Selecting a Banker: Beauty Contest / Bake-Off

It refers to the selection procedure to select an investment banker to sell the business owner's company and supervise the M&A process

Author: Christy Grimste
Christy Grimste
Christy Grimste
Real Estate | Investment Property Sales

Christy currently works as a senior associate for EdR Trust, a publicly traded multi-family REIT. Prior to joining EdR Trust, Christy works for CBRE in investment property sales. Before completing her MBA and breaking into finance, Christy founded and education startup in which she actively pursued for seven years and works as an internal auditor for the U.S. Department of State and CIA.

Christy has a Bachelor of Arts from the University of Maryland and a Master of Business Administrations from the University of London.

Reviewed By: Josh Pupkin
Josh Pupkin
Josh Pupkin
Private Equity | Investment Banking

Josh has extensive experience private equity, business development, and investment banking. Josh started his career working as an investment banking analyst for Barclays before transitioning to a private equity role Neuberger Berman. Currently, Josh is an Associate in the Strategic Finance Group of Accordion Partners, a management consulting firm which advises on, executes, and implements value creation initiatives and 100 day plans for Private Equity-backed companies and their financial sponsors.

Josh graduated Magna Cum Laude from the University of Maryland, College Park with a Bachelor of Science in Finance and is currently an MBA candidate at Duke University Fuqua School of Business with a concentration in Corporate Strategy.

Last Updated:October 6, 2023

What is a Beauty Contest or Bake-Off?

Selecting a banker can often resemble a "Beauty Contest" or a "Bake-Off." In these scenarios, investment banks vie for the financial advisor, underwriter, or placement agent role in a prospective transaction. But what do these terms mean

A "Beauty Contest" or "Bake-Off" is a competition where investment bankers showcase their qualifications to lead a transaction. They present:

  1. The Best Team: Highlighting team profiles showcasing expertise.
  2. The Best Track Record: Demonstrating extensive transaction experience.
  3. The Most Industry Knowledge: Providing top equity research on the sector.
  4. The Most Active Trading Support: Emphasizing trading volume and value.
  5. The Most Relevant Experience: Showcasing deals in the same industry.
  6. The Best Valuation: Offering compelling valuation analysis.

The selection process commences when the organization seeking financial services invites potential bankers to tour their facilities, gaining insights into the business.

Subsequently, bids are solicited, evaluating skills, experience, knowledge, and budget. This process can be competitive and rigorous, especially for high-value transactions.

Investment bankers submit comprehensive bids, sharing past deal information, industry partnerships, and market insights. They also conduct in-depth research on competitors and their bids, aiding the selling organization.

The formal presentation to the seller covers various aspects, including estimated company value, deal team expertise, past transactions, positioning strategies, marketing plans, prospective buyers, potential obstacles, and fee structures.

Additionally, requesting and scrutinizing references from successful and unsuccessful transactions can guide the selection process. Ultimately, the goal is to choose the best-qualified firm to manage the M&A process.

Key Takeaways

  • Several investment banks competing for the same business, whether it's an IPO, financing, or an M&A deal, are referred to as a "bake-off" (also called a "beauty pageant"). These "contests" require lengthy and agonizing pitchbooks.
  • Searching for fund managers to carry out investment mandates takes a lot of time and money for large institutional investors. 
  • In "beauty contests," which are usually overseen by actuarial consultants, a shortlist of two to five prospective managers present their case in person while typically using a lot of Powerpoint.
  • Sometimes, the winning bank in the bake-off was predetermined. Morgan Stanley might already have been selected in advance by the seller to market the assets, but they still send out RFPs to gather information because the responses to these RFPs can be substantial.
  • If the relationship manager is inclined to team up with a potential buyer to purchase the assets, analysts and associates will sigh loudly if bankers lose the RFP. This process takes much longer and has much lower success rates.
  • However, the bankers are already familiar with the assets and will try to contact a potential buyer with access to financing to increase their chances of succeeding.

Initial Public Offering (IPO) And Beauty Contest / Bake-Off

In the context of IPOs, this process also determines the lead manager book runner, often referred to as a "beauty contest" or "bake-off."

Potential underwriters closely examine the company's operations before committing to the IPO. A well-conducted beauty contest helps attract underwriters and ensures the IPO is in capable hands.

To select the lead bank for an IPO, many companies employ a Request for Proposals (RFP) procedure, akin to a "beauty parade." RFPs provide standardized criteria for evaluating candidates, ensuring fairness in the selection process.

Crafting a comprehensive RFP is crucial, reflecting the company's goals and requirements.

Typically, banks respond to RFPs with written or oral presentations, allowing the company and its stakeholders to compare proposals, assess suitability, and foster competition among the invited banks.

Notably, the concept of requesting proposals extends beyond investment banking, applying to various business domains. Whether you're designing a building or fixing a sink, RFPs are a widely accepted practice in the business world.

In the realm of M&A transactions, the investment bank representing the seller is often highly confident of closing a deal, as their compensation is typically contingent on success.

This confidence underscores the importance of selecting the right financial partner in the "Beauty Contest / Bake-Off."

Note

The investment bank will typically receive a monthly work fee to compensate them for their attention to the project should buyers not produce a value acceptable to the seller.

Request For proposals (RFP)

An organization, typically a government agency or large corporation, posts a request for proposals (RFP) to receive a formal bid from potential vendors for the desired IT solution. 

The company seeking the work must create an RFP before inviting proposals from potential bidders. Contractors and vendors can review your RFP after you've distributed it and submit their best bids to compete.

An RFP can assist you in completing a project for your business that is either new (often large) or more complicated and calls for some outsourcing.

You can quickly learn about the advantages and disadvantages of potential vendors for your project using the RFP document without having to spend a lot of time looking for them.

The RFP outlines the customer's requirements and each evaluation standard used to evaluate a vendor's proposal.

The request for proposals also gives bidders instructions on how to put together a proposal. This section will give specifics on the proposal format and guidelines for constructing and arranging the RFP response.

When looking for an integrated solution that requires various technologies, vendors, and potential configurations, an organization can benefit from receiving multiple bids and viewpoints.

Note

For example, a company switching from a paper-based system to one computer-based might ask for proposals for all the hardware, software, and user training needed to set up and integrate the new system into the organization.

In contrast, a straightforward hardware upgrade requires sending a single vendor an RFQ. Once your RFP has been distributed, vendors and contractors can review it and offer their top prices to compete for the job.

Vendors typically include the following items in these proposals:

  1. A strategy for addressing the problem
  2. A schedule of what to anticipate
  3. Any background information required
  4. What will the projected final price of the project be?

RFP Process

If you're trying to decide whether an RFP is necessary for your organization, but there aren't any policies or rules requiring one, consider these factors in your analysis. Additionally, compare these advantages to the processing time and resource requirements. 

You should be able to decide whether it's necessary or wise to issue an RFP after conducting that analysis. Using resources to create an RFP is not worthwhile.

Simply put, finding a vendor to satisfy an organizational need is one of the most fundamental and frequent factors businesses use to decide whether to issue an RFP. 

The accountability and transparency provided by the process are other factors that influence an organization's decisions to publish an RFP.

  • Decide which important parties will be impacted by the purchase.
  • Call an internal team meeting to establish a budget and discuss general and detailed business goals.
  • Make a list of targeted and specialized questions. It exists as a neutral framework that makes a good starting point. Specify a certain number of open-ended inquiries.
  • Ensure the vendors know their responses will be compared to those of other vendors.
  • Most importantly, give your prop extra attention. If the specifications are vague, some vendors might choose not to respond to your project. By editing the proposal, you can aid providers in better understanding it.
  • Editing software can help you save time and improve your writing if you're having trouble cleaning up your document.

Note

Requests for proposals are formal requests in which an issuer asks suppliers to submit proposals that show how a good or service they provide can meet one or more of the main needs of the issuer's business. 

RFPs have long had a significant impact on business. RFPs enable suppliers to showcase the distinctive advantages of their solutions while allowing issuers to evaluate the various suppliers' offerings.

It's crucial to give vendors background information and context so they can better understand your company's needs if you want to find the best partner for your business. 

Vendors will consequently be able to respond appropriately and have a better understanding of the circumstance. Issuers must give vendors specific information about the issues they want to address in their RFP. 

As previously stated, it is evidently in the issuer's best interest to make this document as transparent as possible. This will improve the accuracy and value of the proposal and make it simpler for the supplier to comprehend.

Investment Banking Divisions In Beauty Contest/Bake-Off

Investment banks serve as intermediaries between prospective buyers and sellers of businesses, business units, and assets. In the course of an M&A transaction, they serve as advisors to either sellers or potential buyers.

Investment banks are just one department within an investment bank, whereas investment banking refers to organizations with numerous other departments and divisions. IBD is another name for it (Investment banking division or Corporate finance division).

Bankers from the M&A team, industry coverage team, and/or country coverage team would typically make up a deal team. Due to the highly confidential nature of M&A, investment bankers in marketing sensitive information.

Investment banks are invited to compete in a "beauty contest" for the assignment to serve as the selling company's advisor when a company decides to sell itself or divest a business division. 

Investment bankers present their qualifications for the position, strategy, buyer identification, early valuation opinions, and a fee proposal. Typically, the seller's main goal is to sell the asset for the highest price attainable. 

There may be additional elements that are crucial to the seller. The sell-side advisor oversees the sales process while coordinating with the client, prospective buyers, attorneys, and accountants.

Note

Investment banks that aren't on the sell-side of an M&A deal frequently try to represent potential asset buyers.
 

The buyer's primary goal is to prevail in the auction at the best price and conditions. There may be additional elements that are crucial to the buyer.

The buy-side advisor's job is to coordinate with the sell-side advisor and other advisors, such as attorneys and accountants while assisting the client through the auction process.
Companies may raise capital to finance operational requirements, expansion, acquisitions, and refinancing current debt.

Investment banks provide advice and serve as underwriters for companies seeking debt and/or equity financing. The investment bank places the recently issued financial securities with investors rather than providing the funds directly.

Similar to M&A deals, clients invite investment banks to compete in a "beauty contest" to pitch for a part in the issuance. A "syndicate" of banks will typically be hired, with some banks holding more senior positions than others.

Capital can be raised by issuing new shares to investors in exchange for money.
A privately held company becomes (at least partially) publicly owned through an initial public offering (IPO) (shares traded on a stock exchange).

Note

Private placements and secondary (follow-on) offerings are two more instances of equity issuances.

Risk of using Beauty Contests to draw in Foreign Investment

By examining factors such as market access, skill levels, land prices, tax structures, levels of corruption, and so forth, academics have attempted to understand this and have determined which nations appeared attractive to investors.

However, factors much more local in scope than countries are what draw investment flows across the globe. In many ways, the story of globalization is one of the connections between specific sub-national regions worldwide. 

Companies are more interested in what they receive from a specific city or region than what a nation offers. Tens of thousands of investments have been examined in recent and ongoing research, region by region and project by project. 

It becomes clear that businesses are drawn to a particular set of regional circumstances. Investment attractiveness also varies greatly depending on the firm's strategies, industry, and stage in the global value chain.

So how does a business decide where to invest? What are the main determining elements? How do you lure a new Amazon base or steal a major corporation from post-Brexit London?

New research reveals which investments respond to factors that are at the national level and which activities respond to local factors. Hundreds of North American cities provided incentive packages to lure Amazon's second headquarters.

Note

Amazon invited bids from 238 US cities in September 2017 to host its second headquarters.

The importance of outside investment to local communities was made clear by this competition. Still, recent research indicates that national factors fundamentally impact where headquarters are located. Other subnational factors are only marginally significant.

Businesses search for various locations for various activities. To understand what activities best match the local environment, it is important to look closer rather than just at individual firms. 

This includes looking at the range of activities a firm can engage in, such as R&D, manufacturing, or marketing. 

Research demonstrates, for instance, that R&D investments are concentrated in the sub-national areas that multinational corporations consider conducive to innovation, such as university towns with their vibrant and cooperative environment. 

Beyond providing financial incentives, local policymakers can take much more action in this regard. Overall, the type of activity (such as headquarters vs. R&D) or the value chain, rather than the sector, determines where businesses locate.

Understanding how various types of businesses, such as multinationals from advanced economies versus emerging economies, sort themselves into various regions depending on the type of investment, such as greenfield vs. acquisitions or activity.

It is crucial to comprehend why some cities and regions of the world suck in vast flows of investment while others are left seemingly untouched (e.g., R&D vs. HQ or production).

Researched and Authored by Athira Anand M | LinkedIn

Reviewed & Edited by Ankit SinhaLinkedIn

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