What is M&A?
There are many different functions and areas within investment banking. The Mergers and Acquisitions (M&A) team is part of the capital markets team that also comprises of Debt Capital Markets (DCM) and Equity Capital Markets (ECM). In the M&A team, you will act as an advisor to companies who want to either acquire (hence becoming the 'buy side' advisor) or divest an asset (you're the 'sell side' advisor).
What you do as part of the M&A team
Basically, you are constantly building relationships with potential clients or bringing acquisition or divestment ideas to them. An important role of investment bankers is to pitch to the client (they prefer the word 'pitch' to 'sales' since the former adds an exclusive and glamorous touch). Winning the mandate (a.k.a. the right to the business) means you probably stood out against ten other banks who might also be pitching to the same corporation for business.
Let’s say you are pitching to a telecommunications company. You have no idea what the business wants to do or have in the works. However, to stay ahead of the game and to be in the running for a possible mandate, you will need to constantly bring in ideas on what to invest, buy, or sell. If the bosses in the company like what you’re pitching, you win!
It may sound odd to ask a company to pay you for advice to do so. But looking at it from another angle, your fee is only a fraction of what they could earn from a good investment based on your sound advice.
When you first join the M&A team, you will most likely be occupied with preparing pitchbooks* for your managing director or your vice president to present in pitches. So essentially, at the lower ranks, you will likely not be involved in the presentation to the client, but rather in the preparation of the pitch. The difficulty in this is that because they are pitching the idea and they seldom have sufficient time to review the pitchbook, they may come in 5 minutes before the meeting and make lots of changes which you'll then have to act on, print, and re-bind the books for presentation. At lightning speed, mind you.
*pitchbooks are not storybooks but a compilation of the pitch with financials, proposal, synergistic rationale, league tables and other necessary information to help your prospective client decide on hiring you to advise on acquisitions or divestments
You may think you need to do much research to make a sound justification on why your potential client will require your expertise. The truth is, investment banks buy lots of information that will help you in your job.
Broker coverage (equity research) reports, Bloomberg, Capital IQ, Factiva, and industry reports (e.g. IBIS) are readily available for you to prepare you pitches. What you need as a skill then is to read very quickly, synthesise and pull out the right information, and put everything together coherently.
When you win the mandate, you start the process of advising the client on the deal. Things you do in this process would encompass the following:
- You work on very lean teams of 2 to 3 people: 1 analyst, 1 associate/VP and 1 Director/MD working on a deal for approximately 3 to 4 months.
- You become the middle man for the bank in terms of coordinating all the advisers (lawyers, accountants, tax etc.), making sure everything flows appropriately according to the deal timeline. You are the key person to the working group comprising of the advisors, and you'll draw out the time frame of the deal using Gantt* charts and ensure all advisors follow it.
- You're the valuation and corporate finance expert and you'll build valuation models to value your asset that you are selling or buying based on various valuation methodologies, such as Trading Comps and Transaction Comps, Discounted Cash Flow and Sum-of-the-Parts.
- In a sell-side scenario, you write the Teaser (2 page document just trying to hook potential bidders) and Information Memorandum (100-page document—essentially describing each and everything about the asset including financials, risks, historical performance and future predicted performance). You're likely to go on a one-time site visit to snap pictures and information, after which you must be able to write out the 100-page document within a short time frame.
- In a buy side scenario, you should know all the M&A rules in the country, and write the Bidders statement depending on whether it is an on-market or off-market hostile/friendly takeover.
- You will bring the Bidders (on a sell-side) or accompany the client (on a buy-side) for multiple site visits to make sure your client does not say anything that may jeopardise the deal value.
- You will work closely with either the company's CEO or corporate finance team to make sure the deal does not slip.
- You will pray and hope that at the end of the day, the deal goes through and does not fall apart. The thing is, there are many reasons why it can fall apart. Majority of shareholders of the target company may not agree to sell their shares, or other bidders gave a higher valuation than you, or the client decides halfway to not sell their asset.
- If your deal is successful, you add another credential to yourself. In banking, it really is about how many deals you've done. A deal toy / or tombstone** is made to celebrate the deal and everyone gets one. You proudly display it on your desk as a memento to show off the number of deals you have done. Deals are like currency; it signifies experience in investment banking and everyone fights to get put onto a deal team. In bad times where there is an economic crisis or when companies are not cash rich, you're lucky if you get to do 1 to 2 deals successful deals completed a year. Most of the time, it is just non-stop pitching.
*A Gantt chart, commonly used in project management, is a chart that illustrates a project schedule.
**A deal toy, or "tombstone" in the finance and investment banking world, is a customised memento or gift that is intended to mark and commemorate the closing of a business deal. These plaques or other types of trophies are typically presented at the closing ceremony or dinner to the issuer and senior third-party advisors of the major financial transactions as a souvenir. (Source: Wikipedia)
A check-list of skills required for your daily role
- Microsoft Excel skills. Not just any excel formatting skill but you have to be a whiz at it: whatif scenarios, and visual basic macros. Microsoft Excel is your best friend.
- Ability to create amazing, informative and coherent Powerpoint slides. The bank will be equipped with specialised Powerpoint tools (e.g. Thinkcell) but essentially, you need to have the knack for putting crucial information in a summarised, bullet point manner that will sell the million or billion dollar deal. Unlike consulting, you will not need to think of a storyline. It's sharp and concise, or simply put, do-not-waste-my-time kind of pitch. Just tell me what I need to know—how much can I make out of this deal in different scenarios.
- Top-notch business acumen. You must be smart and sharp as a shark to advise on multi-million dollar transactions that move markets. That’s what makes you different from just any finance personnel.
- Calculation precision. Compared to a management consultant, there are much higher stakes when it comes to making mistakes. You need to have a robot-like precision because any calculation error could mean millions of dollars in losses for your client (e.g. a mis-valuation of the company you are going to buy).
- Financial knowledge. You need to understand all corporate finance terminology and valuation methodologies, such as valuation ratios, trading comparable, EV/ EBITDA, PE ratios, market capitalisation, net debt… you get the drift, all the smart stuff.
- An eye for detail to read legal documentation (e.g. sale and purchase agreements), and working with lawyers to pick out all the representations and warranties to defend or act for your client.
- A stamina and body that can take a hit. You are required to work till the wee hours of the morning on a consistent basis (perhaps more than 18 hours a day at times) and forgo all your weekends. And you'll be under immense pressure as you have to get every single number and detail right (down to formatting of Powerpoint slides and Excel sheets) and have bosses shouting at you to make changes or to ask you why is it not done yet
- Background in corporate finance. If you don’t have it, you can pick it up but it will be tough. Some lawyers end up as investment bankers after practicing law for a couple of years because that skill is needed in an M&A negotiation.
Yes the rumours are true
Before the global financial crisis of 2008-2009, you will get 100% bonus every year (it's less now in the post-crisis environment, but the overall compensation is nevertheless still good). With a base salary of about 100k, you get $200k in a year for a junior investment banker. As a young professional who devotes their lives to work, how would you spend your money?
Parties after work till the next morning, 10k watches for your significant other, Maserati cars... These are just some of the regular spending activities of an investment banker. It sounds crazy because it’s not possible for anyone to go on like this without sleep so yes, some even take cocaine to stay awake or relieve stress, whichever is more appropriate at the time.
Some may ask, why don’t you take a holiday to relieve stress? Well if you’re the type who’s into holidays, you'd need to pre-book your holiday 6 months ahead. Don’t be too optimistic, your boss can still cancel your holiday because a major client may be going through a merger and you will need to burn your holiday working on it.
It’s true that as an investment banker, you “sell your soul” to the bank. The minute your Blackberry beeps, you go back to work.
That snotty bunch
Everyone in investment banking (or banking in general) thinks everyone else not in banking is not that smart or wealthy. Well okay, 80% of them have an attitude and think they are better than everyone else.
There is in fact, an additional tier of snobbishness within banks. If you’re investment banker, you will likely look down on retail* bankers etc.
During lunch (you're probably eating in front of your computer if you're an analyst, or fine dining with clients as a managing director), it’s all about the latest IPO, the latest merger—oh work work work it never ends!
In fact, some people think the movie “Wolf of Wall Street” only happens in Caucasian environment—no way! It happens right here in Asia as well.
*Retail bankers are the ones who handle individual money, which includes your local bank consultants to even private bankers.
Why some think it’s worth selling their souls to the bank
Top investment bankers are also at the top of the world. Wining and dining at the expense of your company means the best of everything. Because you are working till late at night, you get to expense dinners and before the financial crisis of 2008-2009, they are expensive dinners! But eating it at your desk whilst working on your pitchbook is not fun.
However, what’s interesting is that even analysts, fresh out of universities, have executive assistants to support them. The theory is that even an analyst’s time is precious and expensive so their secretaries type out slides that bankers have handwritten on paper (or perhaps done by the graphics department) or help to process their receipts, whilst the analysts come up with the “brain work”. Now you see where the attitude comes from.
Of course, pay is a huge incentive for wanting to join as an investment banker, but for some, it is the satisfaction of moving and influencing multi-million dollar deals that move the markets. You are in the midst of that action even before it’s publicly known. Maybe it’s something about that exclusivity and power that makes it so attractive. And the very next day when your deal is done, you see it in the newspaper, you smile knowing that you were part of making that deal happen. Knowing that the share price will go up for the target company immediately when the acquisition is made public, you are unable to trade shares. If you want to you will need to declare every share ownership you have to your bank. Because of the greed and big money you can make knowing information before it hits the market, insider trading has become very common and there are very strict rules on what shares you can trade and what you cannot.
Since it demands the best, you are also working with the best and the brightest. In doing so, you are surrounded by people who drive you to work even harder and smarter as you are likely to possess an innate drive to be the best.
Even if you are not self-motivated, the likelihood to be fired will then be your motivation. Imagine if you make mistakes that have costed your client millions in losses- you can forget about returning to work.
Career Progression as a M&A investment banker
- Analyst: 3 years
- Associate: 3 years
- Note: As an analyst or junior associate, “Face time” is important at most banks. It means, even if you have finished your work and you can leave the office early, you may have to pretend to be busy, stay back at work and look stressed. If you leave work early, your bosses will see it, assume that you are too free and pump you with more pitchbooks to do. That's the end of your weekend. On Fridays, try to hide away from bosses because there is the tendency for them to grab you and ask you to do models that are due by Sunday.
- Vice President: 3 years
- Director and above: Depends on how much money you can make for the company
- Managing Director
Notice the first few ranks are in 3-year time frames. If you don’t progress in that time, you’re not cut out for the industry—it’s time to go.
Pay progression is about 30k increase each time, and bonus is about 80% - 200% (prior to the financial crisis of 2008-2009) of your base pay each year. According to careers website Mergers & Inquisitions, the top tier bonus bucket in 2014 for a first year analyst is USD 65-75K while that for a third year analyst is USD 95-115K.
Many young students, fresh out of school, are lured by the high pay and luxurious lifestyle of an investment banker. Especially when compared to peers, the potential to earn so much more to afford a lifestyle most peers cannot afford makes this role such an attractive one.
However, what most do not realise nor understand is the calibre of candidates required in this tough world. Any mistake made could mean the end of your career not only in investment banking, but also in banking. You will also need to make huge sacrifices to your relationships with loved ones since you are always on-call and at work.
At the end of the day, after a few years in investment banking, everything else seems easy. You are able to take any kind of pressure and have become super meticulous in your work that you are able to spot errors from far away, know the font size of a deck just by one look and identify if one slide has a slightly different shade of green from the other in the same deck.
Beyond the high-roller lifestyle, some may be motivated to understand and master the skills required to navigate through the investment banking world—where almost everyone is a shark and the weak will get kicked out.
Exposure to tough negotiations, or an environment to understand businesses could very well help you become a successful entrepreneur one day with network and funds to boot.