Im just wondering how the prospecting process works?
Will a firm, lets say BHP approach the IBD and say, look we got all this cash find us someone to buy. Then IBD comes back and says hey, lets try buy RIO?
Or does the IBD approach BHP with the idea to buy RIO?
Interested to hear how it all works the origination process I guess
Quick Guide: M&A Firm’s Deal Origination
Companies looking to acquire targets will generally approach a select group of investment banks.
The banks will make a valuations, business profiles of targets, key industry information, etc.
The managing director then presents the pitchbook to the acquiring company. This is when the sales pitch comes in.
The managing director will sell his bank, leverage his relationships within the company and highlight his bank's' strengths (
Companies with in-house corp-dev teams will use bankers when making an acquisition for multiple reasons, including legitimacy and expertise.
In-house teams will often decide they would like to acquire a company for XYZ reasons, and going to a banker can help streamline the process.
Bankers will often know of companies looking to sell, or at least willing to listen to offers.
In-house teams may know the industry better, but bankers are more in touch with the strategic intentions of companies in the industry than the in-house guys.
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Usually the second, because the bus dev guys at the BHP wouldn't have a job if all they did is the first one.
so for example, GS could go to walmart and say, look we think such and such a freight company would fit in perfect with your business, interested in trying to put together a deal to buy them??
Either your bank pitches ideas or companies send in RFPs
The normal way normally goes like this...
... IBD X is interested in making a deal with potential client Y. So the MD of X covering company Y orders analyst z (usually refered to as "monkey") to set up a pitch book outlining potential transaction ideas for company Y. The monkey obviously has no clue about the specific products and business model of company Y, so he starts his research quests. After a few days of strenuous research he finished the pitch book (normally this would be around 6 am just 2 hours before the MD leaves to company Y to hold the presentation). The pitch book includes the standard stuff like industry and market research, potential targets companies in the case of a possible acquisition with indicative valuations etc. Now the MD presents the pitch book to the general managements and business development of company Y. Obviously, general management and business development now their industry and markets at a much more detailed level than any monkey will ever get to. So in the end they all know the potential targets in the pitch and they also certainly have a very good understanding of the approximate valuations. Certainly they also know a lot more about their industry trends (product prospectives, industry growth trends, profitability drivers) than the monkey will ever know, but in this analysis might actually be some informative value to the clients. All I want to say at this point that 90% of the information in the pitch book is useless and minimal value to the client. Still, it is the underlying document for the MD to illustrate the greatness and experience of his company as a financial advisor. Ultimately, the origination of a deal depends on the sales skills of the MD, the general relationship of the bank with company Y and any extra services provided by the bank (eg provision of financing).
The whole pitching process really is excruciating for the monkey. Apart from a few items like the calculation of net debt and the insertion of valuation multiples, it really has little to do with finance. It is more about sucking information from as many information as you can get hold of (research papers etc), throwing it together and structuring it into a document which appears to be tailor-made for the customer but really is nothing more than combining quotes from people and sources who really do know something about the industry of company y.
So my advise is the following: If you are tempted to accept a job whose main focus lies on sourcing deals, run!
The process may vary.
At my bank, there are "relationship" bankers. They are not quite "investment bankers". They are more close to private bankers, but to corporates. They schmooze with company executives and they are the first point of contact. These relationship bankers "tip off" deals initially to "real" bankers. The process is then almost completely dealt by the "real" bankers from then on (though relationship bankers initiate/attend conference calls and meetings together with the "real" bankers).
Sure, there is a grey line between relationship bankers and "real" bankers (IBD Managing Directors). But, generally, relationship bankers are designated to specific companies (not to specific industries), therefore they are very close to executives and are experts of their designated corporate clients (as in, they know what these companies are currently looking for, what their current corporate strategies are, corporate politics and etc.) The "real" bankers too have close relationships with corporates. But they have a comparative advantage in "industry" knowledge and "technical" knowledge for executing deals.
Relationship bankers and managing directors always go together to pitches and etc. and ideas for pitches are initially "tipped off" by relationship bankers.
Or.
Companies send in Request For Proposals (RFP) to a range of investment banks. They then short list few banks who would advise them on whatever they are planning on doing (M&A or IPO or w/e).
The whole pitching process really is excruciating for the monkey. Apart from a few items like the calculation of net debt and the insertion of valuation multiples, it really has little to do with finance. It is more about sucking information from as many information as you can get hold of (research papers etc), throwing it together and structuring it into a document which appears to be tailor-made for the customer but really is nothing more than combining quotes from people and sources who really do know something about the industry of company y. ---that actually sounds pretty interesting - its basically what i do in school (i know less about the topic so i wikipedia/google info and put it together for the professor) so theres at least some learning involved
It may sound interesting to you and maybe it is for the first 2 to 4 weeks on the job. But following that it is no fun anymore sitting in the office at 2 am and googling for target companies because so far you only have 40 and you want to get to around 50 while ultimately only 20 will be shortlisted and presented to the client. Then it really is just excruciating.
Thanks for the detailed responses guys.
But why do business development department worry with IBDs then. Why not just find the targets they want themselves, they know best about their undistry anyway. Cut out the middleman.?
Another question based on the above. Can someone give me an example of how the MD may decide for targets that compliment a clients business.
I will give an example and can you tell me if it may go something like this. MD has a client who is a clothing manufacturer. Maybe clothing manufacturer wants to enter the european market and get involved more in the distribution. So MD will tell analyst go and find distributors of clothing throughout europe to purchase. (vertical merger)
Or maybe another example... A firm buying a simliar company to exploit economies of scale, market share increase etc. So a maker of some specialised software, buys a software company making a similar product. So MD will tell anayst to go find software makers making similar product to purchase. (horizontal mergers)
Would like to hear your thoughts again from guys who actually work for MMs, or even BBs on how this works.
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