fusion point research Marketing Research Reports

Marketing to Mergers & Acquisitions Leaders in Investment Banking

Understanding Their Role

Financial institutions have departments that specialize in helping companies either purchase or join forces with another company- these departments are called Mergers and Acquisitions, usually abbreviated as M&A departments.

 

M&A is a global business, with approximately half of all transactions c­ompleted inside the United States.1 The volume of announced deals for the top five investment banks in 2010 was more than $2.4 trillion.2 It is not uncommon for a single high profile transaction to be worth tens of billions of dollars. For example, the purchase of DirecTV by AT&T was valued at $48.5 billion.

 

There are three general types of companies that look to acquire or merge with a company:

 

  • Strategic buyers are seeking to extend their geographic reach, expand their customer base, boost market share, and fill out product lines to be more competitive.
  • Financial buyers are interested in the cash flows generated by the target company and the profits from future exit opportunities.
  • Consolidators seek to roll up or consolidate businesses in industries3

 

Turning to the selling business, owners and managers sell for many reasons. One major motivation is that founders and other individual owners sell as part of` their retirement and estate planning, or as a strategy to other business ambitions. Another reason for sale is the recurring need for expansion capital when the public markets are either not desirable or unavailable. For a private company, another powerful reason to sell is the elimination of personal liabilities such as personal guarantees on corporate debt.4

 

These Merger and Acquisition transactions are very attractive to financial firms because they generate large revenue in the forms of fees. The investment banks receive these fees whether or not the merger or acquisition was ultimately successful, which makes managing these transactions even more attractive.

 

The fees that M&A departments charge are usually negotiable and often are determined by the size of the deal. Traditionally firms have used what is known as the Lehman 5-4-3-2-1 formula. Under this formula, 5 percent is paid on the first $1 million of sale price, 4 percent on the next $1 million, 3 percent on the next $1 million, 2 percent on the next $1 million, and 1 percent on the amount in excess of $4 million. For a larger transaction, the fees are less than 1 percent of the deal's value.5 As an example, if a large deal is worth $5 billion and the fee is just one half of one percent the fee revenue is an impressive $25 million. Investment banks will typically charge a significant retainer fee before even starting work on a transaction because it is not unusual for one or both parties involved in the transaction to change their mind.

 

What do the parties get in return for paying these fees? Advice on mergers and acquisitions ranges from strategic recommendations to clients about which targets are worth pursuing, to tactical suggestions about what price to offer and how to best structure the deal. Targets of acquisitions also seek M&A bankers for advice on how to negotiate the best price or how to defend themselves.6

 

Finally, there are many potential obstacles the may derail M&A deals. Because larger deals potentially may create “monopoly giants”, there are regulatory approvals that must be granted before these deals go through. In the United States, most public M&A transactions require a Hart-Scott-Rodino (HSR) filing with the Federal Trade Commission (FTC) and the Department of Justice (DOJ). Upon filing, there is a 30-day waiting period during which the FTC and the DOJ may request further information.7

 

There are also non-financial and non-regulatory issues that can spoil a potential deal, such as personal issues. In practice, ego and pride, such as who gets to run the show, affect many merger deals. These social issues are among the most difficult aspects of negotiating multibillion-dollar deals. Often, a big factor in the success of a merger negotiation is an aging chief executive. Many megadeals tend to take place when a chief executive is nearing retirement and looking to go out with a bang.8

 

“Today’s investors are less swayed by the safety net of size and scale, and instead, are focused on companies that are trading at a premium stemming from superior operating performance."

- J.P. Morgan’s M&A team. 9

1 Stowell,David. Investment Banks, Hedge Funds, and Private Equity. 2nd ed. 225 Wyman Street, Waltham, MA 02451, USA The Boulevard, Langford Lane, Kidlington, Oxford, OX5 1 GB, UK: Academic Press, 2012.

2 Liaw, K. Thomas. The Business of Investment Banking: A Comprehensive Overview. 3rd ed. Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.: John Wiley & Sons, Inc., 2012.

3 Ibid

4 Ibid

5 Ibid

6 Ibid

7 Stowell,David. Investment Banks, Hedge Funds, and Private Equity. 2nd ed.

8 Ibid

9 “The M&A Market is Poised for Continued Growth in 2015.” J.P. Morgan. January 2015. Accessed 11/20/15, available at: www.jpmorgan.com

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Copyright © 2016 Fusion Point Research, Inc.

Merges & Acquisitions are a major source of revenue for investment banks. These financial institutions help two companies join together by assisting with a wide array of legal, financial and regulatory challenges.

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fusion point research Marketing Research Reports
Merges & Acquisitions are a major source of revenue for investment banks. These financial institutions help two companies join together by assisting with a wide array of legal, financial and regulatory challenges.
  • Strategic buyers are seeking to extend their geographic reach, expand their customer base, boost market share, and fill out product lines to be more competitive.
  • Financial buyers are interested in the cash flows generated by the target company and the profits from future exit opportunities.
  • Consolidators seek to roll up or consolidate businesses in industries