We are certainly strong advocates for disintermediating the investment banking process, particularly when it comes to mergers and acquisitions. Some would argue–incorrectly–that advisors in a transactions are overly valued, especially given today’s flatter world, including access to “big data.” In fact, this very question was posed by academics who assessed nearly 4,500 private acquisitions from between 1980 and 2012. When intermediaries were retained as advisers to a deal, the “private sellers receive significantly higher acquisition premiums when they retain M&A advisers.”
Typically M&A advisers and investment bankers add value by creating a viable market for a firm’s illiquid stock. That is, where no demand exists for a private company’s stock, the truly successful investment banker is able to bring multiple, interested buyers to the table. If executed correctly, the investment banker or M&A adviser will engage multiple, strategic buyers simultaneously. Obtaining the best sales price is often a byproduct of a handful of interested, strategic parties all at the table at the same time.
Furthermore, intermediaries are needed to keep multiple, interested buyers simultaneously engaged. Obtaining the best price not only requires multiple interested parties to the table at the same time, it means managing such parties in order to keep them engaged and interested throughout the process. Driving competition among bidders is often best achieved when the prospective buyers understand they may be competing with other interested parties. Even in cases where true competition for the deal does not exist, an adviser can help create the impression that a full process is producing more than one competing buyer for the company.
Certainly pricing asymmetry exists in the private markets. However, the supply/demand equation has changed in recent years as the supply of capital has significantly outpaced the supply of quality dealflow, especially among middle-market firms. Intermediaries, M&A advisers and investment bankers can still significantly increase the demand for typically illiquid, private securities. Public firms tend to have greater publicity, more liquidity (due to higher demand) and more information about other interested parties. For instance, initial takeover bids via tender offer are required to be publicly-disclosed and must include a waiting period so other potential buyers can submit potentially-competing bids. In the private markets, these advantages do not exist. An engaged adviser can help overcome the lack of publicity, interest and illiquidity by tapping a whole host of strategic and financial buyers when creating a market for the stock and assets of a private company.
At the core, investment bankers, acting as M&A advisers, perform as a team of expert marketing and sales professionals, seeking out the ultimate buyer for a business–one willing to pay a premium. However, such consultants act as so much more. The complexity inherent in such transactions require intermediaries with an understanding of tax, accounting, finance and legal nuances to how M&A is structured and performed in the real world. It’s the ultimate sales and marketing professional with in-depth, tacit knowledge of the details inherent in how one can butcher a deal.
In addition to creating a market, the most seasoned M&A advisers and investment bankers can assist across the value chain through things like M&A negotiations, exit planning/processing, deal structuring (including creative financing options) and counseling among several shareholders (some of which could include complex family situations). In any case, having an objective third-party to a deal can be priceless when negotiating complex relationship issues as a closely-held enterprise looks to divest or sell.
In addition, as any good M&A adviser knows, selling a business can often take a great deal of focus away from the company which can sometimes hurt the company’s performance right when performance matters most. Having a third party managing the M&A process helps ensure the business owner keeps his/her eye on the ball so the company continues to perform and over-perform prior to the close of the deal. Nothing is worse than a significant dip in earnings before the deal closing table. Buyers that feel they may be paying a premium will look for any excuse to re-trade or re-negotiate price before the definitive agreement is signed.
One final note. The previously-mentioned study indicated that simply having an adviser to a deal increased valuations across deal sizes and types. However, the data also revealed something very interesting: top-tier intermediaries offered the highest M&A premium. Similar to any field, there is a significant difference on the margin. That is, the marginal difference the success of the intermediary can spell large gains for someone selling their company. That extra turn or even half-turn in EBITDA is worth paying for.