A poorly-negotiated deal can cause significant risk to the selling entity and its shareholders.
On the buyer’s end, it can jeopardize the closing and create post-closing liabilities.
But, creating a loop-proof deal is easier said than done, more so in 2020.
Two recent fountainheads are birthing newer challenges for the industry:
The business overhauls of 2019
In 2019, “several major players in the US investment banking industry announced their plans to move from traditional underwriting business to other activities including mergers, acquisitions advisory, and fundraising”, reported Business Wire. This translated into increased competition.
Covid-19 of 2020
COVID-19 made dealings more complex and stretched the timelines.
We will discuss these issues at length. But before we do so, here’s a look at the roles investment bankers play in M&A deals. The issues that an investment banker will come across are likely to stem from the role she is in.
Role of an Investment Banker in an M&A Deal
The role of an investment banker in an M&A deal will vary with the role the bank is playing in the deal. Is it representing the buy side or the sell side? We’ve outlined the most prominent responsibilities here:
If you are on the sell side, you will:
- Understand the industry and the client.
- Identify pointers that will make a compelling investment proposition.
- Assemble marketing materials like “information memorandum” to communicate these pointers.
- Keep a check on the pulse of M&A trends to frame the valuation expectation for the client companies.
- Identify the right time and go-to-market approach.
- Identify and contact potential buyers. Conduct strategic discussions with inclined parties.
- Formulate a bid process for reviewing and selecting buyers.
- Set up online diligence or data rooms.
- Assist in negotiating the final terms.
If you are on the buy side, you will:
- Study the potential target and the industry.
- Assess its strategic fit.
- Identify synergy opportunities.
- Compile the bid strategy and draft the terms of purchase.
- Identify potential issues in the diligence process.
- Analyze the buyer’s capital structure. Help the buyer arrange the financing.
- Assist in negotiating the final terms.
In an IPO, the responsibilities of the banker remain the same as the sell side. But instead of appealing to one buyer, the proposition is made to several buyers.
Issues Investment Bankers Are Likely to Face in M&A Deals
COVID-19 has exacerbated the nature and extent of the existing issues in M&A deals. However, with a lot of prudence, these issues can be mitigated.
# Cost Optimization
Issue:
Cost efficiency has been a concern for investment bankers for quite some time now. Ongoing efforts on this front are thwarted by growing regulatory and digital pressures, declining revenues, and accumulating costs.
How to address:
Investment banking leaders can optimize costs by striking a balance between refining the core activities and investing in new opportunities.
# Improving Client Experience
Issue:
Customer experience demands have extended from B2C to B2B sector.
How to address:
Investment banking leaders can evaluate their current customer experiences with the experiences they’d like to deliver, and accordingly make the necessary changes.
# Cybersecurity
Issue:
Legacy technologies have become risky. The legacy technologies acquired by the acquirer may not be safe and may need them to conduct immediate fire-fighting.
How to address:
Assess the technologies of the selling company before finalizing the deal.
# Documentation and Operations
Issue:
While important documents for public targets such as corporate strategy, terms of previous M&A deals and financial performance are easily available, getting information on middle-market deals can be tricky.
How to address:
Leverage industry connections to get information on middle-market deals. To do this, you may have to manage a greater share of the process in such deals.
# COVID-19
Issues
COVID-19 has impacted M&A deals in many ways. Deal activities have plummeted. The dealings are more complex and timelines are stretched for negotiations, due diligence, buyer agreements, and third-party consents. Buyers have become more cautious. Fewer finances are available and buyers have more difficulty in valuing their target.
How to address:
Many of these issues will recede once the dust settles. However, there will also be lasting changes in the approach and modalities of future M&As. Investment banking leaders need to foresee which changes are temporary and which can be lasting.
The Way Forward
A pro-growth and friendly regulator environment is the need of the hour.
“Drivers such as availability of a significant amount of dry powder, attractive valuations, a very favorable low-interest-rate environment, and access to financing and certain underlying dynamics that have been driving M&A to this point (such as the search for digital capabilities or the desire for scale efficiency) will likely continue.” – Deloitte
However, the investment banking fraternity’s choice to confine itself to buying, selling, or stalling will decide the future M&A activities in 2021 and beyond.
