The Role of Investment Banks in M&As

Investment banks play a key role in the financial services industry, particularly concerning mergers and acquisitions (M&A). Learn more about how banks assist with M&As, including their role as advisors that offer insights on market trends and conditions.

What Are Investment Banks?

Chances are, you can recognize the names of major investment banks such as Goldman Sachs or JPMorgan Chase. However, do you know the definition of what is an investment bank, or what is the investment bank role in M&A?

An investment bank is a type of bank that assists with advising companies on complicated financial transactions, such as M&As. It is materially different from a consumer-oriented bank where you might establish a checking or savings account.

Companies rely on the knowledge and insights of investment bankers to assist with complicated transactions, whether it's by advising a business owner who wants to sell, conducting due diligence for an acquisition, assisting with negotiations or helping a company raise capital or prepare for an initial public offering (IPO).

With that in mind, let's take a deeper look at the role of investment banks in merger and acquisitions.

Key Roles of Investment Banks in M&As

The investment banking M&A role varies depending on the life cycle of the deal. Moving through that life cycle, here are some key ways that an investment banker assists in the process:

1. Advisory Services:

In the advisory phase, the bank's role is to assess the market, analyze trends impacting the business sector or the broader economy and advise the company on what is in its best interest. For example, the bank might compare potential buyers and weigh in on which buyers have the right profile based on their finances.

2. Valuation:

A business valuation estimates the value of a company using a predetermined method. Well-known M&A valuation methods include market capitalization, balance sheet or discounted cash flow. To conduct a valuation, an investment banker will review financial statements and market conditions, take into account growth potential and help to set a baseline for M&A negotiations.

3. Deal Structuring:

Once the planning part is over, the banker can assist in designing the financial structure of the M&A. Not only can they offer advice on how to best finance the deal, but also they can structure the deal for regulatory compliance and low tax implications.

4. Negotiation:

As the deal moves through the negotiation phase, an investment banker looks out for the interests of their client, whether it's the buy-side vs. the sell-side. The banker may mediate conflicts with an eye toward aligning the interests of both parties, or they may take a leading role in the negotiation process.

5. Due Diligence:

In the M&A due diligence phase, the banker will perform a strategic evaluation of M&A data to identify and mitigate any risks. This includes pointing out red flags, checking the financial and operational health of the target company and ensuring that a strategic fit is there.

6. Regulatory Compliance:

As mentioned above, the investment bank takes steps to make sure the deal meets any financial regulations. Given the complexity of the regulatory landscape around mergers and acquisitions investment banking assistance is a necessary step to make sure that all regulatory and legal boxes are checked.

Investment Banking M&A Process

While the M&A investment banking process looks a bit different depending on whether the bank is working for the sell-side or the buy-side, let's review the process and the bank's responsibilities throughout.

• Initial Discussions and Planning: In this phase, the bank takes a high-level overview of the industry, sector and financial trends that impact the deal. There generally are no specific targets involved at this point; that comes later. This phase typically ends when the investment bank has enough information to put together an offer and then reach out to potential clients who may be a fit. As part of this phase, the bank will also come up with a business valuation using one of the methods mentioned above.

• Target Identification and Screening: At this phase, investment banks vet buyers (if they represent the sell-side) or sellers (if they represent the buy-side). They screen the other side to check for alignment, looking for potential pitfalls to avoid and opportunities for mutual gain. Assuming that both the buyer and seller are interested in moving forward, the deal proceeds to the due diligence phase.

• Deal Structuring and Negotiation: Once a valuation is set, the bank assists with negotiations. Investment bankers have significant experience in negotiating a deal that is mutually beneficial and delivers profit for the buy-side and the sell-side. This is where a banker's experience in negotiating and structuring a deal has a significant impact.

• Due Diligence: Due diligence is a research-intensive process that thoroughly vets the financial information of the target company, to ensure that everything is accurate and complete.

• Closing and Post-Merger Integration: Negotiations continue until both sides are satisfied. At this point, the investment banker takes care of regulatory and legal compliance needs and attends to deal closing tasks. The banker can step into an advisory role during the post-merger integration, as the target company is subsumed into the operations of its new partner.

Benefits of Using Investment Banks in M&As

Let's recap the chief benefits of using an investment bank in the M&A process:

• Expertise and Experience: Investment banks have expertise and experience that companies do not. Leveraging their specialized knowledge helps a company secure the most profit from the deal, whether they are the buyer or the seller.
• Access to Networks: Investment banks specialize in M&A deals. They have vast networks of industry contacts and potential buyers/sellers to tap into, and act as the main point of contact between buyer and seller. For a business owner thinking of an M&A as a valuable exit strategy, this is invaluable.
• Objective Advice: From start to finish, investment bankers provide unbiased, professional advice to their clients. The bank is able to maintain an objective point of view at times when high emotions may override the client and potentially destabilize the deal.
• Efficiency: It should be clear how buyers and sellers would not be able to connect, negotiate a deal or see it through to completion without an investment bank's support. Taken together, each of these benefits streamlines the M&A process, saving companies time and resources while also maximizing financial gain.

Investment banks guide companies through the M&A process by lending their expertise at every phase of the deal. Whether it's in researching the market, connecting potential buyers with sellers, reviewing the financial statements, negotiating the deal or ensuring that the deal meets all regulatory and compliance measures, it should be clear now that the bank is an invaluable partner in the process.

While choosing the right investment bank is critical to securing a good deal, so is using the right M&A software throughout the deal. Discover how DFIN's signature software is a one-stop solution for M&As, reducing the complexity and workload of preparing for deals and keeping everything on track for a successful close.