Understanding M&A
The M&A team is a product group within the investment banking divisions of financial institutions responsible for assisting clients with corporate mergers or acquisitions.
When a company decides to merge with another business, there is a lot of work involved in terms of structuring and pricing the deal as well as various other due diligence tasks. Banks have specialized M&A teams which are solely dedicated to this task and help their clients with mergers or acquisitions.
Mergers are mostly an equal partnership where two companies decide to join together for some strategic reasons while an acquisition is one company taking over another.
Job Description
The process of a merger or acquisition, from the perspective of an investment bank, is divided into three parts. Phase one is origination where a deal is sourced, or a mandate is won. Phase two is the due diligence process which leads to the creation of a more accurate model, followed by negotiations. Phase three is the actual execution of the transaction.
1. Origination
More than half the work in most M&A divisions revolves around origination efforts. And that is just the junior level analysts and associates. For senior level managing directors or partners, it takes up the bulk of their time. After all, origination is how you get clients and make money.
Origination in M&A is all about identifying targets and making pitch books. The way it really works is that investment banks come up with potential deals on their own and then pitch it to their clients. If the client likes the deal, they might decide to go ahead with the transaction. The investment bank will make a hefty fee for structuring and executing the transaction. Sometimes the clients can come up with investment ideas as well and then approach their preferred investment bank to price and model the deal.
The origination process looks something like this:
- First, the targets are chosen based on some acquisition strategy which the senior level M&A executives decide on based on their experience.
- Analysts and associates are then tasked with analyzing the target company’s balance sheet and financial statements and begin preparing pitch books.
- The analyst will look at all the data and process the information based on set templates. Although it often does require significant modifications since company structures can be quite diverse.
- The idea behind this process is to find additional value aka synergy that can be unlocked by a potential merger or acquisition. Synergy is said to be created when the merged entity is more than the sum of its parts. That, in this context, can mean higher revenue, lower costs, more market share or dozens of other strategic advantages.
- All of this financial data then has to be condensed into a presentable format. This usually means the preparation of PowerPoint slides which highlight the core value propositions behind the deal.
- It is usually the managing director or partners who actually go and pitch the deal to the clients. Analysts or associates are almost never involved in the client-facing pitching phase of the origination effort.
2. Due Diligence and Negotiations
Once the M&A team of the investment bank gets a mandate to proceed with the transaction from their client, they begin the actual diligence and modelling process.
- The due diligence process involves detailed discussions with the target company and many of its external stakeholders like buyers or suppliers. As you can imagine, the idea is to not only look at the financial and legal paperwork, but to go over the entire business with a fine-tooth comb. This due diligence process might even include third-party consulting firms and associates/ VPs are expected to liaise with them in order to complete the process.
- A more through due diligence process is undertaken to verify the valuation of the target company based on all of this additional data.
- More detailed models are created in order to better understand what the post-merger entity might look like. There are substantial sums involved which can make or break careers, so there is a lot of focus on trying to get it right.
- The financing options must also be evaluated and explored. The investment banks will usually participate in this process and the cost of financing the deal is also a significant component of the model.
- Additional considerations like market conditions, tax considerations, any competing bidders, anti-trust considerations, various financing options etc. also need to be looked at. These things can complicate the transaction and it is usually the senior level executives who bring their experience to bear on these issues.
3. Execution
- The final phase from the perspective of the investment bank is the execution of the transaction. This involves negotiating the terms and structure of the deal based on the valuation report.
- The target company will have its own advisers and the purpose of the negotiation is for both parties to be on the same page. Some complications might arise which might require modifications like selling off certain divisions or assets and so on.
- Certain law firms specialize in mergers and acquisitions and they are also brought on board during the negotiation phase and while finalizing the contract.
The real work for the merged entities actually begins post-merger. The next few years decide the fate of the company and determine the success of the acquisition. Given the high stakes, big mergers or acquisitions are rare but small ones are fairly common. Some companies routinely absorb several smaller entities on a regular basis.
M&A Qualifications and Skills
Modelling and structuring – The modeling and structuring requirements for a merger transaction can be quite variable. For example, some mergers are simple which don’t require much beyond feeding the raw numbers and assumptions into a template and using the output in the pitch. However, larger transactions can be infinitely more complex with dozens of divisions, product lines, international exposure, subsidiaries and other such factors.
Analysts and associates have to really be on top of these things, but they do get the opportunity to learn these skills on the job really quickly.
Presentation Skills – Once the model is complete, the next phase is the preparation of the pitch book that the MD or partner will share with the client and other relevant stakeholders. A lot of time is spent in the preparation of these pitch books and being good at it will only serve to make your life easier.
Attention to detail – There is little tolerance for errors when it comes to M&A models or presentations. The situation can be tough for green recruits who not only have to deal with tight deadlines and stress, but also learn new concepts on the job and think on their feet.
Strategic insights – All the numbers are modelling is moot if there is not a very strong strategic reason to undertake a large and expensive merger or acquisition. This is where the experience of the senior level bankers comes into play. They understand the industry that the client is operating in and their business model. Based on these factors, they can come up with strategic opportunities that are then pitched to clients.
Relationship management – Don’t expect much client interaction at all at the analyst level. However, once you get to the associate level you will likely deal with other partners like law firms, consulting firms, and junior level people on the client’s side to get the necessary data and coordinate your efforts.
Relationships starts being more important once you hit VP and above. For the directors and managing directors, it is pretty much their main key performance indicator. Your ability to manage client relationships is what is going to win you business.
Ability to work long hours under stress– M&A teams are notorious for being highly stressful work environments with exceptionally long hours. Most of the time, the reason for this is that the transactions need to be worked on and managing directors and clients expect instant results.
However, part of it is also as a result of cultural issues at certain banks. This culture then percolates through the ranks and makes its way to the next generation of bankers. Some of the big names have been trying to address this by limiting the stress placed on analysts and associates.
How to get into M&A
Academics
Investment banks require a lot of fresh recruits each year. They visit certain colleges and universities around the world to get a chance at picking the best candidates for the internship or full-time programs. Your best bet to get into M&A is by being at one of these target schools and maintaining a high GPA.
The bigger and more prestigious the investment bank, the higher their standards are. But smaller, boutique investment banks do hire from non-targets as well.
In terms of degrees – business, finance, economics, physics, engineering or anything quantitative is acceptable.
Courses & Certifications
Certifications like the CFA, CAIA, FRM etc. are not really all that relevant for an M&A role. They are surely “nice to have”, but they’re not really going to be as important as your academics and internships. FINRA certifications are required in the US though.
There are also some M&A specific courses and certifications. I have reviewed and ranked them here:
Networking
Networking does open up a lot of doors for you. Reaching out to alumni or people that you have worked with as part of an internship program can be very helpful and might even be considered essential.
The intention is not really to massage egos, although that does happen a lot. It’s more about having top-of-the-mind recall so that when recruiting decisions are being made, there are people who remember you and are batting for you. You will be spending a lot of time with those guys so if you’re likeable in addition to having the necessary skill-set, then that will undoubtedly help.
Internships
Internships are very important for M&A recruiting. If you can secure investment banking internship, you must give it everything you have in order to convert it into a full-time offer. Even if that does not materialize, the internship will still add significant value to your CV based on the reputation and prestige of the bank you interned for as well as your ability to sell that to the recruiters.
Here’s a comprehensive guide to investment banking internships to get you started.
CV Building
If you lack any relevant work experience, then you need to focus mostly on the internships and academics. Recruiters want to minimize the risk of hiring a bad apple and therefore they look for candidates who have displayed consistent performance all through their lives. It is just a lot easier for them to shortlist the CV of an academic over-achiever as opposed to someone with an inconsistent performance recorded.
Big-name brands on your CV obviously help, but if you’re not a target school then you must put additional effort into CV building, networking and trying a more circuitous route.
If you need more help with your CV, here are some professional services to help you out.
Best Resume Writing & Review Services for Investment Banking & Finance ranked by Bankers
Post-MBA recruitment
Jumping right in at an associate level position straight from business school is a better option in my opinion. Associates are better paid and do better quality work.
However, the problem here is that the competition can be just as stiff if not more so. You would also be at a disadvantage to other MBA students who already have some pre-MBA investment banking work experience. Consider all of these factors before making your decision.
Salary and Bonus
M&A analysts at bulge bracket banks usually start with a fixed component of USD 85,000 to USD 100,000. The variable component is only slightly related to performance at the analyst level and often amounts to 50% to 100% of the base component. This is more based on the performance of the team as a whole rather than the performance of the individual analyst.
At the associate level, the fixed component is usually USD 150,000 to USD 200,000 with the variable component being 50% to 150% of base. This is where you start to see more variation in terms of the performance-linked component.
Once you hit the VP or associate director level, the compensation range can become quite broad. At this stage, you are partially responsible for origination efforts and your revenue generation potential plays a bigger part in your overall compensation.
A Normal Day in the life of an M&A analyst
As an analyst, you will start your 16 to 18 hour workday by clearing up any pending requests from the previous night. This can include things like status reports, data requests, modifications to some model or pitch book and things of that nature.
- If you’re working on a deal, then the rest of your day (and night) would be spent on the transaction. This includes things like emailing and calling people to get the relevant data or perform due diligence tasks. It also means working on the valuation or other details of the transaction after looking through all the data and documents.
- If there is no deal currently in the pipeline, then much of the time would be spent on origination efforts. This means things like assisting the managing director with that they need prepared.
Associates also perform many of the same tasks but they focus more on coordination and enabling. They work to remove any obstacles that the analysts are facing or assist them with specific queries or more high value work.
VPs act more like project managers and oversee everything. They receive instructions from managing directors and translate that into actionable tasks for the associates and analyst to perform.
Ad hoc requests
Analysts and associates often receive ad hoc requests from managing directors who are off somewhere trying to schmooze a client. This means that you have to stop doing whatever you are irrespective of what time of day it is and get that request processed.
Working Hours
M&A has by far the worst hours of any banking role. I am not going to sugar coat it because I don’t want anyone making a wrong career choice based on misleading information. Analysts often can be seen at their desks way past midnight. Expect to spend 75 to 80 hours at your desk each week. Then there’s also the possibility of being assigned additional work over the weekend.
Things tend to get a lot better once you hit the associate level. Associates are usually hired straight out of business school and don’t have to go through the trials and tribulations that analysts must endure. The hours are still pretty bad, but nowhere as bad as the analysts.
This complete lack of a work-life balance is a major contributing factor to investment banking having a bad reputation as a whole. Most analysts just want to get promoted as quickly as possible or jump ship to a more aspirational role. It is this bounty of exit options as well as a decently high-paying carrier path that makes M&A so attractive to so many.
Career Path and Exit Options
M&A offers some of the best career progression and exit options in the world of banking. Not only do you pick up a lot of skills, you also begin to look at things more strategically and establish your ability to create flawless financial models.
M&A Career Progression
Analysts usually have only 2 to 3 years to prove their worth to the bank. After this, they must move on to business school, get promoted to the associate level or make a lateral move because they are not retained at the analyst level after a few years.
The compensation for associates, associate directors/ VPs, directors and managing director increases almost exponentially. While at the same time the quality of work also improves with a corresponding decrease in hours spent doing mindless number-crunching. This makes it an attractive proposition for many.
The stress always remains though. After all, you are working on large and strategic transactions where the stakes are high, the fee is generous, and the clients are always jittery.
The vast majority of analyst totally burn out and move to some other field. But those who remain and have what it takes to succeed, can do quite well for themselves just moving up the M&A career ladder.
Investment Management Careers (PE, HF, AM, VC etc.)
Private equityv and hedge funds are considered the ideal exit options by many investment bankers, not just in M&A but in other roles as well. The reason for this is a significant improvement in the quality of work, a drastic reduction in the stress level and even better compensation.
Given all of these factors, it almost seems like a no-brainer move. And that is why the majority of analysts actually pursue this career path. The only hurdle is the extremely high barrier to entry into private equity or hedge funds. There is a serious mismatch between the supply and demand of candidates and this leads to a very competitive recruitment process when trying to get into private equity or hedge funds.
In such cases, it might make sense to start with a smaller PE or hedge fund just to get your foot in the door. Asset management and venture capital are also good options where the entry barrier is far lower.
Consulting
Mergers and acquisitions is not a role that only bankers can perform. Consulting firms of all sizes also have dedicated M&A teams which also try to get a piece of action by advising their clients on several strategic issues regarding mergers. In fact, these consulting firms play a crucial role in the post-merger environment which is especially sensitive to teething issues or cultural conflicts.
M&A bankers make ideal recruits for such consulting firms. If you have a good reputation and strong client relationships, then you can command a premium in the market or even act as an independent consultant for smaller clients.
Moving into corporate finance
A lot of M&A executives eventually end up in the corporate finance departments of large corporations. They usually have the breadth of skills to excel in such roles as well as enough contacts in the banking world. This makes them ideal candidates to head departments like strategic acquisitions, corporate development, project financing, treasury and other leadership roles. They get to decide on the capital structure of the firm or make other strategic financial decisions.
The main attraction of such a move is the much better quality-of-life that you can expect at such companies. Even though the compensation is unlikely to be as generous, there are other benefits including the possibility of making more strategic decisions for larger main-street corporations and adding value that way.
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