The Role Of Investment Banks In Mergers And Acquisitions
Author: LawSphereX
Category: Corporate & Insolvency
Published:
Updated:
THE ROLE OF INVESTMENT BANKS IN MERGERS AND
ACQUISITIONS
Vinayak Sharma, Army Institute of Law Mohali Mergers and Acquisitions also referred to as M&A, are a set of business transactions through two separate entities combine to form one. There are various means through which this process is achieved one being mergers (where two entities may merge to become one) or acquisitions (where one entity acquires control of another). For both mergers and acquisitions there are a number of ways through which they can happen, in cases of mergers for example, there are horizontal mergers, vertical mergers, market-extension mergers and etc, in cases of acquisitions, there are stock sale and asset sale. These are acts that are aimed towards accelerating growth, expansion and influencing the industry. The most important aspect in executing such deals is having proper strategies in order to bring maximum profits from these deals.
It becomes easy to refer that in order to fund these transactions there are many intricacies required to be fulfilled this includes the most important factor Funds for these transactions along with other necessities such as due diligence, valuation, deal structuring and etc. And to assist firms in these aspects’ investment banks play a crucial role. Investment Banks are primarily intermediaries that help companies raise capital. When it comes to mergers and acquisitions investment banks play two roles: seller representatives or buyer representative. However, they may also choose to act exclusively as advisors in the procedure as well. The exact work of the Investment Bank differs as to whether they are on the buy side or the sell side.
Having understood the basics lets dive into some of the roles played by investment banks in M&As: ADVISORY FUNCTIONS: Like discussed earlier Investment Banks may exclusively play an advisory role in facilitating M&As. This includes providing strategic advice to firms looking to enter into these transactions. Investment Banks provide comprehensive market research,
company insights identifying potential buyers or sellers, valuation and etc. Investment Banks also advice in aspects of managing debt, risk management, financial structure etc. Investment banks also advice in matters in relation to maximising shareholder value and brining the most returns for their investments. VALUATION: Investment banks conduct thorough research and analysis of the entities involved in the deal. They analyse financial health of companies including their assets, liabilities, ROI and other important financial factors. Valuation is a fundamental feature in any M&A deal and require technical expertise. Valuation however differs from price, as rightly said, “Price is what you pay, value is what you get” value is typically the price at which a rational buyer would purchase, in M&A deals understanding valuation is key to making sound decisions.
DUE DILIGENCE: Due Diligence is an essential first step before entering into any deal. Investment banks help entities verify that all legal compliances are being met as part of the deal that they might undertake. Due Diligence helps make informed decision and ensure a higher success rate in the transaction. Due Diligence includes looking into finances, legal issues, strategic fit, corporate matters and many other such key factors. Due Diligence is necessary in order to minimise the risks associated in M&A deals. This provides a better understanding into the working of the business and its operation. FINANCING: Investment banks also help firms in financing their deals. This includes raising capitals in form of debt or equity or both. This also forms part of their advisory functions that these banks perform.
The most common method of financing is through a line of credit or loans or can happen through staple financing. Favourable or efficient financing can help small scale companies increase their operations. Understanding the nature of financing is key as it may result in varied consequences. There are two types of M&A financing, Debt Financing and Equity Financing. Debt Financing primarily refers to borrowing money from lenders on the condition of repaying them later, usually with some interest, debt financing is usually difficult for small scale start-ups. Equity Financing means either selling the equity of the firm in order to raise capital for the deal or a stock swap/ using the company as equity for the deal. Equity financing may however lead to dilution of the company’s ownership.
DEAL STRUCTURING: Investment banks provide major assistance in deal structuring and help make the deal a reality. This includes long and hard negotiations along with closing the deal. Negotiations in M&A require some of an intermediary and investment banks play that role to
help the bring the entities together and put signatures on the dotted line. The process of negotiation involves getting both the parties to agree on the deal. The aim of these negotiations is to bring the deal to a close and complete the drawn process as planned. Investment bankers are well equipped with the knowledge of how to bring most profit to both sides. Negotiations have an added layer of technicalities as it involves negotiating on several different fronts such as aspects of valuation or management etc, these things require technical expertise for which investment banks have to step in. POST-MERGER INTEGRATION: Post merger or acquisition there follows a complex process of integrating the new entity with the buyer’s firm.
This integration requires Investment Bankers to carry out a seamless, smooth and careful transition and to advice their clients on various aspects such as management, operations, structure etc. This is another key aspect and the final step in ensuring the completion of the deal, if this step is done incorrectly, if might lead to the failure of the whole transaction. These are some of the common functions that are performed by investment banks in Mergers and Acquisitions, however the exact roles differ in nature from the buy-side to the sell-side. BUY-SIDE: From the buy side investment banks aim to find the perfect target company to merge or acquire. Valuation plays a pivotal role from the buy-side as these companies are looking to invest a large sum into their deals. Investment banks perform Due Diligence with regard to the target company.
This also includes analysing the buyer’s capital structure and helping the buyer finance the deal. Another important role is to help the buyer with post-merger integration. All the steps and functions performed by Investment Banks from the buy-side are aimed at bringing the maximum value for the buying company. SELL-SIDE: From the sell-side Investment Banks pick up the role of making pitch decks for selling the company and advise the firm on how to grow in order to attract better investment. While on the buy-side valuation is important to ascertain the price at which to buy or the value of the firm on the sell-side valuation is key to understanding the current state and position of the firm in order to search for targeted buyers. Investments Banks on the sell-side have immense legal duties when it comes to compliances and Due Diligence checks of the selling company.
The main goal is to negotiate with the buyer and find the best value for money. Finally, the aim of an Investment Bank from the sell-side to maximise opportunity of getting investments and formulate the maximum profitable conditions.
In conclusion, Investment Banks play a pivotal role in Mergers and Acquisitions deals, by acting as the primary intermediary between the buying and selling entities. They overtake key functions that are fundamental to forming and executing such deals, and provide the necessary assistance in making rational business decision. Their expertise, knowledge and execution capabilities are instrumental in facilitating successful M&A deals. The main purpose of these Investment Banks is to provide their client with maximum profit out of their deal. Their roles differ in detail however fundamentally are the same on both the buy and sell side. As the global economy continuous to develop the role of these investment banks remains pivotal in the M&A environment.
Through these successful deals investment banks help shape the industry and influence corporate affairs both domestically and internationally.
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