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.
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.
M&A deal origination on Wall Street
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.
“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. 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.
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.
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.