M&A Advisory Fees in Banking

So I know that M&A Fees are usually a percentage of the total value of the deal. At the company I worked at this past summer I got to see an agreement with the client and our company took a fee ranging from 1% to 1.9% based on the final sale price. However, this was a deal in the $100-200 million range.

I'm curious what are fees generally like for a huge deal such as $10 billion? Obviously no one is going to pay 1% or 2% (100mm to 200mm) fee for a deal this size. So what is a realistic/ common amount?

Also do fee structures usually change based on whether you are representing buyer or seller? It seems a fee scale that relied on a percentage of total value would skew incentives for the IB if you represented the buyer (because the higher price you pay makes you more money, but also hurts the client). Also does how many Investment Banking advisors the client has hired affect the fee at all?

Any info on this from someone who actually works in IB, (not some senior in college who doesn't know any more than me) would be much appreciated.

investment banking commission fees

When an investment bank works with a client on either the buy side or sell side they will collect payment that is called an advisory fee. If financing is provided by that firm, banks will also collect financing fees. On the sell-side the fee is determined by a percentage of the total sale price.

Mergers and Inquisitions:

Fees paid to banks in a sell-side M&A deal are a percentage of the sale price (the equity value of the deal, not the enterprise value), and that percentage scales down as the size of the deal increases.

For a $500 million deal, the bank might negotiate a 1% fee and therefore earn $5 million if the deal closes. For a $5 billion deal, it might be 0.2% or 0.3%, for $10-$15 million. For deals in the $50 billion range - very rare - the fee might be around $50 million (0.1%).

Buy Side and Sell Side Advisory Fees

User @A-Davion", an M&A Director, broke down how fee negotiations work at their firm:

A-Davion:

As a Director of M&A in an IB I do fee negotiations:

They come from Freeman & Co's analysis of standard advisory fees.

1. Find the deal size in millions - this is a negotiation around "we think the deal is worth X" this is done while you are pitching
2. Take the deal size's square root
3. Divide by a number between 5 and 6 with 5.25 and 5.5 considered average. So for a higher number in a more contested market.
4. Express that number as a percentage of the deal in a sell-side transaction
5. Express that number as a dollar figure in a buy-side transaction.
6. Realize the market for M&A is almost dead and divide by a number between 1 and 3.

NOTE: Deal size = transaction value = market cap plus debt. This is higher than enterprise value which is market cap plus net debt. The logic is - we are advising on a transaction, you will be getting all of the equity and all of the debt, however the seller keeps the cash in the business. i.e. you bidder need to finance market cap plus debt somehow - this is especially true if the debt has change of control provisions in its covenants.

For a buyer basically, you sit down with them and say we think it is worth X and you agree the fee then. you might try an incentive bonus of X% of anticipated minus actual but that is rare.

If you are sell side you can do a percentage because you and the client both benefit from an increase in price. You might say the standard freeman fee plus a incentive fee eg 5% of anything on the upside.... That too is rare.
Note: this is the advisory fee only.

In a $10bn deal there would be a pile of debt and "capital markets" fees - i.e. issuing capital and underwriting etc.

1-2% for a credit line - i.e. pledging debt
3% to 6% for issuing equity.
2.5% for issuing debt.

These fees are all tied in to your cost of capital and the availability credit lines within the bank. There is zero probability of getting a discount if the value of the transaction goes up.... in many cases the fee will increase and then you will be flat out told no deal if the size is too high ie you will need to syndicate with multiple IBs - as you would take more than the single line capacity of any one bank.

If equity is underwritten even at this size it is still 4% to 6% (most likely at the upper limit - again because you are pledging the banks' balance sheet) on top of the 3% to 6% issuance fee.

i.e. total fees for financing a $10bn with 60% debt could be:

Advisory: $18.5m

Debt issuance: $270m (and there would be other fees inside the debt based on spreads and management of facilities etc)

Equity issuance: $200m

Yes, they really are that high.

Note that the "advice" fee is less than 4% of the total fees; the other fees are earned by the IB becoming the client's counterparty or advising/convincing the IB's institutional clients on taking the transaction - so guess what the IB's incentive is to do.......

Best evidenced by BHP's bid for Potash corp. BHP's IBs kept that dead dog alive enough until the banks had to pledge their balance sheets. When the credit lines were untapped but still pledged the IB's got their fees and then let the deal collapse without having to pay BHP a cent of their promised capital.

Learn more about M&A advisory fees below.

Read More About the M&A Process on WSO

• M&A Transaction Timeline
• Sell-side M&A vs. Buy-side M&A

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