“Who You Know” No Longer: How Big Data is Affecting Deal Making
Thanks to technology, Creative Destruction has impacted nearly every sector of the economy and there doesn’t seem to be any sign of abatement. From fast food to fintech, machination, automation and “big data” are altering the way industries operate, leaving both companies and individuals as casualties in the wake. Sadly, this is one of the very reasons the gap between the rich and poor continues to widen, but is also opens up avenues of opportunity for those with proper foresight.
Traditional investment banking is a difficult nut to crack when it comes to innovation. Because each deal is so unique, involves many varied and complex nuances and involves more people than processes, it remains a difficult sector to upend or drastically change with the use of technology. The traditional investment banking world will likely remain unchanged in all the aforementioned areas, but gone are the days when “it’s all about who you know” matters as much. “Big data” has now replaced the proprietary deal network in advancing the speed, quality and processes of even the smallest, private deals.
The “Good Ol’ Days”
In the good ol’ days of corporate finance, it was all about who you know. You want to raise capital? Pull out your Rolodex. Want to sell your business? Find someone that has done deals within your sector that knows the lay of the land. Want to accomplish an aggressive buy-side mandate? Get a firm that has done one for a similar group of companies. [Note: I’m not downplaying the role of sector expertise in getting a deal done. It still remains–and will yet remain–one of the single factors in gauging deal success]
When competing with other investment banks on some of the best deals, we’ll go toe-to-toe against some of the best regional and national players. In doing so, I’ve seen some of the best-touted banks tell a potential client, “these are the five buyers to whom we will make immediate introductions.” Certainly, the five most recognizable buyers within a market will top the list, but what of the thousands of other potentials that could be used to help enhance the value? With the financial world completely awash in capital, why would a business owner ever wish to secure their liquidity event (which could equate to retirement) on the hopes of just a few potential buyers?
I will most readily acknowledge that business is still (and will continue to be) all about the people, but having access to a larger quantity and quality is all about use of today’s technology, including some of the best business and investor databases available.
Letting the Market Work
Efficient market theory assumes no asymmetry of information. It requires that all parties have equal access to all information required to make an investment decision at the same time. In this assumption, we typically take into account publicly available data, including all relevant news, comparables and financial statements. As an industry, we’re also getting much better at being efficient on the private side as well.
Whenever a dealmaker takes a deal to market, they should be doing so with the largest database of potential buyers, investors or sellers they can possibly muster. It means getting into the weeds on SIC and NAICS codes. No rock is left unturned. Financial and strategic buyers and investors are collated into the outbound marketing. There is a desperate need to not leave any potential out. In a true M&A auction scenario, an investment banker will only exclude those who could prove damaging to the process (e.g. direct competitors).
In this way, a more efficient market is made for the securities in question–whether you’re finding a buyer a seller. The use of general solicitation with 506(c) is one perfect example of how private capital markets can now more efficiently source capital from larger databases of potential, relevant investors without simply applying “who you know” principles.
Gone are the days when the mantra “it’s not what you know, it’s who you know” applies as a blanket statement in corporate finance. Anyone with access to efficient databases and good, quality market information, can become a great “who you know” person by simply applying “what you know” principles of database management. Certainly, investment banking will never have replaced fully by robots, but the robots and automation are likely to greatly enhance efficient and smart capital movements in the private market–right where it is needed most.
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