suppose it depends on how good/popular the company really is. I have seen folks hire an advisor for valuation, but many series A-C financings occur without a placement agent.

Mar 21, 2017

I work mostly with private small companies, 20-100m EV, and I'm surprised every day as to what a mess their procedures are.
Here's where my firm adds value:

  1. The owners have a business to run, they don't have the luxury of time to deal with all the things I'll mention below.
  2. Price guidance. Most entrepreneurs come to us with a number already in their mind. Our first job is to manage their expectations and tell them what the market is most likely willing to pay for their company.
  3. Preparation for the sale process. Their accounts are most of the times a mess, they haven't spent the time to figure out what their main drivers are, what the margins are, which segments of the business are more profitable, etc. They track just a few things, if any, and they're happy as long as they have money in the bank. My job is to ask them for the right documents, so that when we go to market, we'll be ready to move fast through the dd process. We've seen more than one deal fail because the buyer was a large corporate which wasn't willing to spend months untangling financials, legal documents, etc.
  4. Marketing. Putting all the materials together in a nice package to make the company look like an attractive asset.
  5. Identifying the right buyers and discretion. When a partner has been operating in a sector for over 20 years, they know the right people to talk to. Moreover, an owner who is still running a business, bidding for work, etc. doesn't want to scream to the market that his business is up for sale.

I'm sure that when it comes to larger transactions, there are more areas where bankers add value. Managing a process that may take years is not something that can efficiently take place internally. Advisers who sit at arm's length, coordinate a process and manage egos are necessary.

As far as PE goes? You're at best naive if you think that deal sourcing in this competitive environment is proprietary.

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Mar 21, 2017
Jack.M.T.:

I work mostly with private small companies, 20-100m EV, and I'm surprised every day as to what a mess their procedures are.Here's where my firm adds value:

  1. The owners have a business to run, they don't have the luxury of time to deal with all the things I'll mention below.
  2. Price guidance. Most entrepreneurs come to us with a number already in their mind. Our first job is to manage their expectations and tell them what the market is most likely willing to pay for their company.
  3. Preparation for the sale process. Their accounts are most of the times a mess, they haven't spent the time to figure out what their main drivers are, what the margins are, which segments of the business are more profitable, etc. They track just a few things, if any, and they're happy as long as they have money in the bank. My job is to ask them for the right documents, so that when we go to market, we'll be ready to move fast through the dd process. We've seen more than one deal fail because the buyer was a large corporate which wasn't willing to spend months untangling financials, legal documents, etc.
  4. Marketing. Putting all the materials together in a nice package to make the company look like an attractive asset.
  5. Identifying the right buyers and discretion. When a partner has been operating in a sector for over 20 years, they know the right people to talk to. Moreover, an owner who is still running a business, bidding for work, etc. doesn't want to scream to the market that his business is up for sale.

I'm sure that when it comes to larger transactions, there are more areas where bankers add value. Managing a process that may take years is not something that can efficiently take place internally. Advisers who sit at arm's length, coordinate a process and manage egos are necessary.

As far as PE goes? You're at best naive if you think that deal sourcing in this competitive environment is proprietary.

This.

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Mar 21, 2017

Totally agree here. Unfortunately, I have seen $500MM-$xBN EV deals with just as many problems.

  1. Yes we are their outsourced help for diligence, analyses, calls and questions
  2. The market sets the price - a good entrepreneur should know that this principle applies to their business and the actual product/services that they sell
  3. This is common in enterprises both large and small
  4. It's interesting that despite all of the marketing majors out there, so many companies cannot properly tell their story
  5. This is probably the most important reason to hire a senior banker

I understand the PE deal sourcing very well but other than recommending an idea to me and getting me an introduction to the company, what value can you provide (talking $100MM-$750MM deals not $BN deals here where you almost have to have an advisor)? The argument that PE folks aren't good negotiators simply is invalid. We negotiate with them on a daily basis and clearly most of them are smart guys that are aware of what's going on in the market.

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Mar 21, 2017

I work in FDD, mostly within the MM space, and I can also confirm ALL of these points, especially if you're working on sell-side deals. Our role in FDD isn't as important as the investment bankers' is, but it still amazes me how many CFOs/Controlers managing the finances of smaller enterprises can't even get their trial balances to tie to their financial statements or can't give us good data to help calculate the EBITDA and ultimately sell their business.

Even though they can be frustrating at times, I actually really like sell-side deals because you add a lot of value in coaching up a business to help the shareholders exit their business, which can feel really rewarding once it's completed. As you gain experience, you also learn how to play the negotiation game and figure out what information you need to give out in order to maintain some sense of credibility/objectivity, but also what potential deducts you should allow the other diligence team to figure out on their own in order to sell at a potentially higher value than what the owners would otherwise receive. I'd imagine investment banking has even more of this since they advise the entire deal as opposed to just a certain portion of it.

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Mar 24, 2017

Some great points on here about the value of services rendered, often in sell-side processes.

OP seems to either put all of M&A advisory in one vulturous bucket, or doesn't seem to understand value-add advice. Part of the historic shift to the boutique model, and boutiques' growing success in recent years, indicates that while the OP's question is valid, you need to put it in context to match with valid answers. Everyone knows that big banks generally burden senior bankers with concerns such as pitching the bank's non-M&A products to their clients (among other things), in a way devaluing the value of the relationship and future actual advice. That said, transactions involving large, complex MNCs will often need to rely on a bulge bracket's integrated services - these theoretically should work together seamlessly to provide exceptional value despite hefty fees (how else are you going to get a $50bn cross-border deal done?).

That said, can you really explain the chunk of M&A activity cut from the pie as, in aggregate, an accomplishment of rolodex girth? Boutiques, regardless of what they will say in pitches, are by nature specialized. The good ones develop a reputation from separating the wheat from the chaff in a given set of assets for sale, received bids, etc. Years of experience on the partner level, combined with high competency on the junior level for selecting the right comps and communicating story more precisely - these are bread and butter M&A advisory services. To echo other posters, a larger proportion of boutique clients need this kind of help. And to the corpdev point - you can essentially ask of law firms the same thing: why should BX hire STB if they have their own in-house counsel? In-house teams don't work on the same schedule and aren't exposed - on a daily basis - to transformative corporate actions, at least on a market level (not to speak of conflicts of interest and burden of responsibility/fiduciary duty).

The sum total of these points is definitely challenging to put a price on, but ultimately there is a "going rate" in M&A advisory; the good firms will charge more and get those fees, and vice versa. If you've ever read a fairness opinion, the advisor is definitely treated as a go-to 'punching bag' given all of the "subjective" calls it made on getting those numbers. At the end of the day, you're generally dealing with knowledgeable people and those people will know if it was a good deal or not - and your ass is on that line. Got comp?

There's no coincidence. Only consequence. Where others see chance, I see cost. --The Merovingian
Life is binary. --Marty Chavez
Having lots of garbage is a good sign. But all lies rise to the top.

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Mar 21, 2017

+1 turn of EBITDA on your valuation

I work in PE and companies that hire bankers will almost always sell at higher multiples. I remember this one particular proprietary deal where we offered around 6x to the company and they were very close to accepting the deal. However, the company decided to hire a banker just in case and ended up selling to another sponsor for around 9x. Needless to say, we will always try and buy companies that don't hire bankers in order to try and get them at a discount.

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Mar 21, 2017

So far some good content on here. I'm liking most of what I'm reading!

As far as unbiased opinions are concerned - let me pose this question... At the end of the day, don't senior bankers chase fees and want to get deals done? Every year they start at zero from a revenue perspective.

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Mar 21, 2017

On the PE side, other than recommending an idea and getting an introduction to the company, none. Maybe financing, if the bank has a balance sheet.
But PE aren't the only buyers. Bankers are useful to trade buyers and family offices.
And again, on my small part of the market, we don't start from zero every year. We have retainers with family offices which we help sell and acquire new assets. They cover our overheads. It's crazy to me that these guys pay us retainers all year round. It's only a couple, and they went into this agreement after we worked on a few deals with them and the relationship has been built over a decade (obviously I wasn't with the firm back then).

I don't think anyone claimed that PE folks aren't good negotiators. Most of those guys don't leave a penny on the table.

On the other hand I do work in a building where we have common spaces and there have been a few cases when I've overheard things from buyside guys like: "We need to do this deal cause we have fuckall pipeline." There are quite a few firms with AUM<500m out there and it's a very competitive landscape.

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Mar 23, 2017

I would think bankers generally have better market intel (i.e. whose selling what businesses and why, which companies are trying to expand in which sectors, what businesses are having problems, etc.) simply because they talk to everyone. They talk to you and your competitors, customers and suppliers. Bankers hear things that don't necessarily get reported on in the news and presumably, if you hire them, you get the benefit of this knowledge.

On the PE side, while I agree divestiture via auction is a fairly mechanical process, it is still a process. If you want to have the greatest chance of successfully selling the business and get the most value for it, you need to approach multiple buyers with a well-crafted story that appeals to each buyers individual motivations. Producing this story and managing the process is incredibly time consuming. Could a PE VP/Associate handle it? Theoretically, yes they could. But didn't you hire them to evaluate new opportunities and help run existing portfolio companies? If your people wanted to sell companies, they would have stayed in banking.

Mar 21, 2017

Straight from Quatrone's pitch:
Average premium obtained for our clients ? 70%
Average premium overall 22%
Here's your value. But yeah not all bankers are the same.

Mar 21, 2017

I'll give you that. Best fringe case I've heard so far, albeit a fringe case ;)

Mar 22, 2017

Sure i can give you other names which have helped their clients get a better outcome because this is what it is about: maximizing outcomes.
You could represent yourself in court without counsel but is that the way you're gonna get the best out of it ?
You could also decide to sell your secondary home by yourself but is that the best way to get a good price and a legit buyer ?
M&A advisory is like counsel/brokerage. you can do without them but chances are you're gonna achieve a better outcome with them. At worst you're paying for a third party to handle the process/administrative crap; at best they positively affect pricing in your favor.
In Arcelor mital, the younger zaoui brother upped the initial bid by 3B+ through witty bluffs. In Anglo-American the Citigroup dude maximized the price by finding an adequate structure through superior technical/theoretical knowledge and sold that idea to potential buyers.
etc etc...
Also just like for counsel/brokerage, you get what you pay and alas this notion seems to escape a lot of managers in Europe.

Mar 21, 2017

Many mega merger and acquisitions such as Walmart's acquisition of Jet.com are significant moments in industry and business history. Being an important part of industry and business history, these transactions should be executed perfectly - as a piece of history. In that sense, Investment bankers are sort of like a historian. I don't think corporate development team can perfect the transaction process. Advising and executing transaction is what investment bankers do for a living, investment bankers can perfect the transaction process. I think investment bankers have rightful claim for taking this important role in these important moments in business and industry history.

I also think that reports and documents created during the transaction process have historical value. They have high value for business and finance academia. In fact, I think business schools are beginning to partner with investment banks to make confidential M&A reports available for MBA students for their case studies. My business school invited an investment banker from a MM. He talked about a deal he worked on and students studied about the transaction by reading actual confidential documents. Many details of important mergers have high value and perhaps people 10 50 years in the future will still want to study about the transaction. Investment bankers can perfect writing up these documents - pieces of history.

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Mar 21, 2017

Let's get some cheese on this macaroni!

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Mar 22, 2017
RobberBaron123:

Let's get some cheese on this macaroni!

mac & cheese is delicious. #gains

Mar 22, 2017
Gotham's Reckoning:

Are you really just an overpaid realtor with a few industry contacts from when you got your Masters in Porter's Five Forces?

+1 SB for this

Mar 22, 2017

No, I do not think M&A advisory is dead. Consolidation will continue to be a motif throughout existing and new industries, and it frequently makes sense to outsource this function (i.e., one of, if not the, most strategic decision a company can make - to sell) to an expert with a proven track record of success.

The value added is not just running a DCF or LBO, but it is created through effective process management. Process management enables the Company to be positioned and marketed appropriately, reduces the burden on management, drives competitive tension and increases TEV for companies being sold.

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Mar 24, 2017
THE PsYcHoLoGy:

No, I do not think M&A advisory is dead. Consolidation will continue to be a motif throughout existing and new industries, and it frequently makes sense to outsource this function (i.e., one of, if not the, most strategic decision a company can make - to sell) to an expert with a proven track record of success.

The value added is not just running a DCF or LBO, but it is created through effective process management. Process management enables the Company to be positioned and marketed appropriately, reduces the burden on management, drives competitive tension and increases TEV for companies being sold.

From my DD experience on the buy-side, I cannot agree more with the process/project management aspect that IB firms do. The entire DD and sales process can be incredibly messy, and being able to outsource this to focus on key issues within the company comes at a relatively high price.

Mar 24, 2017

Agreed. We are in exclusivity to buy a company now that was proprietarily sourced (i.e., no banker), and it has been multiples more difficult to both play "banker" and buyer simultaneously.

Mar 24, 2017
Gotham's Reckoning:

Are you really just an overpaid realtor with a few industry contacts from when you got your Masters in Porter's Five Forces? Or, are you just my 1st world outsourcing shop to do the crap that I don't want to do/deal with during a process? Do your random analyses actually add value or are you doing them just to "show that we did work?"

Yes (minus the contacts), yes, and no, just showing we did the work.

When I used to explain to my relatives what investment bankers "do", I would tell them, "If you want to sell your house, you call a realtor. If you want to sell your company, you call an investment banker."

In all seriousness though, I don't think banking is going away anytime soon. I could have sold my house myself, but hiring a realtor made my life easier. I don't know if my realtor got us any more money than we would have had we sold it ourselves (probably not when accounting for transaction costs), but it certainly felt worth it when I was able to concentrate on my job/life/everything else and just receive a call from her saying "We have X offers." I think it's similar for i-banking. Most companies, particularly in the middle market, are just not able to run a process on their own while also running their business.

Mar 26, 2017

It's interesting that you list yourself as a first year M&A associate. Nonetheless, several solid points have been raised above. If anything, the market for sell side services will exist long after buy side. Most large firms can execute buy side mandates on their own, and you see fewer and fewer banks advising on buy sides (ex. mega deals, where banks are glorified financiers, who get thrown the bone of "advisory" creds).

But with the proliferation of PE, banks' services will continue to be in need for exit opportunities. As other people have said, banks keep in touch with the various buyers in the market. Banks have the ability to provide financing to buyers. Banks are willing to do the grunt work of organizing Q&A, dili calls, MPs, site visits, etc. But, what I think many people have missed, is that banks are also there to take the blame from both sides. When management complains that the process is too grueling, the board/sponsor can blame the banks while secretly praising them. Buyers can complain that banks are too slow in responding to dili requests, but it's really mgmt that is dragging their feet. It's this service as middleman that banks serve. Sponsors and mgmt don't want to deal with buyers. And bankers can extract more out of buyers by positioning and playing games.

Beyond that, banks hope to serve as the "Trusted Advisor," right? The sounding board. Yes, boards/sponsors do deals over their careers, but the banker does it every day. It's that experience that the board/sponsor hopes to rely on during the transaction.

Bankers also know the key ways to play buyers off each other. Particularly within industries, they can essentially tell two buyers that, if you don't buy this, this other guy will. If they're able to extract $20mm of value, they're well worth their $5-$10mm fee.

Beyond this, for mega deals, no CFO has ever been fired for hiring GS for his fairness opinion. And that business will continue for years to come

Mar 27, 2017

M&A advisory is most certainly not dead, and the fact that the first counter point mentioned is about valuation should tell you how misguided the discussion is. Valuation is one small part of investment banking, but it is far down the list of value-add provided by hiring a sell-side or buy-side advisor. In my experience even many of the most inexperienced financial operators have a general sense of how much their business is worth. They may not have all the comps and DCF spread out but rarely have I ever had a client think their business is worth $200m and it's actually worth $1bn (though I will say many have lofty expectations the other way around). Bankers set the valuation expectations at the beginning of a process, but the client is not hiring a bank to tell you the value of the company - they are hiring the bank to actually achieve that value for the shareholders.

Believe it or not there are $1bn+ companies that would have no idea how to run a proper sell-side process on their own. It's simply not an area of expertise for them and they heavily rely on advisors to properly prepare the financials, draft the offering memorandum, and package everything together in a way that makes sense to investors/buyers. It's also an issue of time - it would be almost impossible for most companies or even private equity owners to manage a full sell-side process while also still running the business successfully/diligencing other businesses. There's a reason bankers work so many hours during during a live deal, and despite all the rhetoric on this forum about wasted time running pointless analysis, there actually is a ton of work steams to manage and execute on during all stages of a deal.

The direct value of M&A advisory on the buy-side is less clear and often it'll feel weird getting paid a similar fee for a 2 month buy-side deal as for a sell-side where we spent 6+ months crafting materials and marketing a company. However, you have to consider the fact that for every buy-side deal that closes there are another 5 that did not close but expended as much effort (and with no fees). For what it's worth, client loyalty is a real thing and they will often feel like they 'owe' an advisor if a significant amount of work is expended with no result. Relationships are everything in this business and time spent showing companies ideas and working through their business strategy will often result in business down the line ("worth it" to the company or not). Again you'd also be surprised at the lack of sophistication of corp dev/executive management teams even at large public companies with this stuff.

Finally you have to consider that M&A advisory fees are often paired with capital markets fees as a goodwill gesture. Yes, the M&A component has value, but companies need the capital raising services as well otherwise the deal isn't possible. I would be surprised if there were many companies out there that could independently raise $2bn+ dollars to do a deal on their own without the help of an investment bank.

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Apr 24, 2017

From having spent time at a large PE fund - there is no value provided.

Let me hear you say, this shit is bananas, B-A-N-A-N-A-S!

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Aug 5, 2017

Well obviously, M&A means Mergers and Acquisitions
In a dragon ball Z world, bankers are the ones that teaches the fusion dance to Goku and Vegeta to make Gogeta. Boom!
Yahoo finance is so flawed, dawg. Why else do you think Marrisa Mayer wanted to sell so badly?
Big question, though... can you @Gotham&#039;s Reckoning do the fusion dance?

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Aug 5, 2017
Sizzling_Biscuit:

Well obviously, M&A means Mergers and Acquisitions
In a dragon ball Z world, bankers are the ones that teaches the fusion dance to Goku and Vegeta to make Gogeta. Boom!
Yahoo finance is so flawed, dawg. Why else do you think Marrisa Mayer wanted to sell so badly?
Big question, though... can you @Gotham&#039;s Reckoning do the fusion dance?

Lay off the Bath Salts bro.

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Aug 5, 2017

This is the most epic response I've seen on here in a while. @Sizzling_Biscuit you just sizzled my biscuit. +SB

Aug 5, 2017

I make beautiful slides. Gimme my $25 supper.

Dec 13, 2017
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Dec 13, 2017
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"Anything less than the best is a felony"