A Beginner’s Guide to M&A Deal Origination

M&A deal origination, also known as ‘deal sourcing’ is the process through which investment bankers, lawyers and other financial intermediaries ‘originate’ the mandates to advise on companies’ transactions.

As their primary source of revenue for most investment bankers, the importance of deal origination cannot be overstated.

We at DealRoom help companies in deal origination and managing their M&A pipeline so we have some expertise in that. So let's start with the definition:

At the lower end of the market, small-time brokers sell family-owned local businesses, often with no more than a few hundred thousand dollars in revenue.

At the upper end, Wall Street investment bankers sell multi-billion dollar companies with complex structures that employ thousands of people.

What do both have in common?

Each will have conducted some form of deal origination.

How does deal sourcing work

Broadly speaking, there are two ways that deal sourcing works: 

1. You contact a party in the market who is willing (or looking) to close a transaction in the market;
2. The party from (1) above, contacts you about their willingness to close a transaction

The smaller your company or investment bank, the more active you will have to be, and the more likely that you will fall into category (1).

Small brokers, for example, regularly conduct direct mail campaigns offering their services to small business owners in the hope that one of them will need intermediary services, or at least be willing to open a discussion about their intentions for their company.

Likewise, if you’re a small company looking to make some acquisitions to grow your business, you will have to be proactive in sourcing deals.

Large corporations are approached all the time by investment bankers about the possibility of acquiring companies, but it is far less common with SMEs. Good deals generally don’t arrive on the doorstep - you’ve got to do your own deal origination.

The same principle holds for larger investment banks.

While they do seek to originate deals (for example, by creating the pitches mentioned at the outset of this article), they are often approached by large companies to help them with deals.

Smaller boutique investment banks will instead try to network with other banks, drive interest to their websites, and otherwise be more proactive to source deals on which they can work as intermediaries on.

M&A deal origination on Wall Street

‘Chickens!’

First time readers of Jonathan A. Knee's ‘The Accidental Banker’ may have been surprised that a book that purported to be a tell-all about investment banks spent the first few pages talking about chickens.

But Knee’s introduction was in fact a fascinating insight into how many investment banks conduct their deal origination.

He notes:

“M&A bankers spent most of their time thinking up deal ideas, cold calling companies, and occasionally getting the opportunity to formally “pitch” their services, although almost always unsuccessfully. Investment banks “pitching” business usually bring along a prop to assist them in their efforts.”

That is, one method of deal origination for an investment banker is to spot potential opportunities in the market as they arise, pitch these opportunities to would-be interested companies and hope that they’ll award the investment banker for their canniness with the mandate for the deal, paying a commission if a transaction closes.

As Knee himself notes, this method is ‘almost always unsuccessful.’

In Charles D. Ellis’ book on Goldman Sachs, he outlines how the mandates of many of the biggest deals that Goldman Sachs advised on in the 20th century were won through making and maintaining contact with companies that were going places.

This meant sometimes doing things at a loss if the management at Goldman Sachs believed that the company in question would be a valuable client down the road.

Again, a highly risky and time-consuming method and one which would bankrupt the thousands of investment banks that aren’t fortunate enough to possess blue-chip clients.

M&A deal origination outside of Wall Street

Thankfully, technology has contributed enormously to investment bankers’ deal origination efforts so that their golf handicap is less of a concern.

Outside of Wall Street, almost all investment bankers use a combination of the following methods for their deal origination:

1. Mailing lists

Investment banking is not unlike other industries in that maintaining a direct line of contact to previous or potential clients is one of the most cost-effective ways to generate sales.

Smaller investment banks usually send out monthly lists of the companies that they have the mandate for (either on the buy- or sell-side) to everyone on their mailing list.

In this case, the mailing list serves a few purposes: It alerts potential buyers and sellers to the deals that the investment banker possesses - potentially even leading to a transaction - but it also provides them with a reminder that this investment banker is active on the market.

When the time comes around to marketing their own company, the investment banker has increased the chances that they’ll turn to him or her.

Thus, mailing lists are a highly cost-effective method of deal origination.

2. Corporate websites

A company’s website is its shop window onto the world. When SME owners are looking to sell their business, they’ll often scout around the investment bankers in their region or business speciality.

It therefore pays to maintain a professional website which outlines the capabilities of your team.

Correspondingly, updating the website with regular, informed and interesting content enhances the chances of the right people finding you at the right time.

3. Creating a network

All M&A deal origination, on Wall Street or otherwise, involves some form of networking.

Investment bankers are called ‘intermediaries’ for a reason: they’re the ones creating value by bringing two different sides together - two sides which are often completely unknown to each other.

The more relevant networking that’s conducted, the more fluid this process becomes.

Building a network then is key to deal origination.

Because even if your website doesn’t attract an audience, your direct mails aren’t being read and there’s nothing showing up on deal network platforms, you’ll be approached by other investment bankers who know that you’ve got useful contacts.

They’ll become your deal originators by proxy.

3. M&A deal platforms

Increasingly, investment bankers network on M&A deal platforms (sometimes referred to as ‘M&A networks’ or some variant thereof), which are essentially online databases of currently active (and too often, inactive) mandates held by investment bankers, both on the buy- and sell-side.

To their credit, these platforms have provided vastly more transparency to a process that was needlessly shrouded in mystery.

When investment bankers are approached, they’re often quite willing to offer some percentage of their commission if the other party makes a good pitch about a suitable buyer for the company they’re selling.  

Deal sourcing for venture capital

A recent survey of nearly 1,000 VC firms conducted by the Harvard Business Review (see here) shows that over 70% of deals come from connections in their network. 

What this tells us is that deal origination in venture capital is quite distinct from that in regular private equity or M&A deal origination. 

Above all, it demands that venture capitalists wear different hats, are always active, and remain visible in the VC ecosphere.

Recommended strategies include:

• Foster relationships with potential VC partners: Many (most) VC deals involve one VC fund leading the round, and others joining in the funding. Hence, it pays to create, foster, and maintain good relationships with other VC firms to source deals.
• Attend/give workshops and Startup Battlefields: A good way to meet promising startups is to go where they go. That means getting out to workshops, startup battlefields, and even incubators to get your company’s name out there.
• Sign up and become active on Crunchbase: Crunchbase is the go-to listing site for most startups, so you have to be active there. Make introductions and watchlists, making your company visible and relevant to the companies that fit your investment thesis.

Deal origination platforms overview

1. Aurigin

Previously BankerBay, Aurigin sells itself as a platform that connects qualified corporate deals with institutional providers of capital.

The word ‘qualified’ is important here, as Aurigin weeds out any of the poor quality prospectuses that can often be found on other platforms. There’s also quite a long checklist of questions before being admitted on the site to deter any casual onlookers from entering.

At close to $10,000 per year (there’s some flexibility on this), you have to be serious about your dealmaking to make Aurigin work. There’s also no guarantee that any of the deals on the platform will be suitable for your purposes (something that all M&A platforms suffer from).

Finally, Aurigin takes control of all communication between parties to guarantee its cut of any deals, which is a limiting factor.

2. Intralinks

Now 25 years old, Intralinks is thought to be the first virtual data room aimed at the mergers and acquisitions industry.

However, the platform also doubles as a deal origination platform - though its in-platform service called DealNexus - where buyers and sellers can show other users on the platform what they’re selling and/or what they’re looking for in a dealmaking context.

Not unlike Aurigin, as soon as you express an interest in joining DealNexus to originate deals, you will be subject to several sales calls from DealNexus team members keen to sell you its benefits.

They create flexible prices, depending on the size of your business - making it a cheaper option than Aurigin - but still means you’ve got to make that investment in your deal origination to make it pay.

3. Axial

Axial is aimed at the lower middle market, with deals typically in the range $5-$100 million.

It brings together over 5,000 deals per year, the vast majority of which (85%) are mergers and acquisitions, with the remainder being capital raising. Nearly all of its transactions are based in the United States and 95% of them involve an intermediary.

As is common in this industry, it doesn’t publish how much it charges, but prices appear to be based on how many people are working for an investment bank or company.

There are suggestions that this can range from a few hundred dollars a month to as much as $10,000 per month. There’s also an emphasis on reaching out to other intermediaries, which can be one of the most effective ways of sourcing deals.

4. CapTarget

CapTarget is a different proposition to the other deal sourcing platforms here in that it takes an active role in sourcing deals for companies looking to acquire.

In essence, it plays the role of investment banker with a twist: it does not work on a success fee - instead, it leverages its own massive network of intermediary contacts and their mandates to bring you the options that fit your requirements.

CapTarget offers flexible pricing for companies and investment banks, depending on their size. It promises to put acquirers directly in touch with target business owners. The platform also puts together a target list of companies based on your target company criteria. Overall, it represents an interesting proposition to a growing field of competitors.

Conclusion

Mastering deal origination is key to the success of any financial intermediary. The good news is that there are more tools to assist you with deal origination now than ever before.

By being proactive in using them and building your network, you’ll soon gain an overview of dozens of deals happening in the market. The more you repeat these steps, the better your deal flow will become over time. Learn how you can manage your deal flow with DealRoom's Deal Flow Software.

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