M&A - An overview

Mergers & acquisitions is the act of merging or acquiring a company by another company. Before diving in, let us consider what sell side is vs buy side, which is an important jargon to know. 

Buy side are firms that buy and manage securities to generate returns for their clients (investors). These include asset management firms, sovereign wealth funds and pension funds. Their goal is to provide risk-adjusted returns to their clients and generate management and/or performance fees. The role of the buy side in M&A is to:

• As money managers, buy side oversees the clients' money
• Determine whether to buy, sell or hold various investments to earn the returns for their clients
• They do this by conducting due diligence, e.g. internal research on opportunities, financial modeling and valuation
• Ultimately to increase wealth (assets under management)

Sell side are firms that sell or facilitate the sale to the buy side, a.k.a. the dealmakers. These include investment banks, brokerages and research houses. Their goal is to generate revenue through commissions/fees and spreads. The role of the sell side is to:

• Facilitate the increase of debt and equity (capital raising), and generate liquidity for securities
• Advise clients on major transactions and M&A
• Provide equity research analysis, perform financial modeling and valuation

Generic and brief M&A process:

1. Strategic planning of the business
2. Research on the target to be acquired
3. Due diligence based on available information (financial, tax, commercial, tech, legal etc.)
4. Contact the target and establish NDA
5. Generate internal business valuation
6. If keen, submit a letter of intent and conduct more in-depth due diligence before arriving at final valuation of the target
7. Negotiations begin and to consider sources of financing the transaction
8. Legal docs must be ironed out
9. Establish purchase price
10. Acquire and integrate

How banks make money from M&A

1. Advisory - banks can come in as an advisor to both the buy and sell side. Key aspects include in-depth understanding of the market and the target, to understand how the acquisition can generate value for the company. Banks earn retainer (fixed and recurring) + success (largest component, paid only upon successful closing of the transaction) fees from the transaction.
2. Financing - typically called leveraged finance in investment banks, the M&A financing team provides loans to the buyer.