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The Ultimate Guide to Investment Banking M&A

Marsha Lewis
VP of Marketing at DealRoom
Marsha Lewis
VP of Marketing at DealRoom

The US investment banking industry is a behemoth. 

In 2021, it is estimated that the country is home to around 3,000 companies, earning about $140 billion. It’s not only massive, it’s also pervasive: investment banking usually has some hand in the biggest transactions occurring across every other industry. 

DealRoom helps lots of investment bankers across the globe in M&A deals execution and in this article, we seek to provide an extensive guide to this mammoth industry and its workings.

What is M&A investment banking?

The role of bankers in M&A deals (M&A banking) is to advise other companies and execute transactions where the owners sell their business to buyers, acquire smaller companies (targets), and divest or acquire specific divisions or assets from other companies. In broad bankers execute sell-side and buy-side M&A deals.

In other words investment banking is the industry that oils the wheels of mergers and acquisitions (M&A) in every industry. The merger of two or more companies through M&A is a complex process with a lot of moving parts. 

It demands particular expertise in areas such as company valuations, capital raising, investor communications, deal negotiations, and more.

Good investment banks specialize in all of these areas, enabling them to act as intermediaries for companies that want to acquire or merge with other companies.

Learn more:
The ultimate guide to investment banking

The M&A group in investment banking

Although this article uses the terms M&A and investment banking interchangeably, there is some distinction. M&A is the main subset of investment banking. Indeed, most of the 3,000 investment banks in the United States are only concerned with M&A and capital raising.

However, the investment banks at the top of the pile offer a more diversified service range that also includes:

  • Underwriting for IPOs.
  • Sales & trading
  • Equity & industry research
  • Advisory services

What is the role of investment bankers in M&A?

So, what do investment bankers do?

As the previous section alluded to, investment bankers make deals happen

The best leaders of companies usually have at least a shortlist of companies that interest them in mind at any one time. However, to make those deals happen, they usually hire investment bankers that have a specific set of technical skills suitable for deal making. 

This enables them to extract the maximum value from the tasks they conduct as part of their mandate from the company. 

These tasks usually include:

  • Providing industry overviews: What are the current dynamics in an industry? For example, in the oil and gas industry, it’s all about the energy transition. In the retail industry, it’s all about the scramble for e-commerce. Providing a detailed industry overview is the job of investment banks, and informs the decision about which companies are most relevant for the M&A process.
  • Deal origination: Investment bankers first find companies that are suitable and attractive, and then narrow this down to companies that are possible to acquire or merge with. 
  • Company Valuation: Valuing companies, public and private, is the bread and butter of investment banks. An investment bank will usually develop a valuation using a complex financial model that takes account of all of the target company’s current and projected financial results. It’s also the role of the investment bank to advise the company on any deviations from this valuation - e.g. if the target company management is expecting a valuation above the offer on the table. 534
  • Negotiation: CEOs can’t easily approach other CEOs with some form of intermediary. When an investment banker is the intermediary, the intention for everyone is obvious: one side is looking for a transaction of some form, and wants to be transparent about it. If this leads to some form of negotiation, the investment banker will be brought on board to help their client in the process.
  • Due Diligence: The fact that experienced investment bankers will have participated as intermediaries on dozens of deals makes them far more capable of knowing the issues to look out for at the due diligence phase than the average business owner. The investment bank will also have their own legal team to look over regulatory and compliance issues relevant to the deal.
  • Deal Closing: Deal closing is not as easy as signing on a dotted line and walking away with the ownership of a company. Rather, it involves a careful final assessment of all the terms and conditions involved, and accounting for contingencies. Again, given that investment bankers will have done this dozens of times, they’re far more capable than the standard business owner of ensuring that nothing is missed in the closing.
  • Post Merger Integration: What happens after the transaction has closed (PMI or simply ‘integration’) can add or destroy as much value as what happens before closing. Hence, investment banks and the wider consulting industry have developed a playbook that enables them to advise companies on how best to integrate the newly acquired company into their own.

What is the investment banking M&A process?

The following is an overview of the M&A process from an investment banker’s perspective:

  1. Develop an acquisition/exit strategy
  2. Connect to the buyer or seller
  3. Conduct a valuation analysis
  4. Begin negotiations
  5. Assist with due diligence
  6. Lead the closing and settlement of final terms

Let's take a closer look:

  1. Develop an acquisition/exit strategy. This includes M&A criteria, analysis of M&A trends, and appropriate targets/acquirers. This may be done for a specific company, or the investment bankers may begin the process and then reach out to prospective buyers/sellers.
  2. Connect to the buyer or seller. Investment bankers often work with Corporate Development to get through gatekeepers and begin a meaningful conversation with the C-suite executives or owners on the other side of the deal.
  3. Conduct a valuation analysis. Once a connection has been made between companies and both parties have chosen to continue down the M&A road together, the investment banker will continue to evaluate prospective targets. 
  4. Begin negotiations. If working for the buy-side, the investment banker will help the buyer develop and deliver an appropriate offer.
  5. Assist with due diligence. During diligence, investment bankers continue to dive deeply into the financials and often will serve as one of the major sources of communication between the buy-side and the sell-side. 
  6. Lead the closing and settlement of final terms. Investment bankers are largely responsible for negotiating the final terms of the deal.

Are the process differ from sell-side and buy-side?

Buy-side investment bankers must raise capital for their clients and help them determine what to buy. On the sell-side, investment bankers generate interest from potential buyers and help create an appealing purchase for the buyer. 

Sell-side investment banking vs. buy side investment banking

The roles of investment bankers diverge somewhat depending on whether they’re working for a company on the buy-side (i.e. looking to buy another company) or the sell-side (i.e. looking to sell part or all of their company). 

Investment bankers will be able to perform buy-side and sell-side transactions, and will usually be active on both sides across a range of transactions at any one time.

For investment bankers representing the sell-side, main role responsibilities include:

  • Creating the company’s pitch deck and sale materials, including its financial projections.
  • Consulting with the company on what it needs to do to improve its marketability.
  • Advising the company on the best avenues for a sale of the company (e.g. through private equity, industry sale, MBO, etc.)
  • Conducts a valuation of the company based on current company and industry level trends.
  • Identifies and contacts potential buyers in the market, usually including several industry contacts of the investment bank and other investment banks with buy-side mandates.
  • Acting as a gatekeeper between the selling company and potential buyers, filtering out ‘tyre kickers’.
  • Conducting negotiations on behalf of the selling company and potential buyers as they express interest in a transaction.
  • Facilitating deal closure through provision of documents such as the letter of intent, share purchase agreement, letters to regulators (if required), etc.

For investment bankers representing the buy-side, main role responsibilities include:

  • Establishing the buying company’s ultimate goals from a transaction, gaining insight into the kinds of companies that will allow them to achieve these goals.
  • Advising the company on recent transactions and what they can expect to pay for a transaction in the market. This is a particularly important role for investment bankers in the case of cross-border deals.
  • Contacting target firms and gauging their interest in a transaction of some form.
  • Conducts valuation of the companies that express interest in being acquired or entering a merger.Like the sell-side process, this usually includes several industry contacts of the investment bank and other investment banks with sell-side mandates.
  • Conducting negotiations on behalf of the buying company and potential sellers as they express interest in a transaction.
  • Ensuring that deal diligence is conducted thoroughly for the buy-side.
  • Facilitating deal closure through provision of documents such as the letter of intent, share purchase agreement, letters to regulators (if required), etc.

Typical investment banker fees in M&A

Not a surprise that investment banks generate money through transactions. Every time that a deal closes, the investment bank that advised on that deal gains a commission.

As such, when the industry reports revenues of $140 billion in total, it’s not difficult to see how investment banks are generating significant revenue streams for their partners. 

Investment banking fees have quite a few variables. At the broadest level, the fee will depend on the type and size of the deal.

In addition, some investment bankers require a retainer (also known in the industry as an “engagement fee”). The percentage the banker walks away with at the end of the deal greatly depends on the size of the deal. 

According to investmentbank.com, mid to lower market deals should expect to pay their investment bankers based on the Lehman or double Lehman formula (for even smaller deals), which states the bankers will receive 10% of the first million.

Finally, the Aligned Method is another way fees are determined. Some believe this method provides more of an incentive for the banker to negotiate the best possible deal. This scale has the investment banker earning 1.75% of the first fifty million

Software for investment banking M&A

Virtual data rooms (VDRs) are a tool most investment bankers use when working on deals, and, in some cases, they may be responsible for the set-up of the VDR.

However, investment bankers interested in simplifying and streamlining their M&A process will select a platform that is not only a VDR, but is also equipped with project management software.

Careers in investment banking

With so much financial reward, it should come as no surprise that careers in investment banking are among the most coveted of all jobs, with top tier investment banks receiving several hundred applications for every job posted.

This also gives them considerable leverage in choosing from the highest achievers and hardest workers, and making them put in long hours when they do join the company. A typical investment banker can expect to work in excess of 60 hours per week in a regular week and more as deals demand it.

DealRoom conducted research into investment banking careers which can be found here.

What are the typical activities investment bankers do every day?

Investment bankers work long hours, often logging close to 100 hours a week, and while no two days may be the same, there are some common tasks these bankers engage in. The job requires strong organizational, analytical, and mathematical skills, as well as robust social skills.

Analysts assist senior level bankers with a variety of tasks, such as creating pitches, models and valuations. Additionally, investment bankers will participate in M&A transaction calls on both the buy-side and the sell-side. 

Finally, when the deal moves along, the investment bankers help negotiate the terms of the deal.

Read also about The Current State Of Investment Banking Culture.

What are the salaries of M&A investment bankers?

Investment bankers are often synonymous with high paychecks. Specifically, at the top banks, M&A investment bankers make approximately $100,000 in entry-level positions.

The average range for first year analysts is $70,000-$150,000, with the top banks most likely raising this average. After a few years, analysts typically fall into the range of $125,000-$150,000.

Associates, on the other hand, tend to fall into higher pay ranges, with first year associates often making close to $200,000 and possibly up to $300,000 or $400,000. As associates put in more and more years, some sources have them making close to $500,000 a year.

Finally, vice presidents and partners inch closer to, and sometimes above, the million dollar mark.

dealroom

The US investment banking industry is a behemoth. 

In 2021, it is estimated that the country is home to around 3,000 companies, earning about $140 billion. It’s not only massive, it’s also pervasive: investment banking usually has some hand in the biggest transactions occurring across every other industry. 

DealRoom helps lots of investment bankers across the globe in M&A deals execution and in this article, we seek to provide an extensive guide to this mammoth industry and its workings.

What is M&A investment banking?

The role of bankers in M&A deals (M&A banking) is to advise other companies and execute transactions where the owners sell their business to buyers, acquire smaller companies (targets), and divest or acquire specific divisions or assets from other companies. In broad bankers execute sell-side and buy-side M&A deals.

In other words investment banking is the industry that oils the wheels of mergers and acquisitions (M&A) in every industry. The merger of two or more companies through M&A is a complex process with a lot of moving parts. 

It demands particular expertise in areas such as company valuations, capital raising, investor communications, deal negotiations, and more.

Good investment banks specialize in all of these areas, enabling them to act as intermediaries for companies that want to acquire or merge with other companies.

Learn more:
The ultimate guide to investment banking

The M&A group in investment banking

Although this article uses the terms M&A and investment banking interchangeably, there is some distinction. M&A is the main subset of investment banking. Indeed, most of the 3,000 investment banks in the United States are only concerned with M&A and capital raising.

However, the investment banks at the top of the pile offer a more diversified service range that also includes:

  • Underwriting for IPOs.
  • Sales & trading
  • Equity & industry research
  • Advisory services

What is the role of investment bankers in M&A?

So, what do investment bankers do?

As the previous section alluded to, investment bankers make deals happen

The best leaders of companies usually have at least a shortlist of companies that interest them in mind at any one time. However, to make those deals happen, they usually hire investment bankers that have a specific set of technical skills suitable for deal making. 

This enables them to extract the maximum value from the tasks they conduct as part of their mandate from the company. 

These tasks usually include:

  • Providing industry overviews: What are the current dynamics in an industry? For example, in the oil and gas industry, it’s all about the energy transition. In the retail industry, it’s all about the scramble for e-commerce. Providing a detailed industry overview is the job of investment banks, and informs the decision about which companies are most relevant for the M&A process.
  • Deal origination: Investment bankers first find companies that are suitable and attractive, and then narrow this down to companies that are possible to acquire or merge with. 
  • Company Valuation: Valuing companies, public and private, is the bread and butter of investment banks. An investment bank will usually develop a valuation using a complex financial model that takes account of all of the target company’s current and projected financial results. It’s also the role of the investment bank to advise the company on any deviations from this valuation - e.g. if the target company management is expecting a valuation above the offer on the table. 534
  • Negotiation: CEOs can’t easily approach other CEOs with some form of intermediary. When an investment banker is the intermediary, the intention for everyone is obvious: one side is looking for a transaction of some form, and wants to be transparent about it. If this leads to some form of negotiation, the investment banker will be brought on board to help their client in the process.
  • Due Diligence: The fact that experienced investment bankers will have participated as intermediaries on dozens of deals makes them far more capable of knowing the issues to look out for at the due diligence phase than the average business owner. The investment bank will also have their own legal team to look over regulatory and compliance issues relevant to the deal.
  • Deal Closing: Deal closing is not as easy as signing on a dotted line and walking away with the ownership of a company. Rather, it involves a careful final assessment of all the terms and conditions involved, and accounting for contingencies. Again, given that investment bankers will have done this dozens of times, they’re far more capable than the standard business owner of ensuring that nothing is missed in the closing.
  • Post Merger Integration: What happens after the transaction has closed (PMI or simply ‘integration’) can add or destroy as much value as what happens before closing. Hence, investment banks and the wider consulting industry have developed a playbook that enables them to advise companies on how best to integrate the newly acquired company into their own.

What is the investment banking M&A process?

The following is an overview of the M&A process from an investment banker’s perspective:

  1. Develop an acquisition/exit strategy
  2. Connect to the buyer or seller
  3. Conduct a valuation analysis
  4. Begin negotiations
  5. Assist with due diligence
  6. Lead the closing and settlement of final terms

Let's take a closer look:

  1. Develop an acquisition/exit strategy. This includes M&A criteria, analysis of M&A trends, and appropriate targets/acquirers. This may be done for a specific company, or the investment bankers may begin the process and then reach out to prospective buyers/sellers.
  2. Connect to the buyer or seller. Investment bankers often work with Corporate Development to get through gatekeepers and begin a meaningful conversation with the C-suite executives or owners on the other side of the deal.
  3. Conduct a valuation analysis. Once a connection has been made between companies and both parties have chosen to continue down the M&A road together, the investment banker will continue to evaluate prospective targets. 
  4. Begin negotiations. If working for the buy-side, the investment banker will help the buyer develop and deliver an appropriate offer.
  5. Assist with due diligence. During diligence, investment bankers continue to dive deeply into the financials and often will serve as one of the major sources of communication between the buy-side and the sell-side. 
  6. Lead the closing and settlement of final terms. Investment bankers are largely responsible for negotiating the final terms of the deal.

Are the process differ from sell-side and buy-side?

Buy-side investment bankers must raise capital for their clients and help them determine what to buy. On the sell-side, investment bankers generate interest from potential buyers and help create an appealing purchase for the buyer. 

Sell-side investment banking vs. buy side investment banking

The roles of investment bankers diverge somewhat depending on whether they’re working for a company on the buy-side (i.e. looking to buy another company) or the sell-side (i.e. looking to sell part or all of their company). 

Investment bankers will be able to perform buy-side and sell-side transactions, and will usually be active on both sides across a range of transactions at any one time.

For investment bankers representing the sell-side, main role responsibilities include:

  • Creating the company’s pitch deck and sale materials, including its financial projections.
  • Consulting with the company on what it needs to do to improve its marketability.
  • Advising the company on the best avenues for a sale of the company (e.g. through private equity, industry sale, MBO, etc.)
  • Conducts a valuation of the company based on current company and industry level trends.
  • Identifies and contacts potential buyers in the market, usually including several industry contacts of the investment bank and other investment banks with buy-side mandates.
  • Acting as a gatekeeper between the selling company and potential buyers, filtering out ‘tyre kickers’.
  • Conducting negotiations on behalf of the selling company and potential buyers as they express interest in a transaction.
  • Facilitating deal closure through provision of documents such as the letter of intent, share purchase agreement, letters to regulators (if required), etc.

For investment bankers representing the buy-side, main role responsibilities include:

  • Establishing the buying company’s ultimate goals from a transaction, gaining insight into the kinds of companies that will allow them to achieve these goals.
  • Advising the company on recent transactions and what they can expect to pay for a transaction in the market. This is a particularly important role for investment bankers in the case of cross-border deals.
  • Contacting target firms and gauging their interest in a transaction of some form.
  • Conducts valuation of the companies that express interest in being acquired or entering a merger.Like the sell-side process, this usually includes several industry contacts of the investment bank and other investment banks with sell-side mandates.
  • Conducting negotiations on behalf of the buying company and potential sellers as they express interest in a transaction.
  • Ensuring that deal diligence is conducted thoroughly for the buy-side.
  • Facilitating deal closure through provision of documents such as the letter of intent, share purchase agreement, letters to regulators (if required), etc.

Typical investment banker fees in M&A

Not a surprise that investment banks generate money through transactions. Every time that a deal closes, the investment bank that advised on that deal gains a commission.

As such, when the industry reports revenues of $140 billion in total, it’s not difficult to see how investment banks are generating significant revenue streams for their partners. 

Investment banking fees have quite a few variables. At the broadest level, the fee will depend on the type and size of the deal.

In addition, some investment bankers require a retainer (also known in the industry as an “engagement fee”). The percentage the banker walks away with at the end of the deal greatly depends on the size of the deal. 

According to investmentbank.com, mid to lower market deals should expect to pay their investment bankers based on the Lehman or double Lehman formula (for even smaller deals), which states the bankers will receive 10% of the first million.

Finally, the Aligned Method is another way fees are determined. Some believe this method provides more of an incentive for the banker to negotiate the best possible deal. This scale has the investment banker earning 1.75% of the first fifty million

Software for investment banking M&A

Virtual data rooms (VDRs) are a tool most investment bankers use when working on deals, and, in some cases, they may be responsible for the set-up of the VDR.

However, investment bankers interested in simplifying and streamlining their M&A process will select a platform that is not only a VDR, but is also equipped with project management software.

Careers in investment banking

With so much financial reward, it should come as no surprise that careers in investment banking are among the most coveted of all jobs, with top tier investment banks receiving several hundred applications for every job posted.

This also gives them considerable leverage in choosing from the highest achievers and hardest workers, and making them put in long hours when they do join the company. A typical investment banker can expect to work in excess of 60 hours per week in a regular week and more as deals demand it.

DealRoom conducted research into investment banking careers which can be found here.

What are the typical activities investment bankers do every day?

Investment bankers work long hours, often logging close to 100 hours a week, and while no two days may be the same, there are some common tasks these bankers engage in. The job requires strong organizational, analytical, and mathematical skills, as well as robust social skills.

Analysts assist senior level bankers with a variety of tasks, such as creating pitches, models and valuations. Additionally, investment bankers will participate in M&A transaction calls on both the buy-side and the sell-side. 

Finally, when the deal moves along, the investment bankers help negotiate the terms of the deal.

Read also about The Current State Of Investment Banking Culture.

What are the salaries of M&A investment bankers?

Investment bankers are often synonymous with high paychecks. Specifically, at the top banks, M&A investment bankers make approximately $100,000 in entry-level positions.

The average range for first year analysts is $70,000-$150,000, with the top banks most likely raising this average. After a few years, analysts typically fall into the range of $125,000-$150,000.

Associates, on the other hand, tend to fall into higher pay ranges, with first year associates often making close to $200,000 and possibly up to $300,000 or $400,000. As associates put in more and more years, some sources have them making close to $500,000 a year.

Finally, vice presidents and partners inch closer to, and sometimes above, the million dollar mark.

dealroom

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