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All right, all right, all right.Welcome to Investment Banking Insights.This is the only show dedicated to helping you learn both the technical and non-technical aspects of the investment banking process.
Hello, my name is Alex Mason, and I am your host.I'm currently a second year MBA student here at Cornell, and we're here to talk about investment banking.So let's go ahead and talk about the different steps in the sell-side M&A process.
Now, investment banks do a lot of different activities.There's capital raising, there's restructuring, there's initial public offerings, there's buyouts, there's M&A.
But really, one of the core functions of a lot of investment banks' operations is M&A, or mergers and acquisitions. And this is very simply helping a company sell itself to a buyer.
That is basically the function of what the banker is doing, and it's a key piece of what a lot of investment bankers are focused on and can generate a lot of revenue for the firm.
So many different things that investment bankers can do, but let's talk about the different steps in sell-side M&A, which many of you will be doing during your internships once you start working on the desk.
So let's go ahead and talk about the different phases.All right, so there's a couple of different phases here.The first phase is the pitch.So the pitch is really kind of like a pre-phase because the investment bank hasn't won the business just yet.
They're just getting going.So when an investment bank is looking to do a deal, they first have to actually convince a client that they're the right bank to do the deal.So this is really like preparation of materials.
So there's like some materials prep.There's like some, you know, some initial valuation work.
And basically the goal here is to win the business, to get the mandate, because if you can convince the client that you're the right bank for the job, that really kicks off the whole process.
There's nothing left for the deal team to do if you don't actually have the mandate of the business.So this is step one.
This is really a key part of what directors and management directors work on, because they're the ones doing the outreach, they're the ones building the relationships, they're the ones really winning that business.
And then the deal team helps execute once they've won and also of course helps prepare certain materials for the actual pitch itself.
What will happen is the team will go to the client, maybe it's a financial sponsor, maybe it's directly with the management company of
the company and they'll sit down with them and they'll basically give them a presentation and say, look, we believe we're the best people to sell your business for reasons one, two, and three.
And just give them a really crisp presentation with a lot of detail and basically sell.Basically you have to sell the client on your services before you can actually help the client sell themselves.So that's the first thing.
Now we're going to move on to phase two.So phase two is really all about prep.This is organization and prep. So once the investment bank has the deal in terms of has the client, they actually have to make the deal happen.
And before you start marketing the business to buyers, there's a lot of things that you need to do in order to make sure you're ready.So there's a couple of different aspects of this. So there's some more valuation work that happens.
So initial valuation, because once you've won the client, you have more access into their financials.You have more access to management, more access to information.
So you can come up with a better estimate of the value of the business once you're in this phase.And then there's also marketing materials that you're prepping.
And one of the primary aspects of this is something called the SIP, also known as Confidential Information Presentation.An earlier version of this in the industry used to be referred to as the SIM, Confidential Information Memorandum.
Basically, this is a really, really fancy PowerPoint deck. And in the old days this was a really really fancy Word document.So things have shifted more on the visual side in terms of what this document is.
This is one of the big things that I was working on this past summer and one of my deals where we were in this phase of marketing preparation.
It's basically a 60 to 80 page PowerPoint deck outlining everything about the business, the positioning, why the investment bank is the best one for the job, and really just outlining the key competitive strengths of the business and also highlighting some potential weaknesses and what the mitigating factors are to make sure those weaknesses are minimal.
So this is a huge, huge piece of it is this CIP right here.There's also a couple other steps here, things like confidentiality agreement.
And this is really just kind of a general legal document to make sure that the right information is being shared with the right people and not being shared with the wrong people.And then you also have a preparation of a buyer's list.
So when you're getting ready to sell a business, you need to, of course, think about who is going to buy this business, who are the likely suspects going to be.
And you can separate this out into strategic companies or financial sponsors, or you can also kind of rank them in terms of most likely to buy based on prior history.
There's all sorts of ways that you can look at it, and we can get into this kind of stuff more in detail later, but Fundamentally, this is a really important step.The preparation of your marketing, your initial valuations,
your buyers list, this is all really key stuff.And I just spent a good chunk of my internship doing this kind of work.So moving on to phase three, this is where things really get going now.So this is the marketing phase.
You've done the prep work, you've worked with your deal team to kind of get going.Now you actually have to go find a buyer for the business.And so this is really exciting because
You're now actually interfacing with financial sponsors who might be a good fit to buy the business. strategic companies that might be a good fit to buy the business.
And you're helping them understand what you're doing and helping them understand why this business is different than other ones that they've seen before.Of course, every buyer wants something a little different.
Sometimes buyers only want to make acquisitions in a certain niche or certain industry space.Sometimes they're really just looking for synergies.
Sometimes they are not as picky and they just want to kind of continue to build their empire, whatever it is.So you have to kind of understand what the buyer's motivations are and that can help you in this marketing phase.
So with marketing, of course you got to contact the buyers, right?You got to reach out, hey, we have this business for you, here's some things you might find attractive, et cetera.There's a whole aspect to that.And then there is the receiving.
the IOYs.So an IOY stands for indication of interest.This is the initial response that you'll get from a potential buyer saying, hey, I'm formally interested in looking at this business further.Let's take it to the next step.
So it's literally just a PDF or a Word document you get from a potential buyer outlining why they think that they should have the business and what they think the valuation should be.And again, they're not actually making an offer at this point.
They're just kind of testing the waters and letting you know as the investment banker that they wanna move on to the next step.So moving on to step four. This is called LOI or letter of intent.
So at this point, you've narrowed down the pool of potential buyers and they're now doing more detailed due diligence to try to figure out, do they actually wanna buy this business or not?So there's a couple of things that goes into this phase.
So there is the management presentations. This is when the potential buyer sits down with the investment bankers and the management team of the client and basically goes through another presentation.
But this time management is present and the potential buyer can directly ask management specific questions about their business because they're really trying to understand
what the business is and do they wanna buy it at a certain price and on certain terms.So it gets a little bit more serious at this point.There's also, you could have site visits, maybe go see a factory or maybe go see some sort of office facility.
And so once you kind of move on past this phase, we're now at phase five.And with phase five, what we're doing is due diligence. At the end of phase four, this letter of intent by some buyer is sent out and you have a final bid.
Once the buyer accepts the final bid, that's when you move into due diligence.So due diligence is really dotting your I's, crossing your T's.So you think about all of like your legal work,
the financing, like how is the buyer going to pay for this company?Are they raising debt?Do they need to get a loan from a bank?That kind of thing.And then you might also have some environmental considerations.
And so this is just a really quick summary of due diligence, but it's actually super detailed.And there's even like accounting like due diligence that happens as well.So it's very involved.
And essentially what you're doing is you're helping the seller kind of package everything in a really tight way so that the buyer knows exactly what they're buying and exactly what terms they're buying it on.Once all those things are done, you have
Closing.And closing is the final step, my friends.Closing is when everybody's happy.That's when the buyer gets their business, the seller gets paid, and you, as the investment banker, also gets paid.
You get your fees for doing the service, and then all of the other third parties who help with the transaction are also getting paid as well.So that's when everything kind of comes full circle and you are complete.
So those are the six phases of a cell-side M&A process.My name is Alex Mason.Thank you so much.I'll see you on the next one.All right, bye.
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