We caught up with Giovanna Burns of Meridian Capital to learn more about the basics of investment banking for the second installment of PitchBook's M&A 101 series. (Check out the first part here.) The interview below has been edited for length and clarity.
PitchBook: What is investment banking? How does it differ from other forms of banking?
Burns: "Investment banking" is a broad term that encompasses capital raising and strategic transaction advisory services for companies. It includes debt and equity issuances, private placements of capital and advisory on strategic transactions such as mergers, acquisitions and divestitures. That means we're different than other forms of banking because we don't act as a depository, and we don't directly lend to or invest capital in our clients.
By contrast, a retail bank serves individual consumers and small businesses, typically through the bank's branch locations and online services with checking and savings accounts, mortgages, auto loans, safe-deposit boxes and cashier's checks. Meanwhile, corporate banking (sometimes also referred to as commercial banking) largely resembles retail banking, with a corporate bank's customers being medium to large businesses. A primary function of corporate banks is to provide business loans. Beyond loans, a corporate bank may offer other capabilities geared toward handling the day-to-day financial concerns of corporations, such as treasury management, foreign currency exchange and retirement plan services.
What roles do investment banks play in M&A transactions? How do those services differ from, say, work on an IPO?
The roles of the investment bank will differ depending on whether the bank is representing the seller of a company ("sell-side") or advising a prospective acquirer ("buy-side").
On a sell-side engagement, the investment bank's responsibilities include:
- Keeping our fingers on the pulse of industry M&A trends to set valuation expectations for client companies and helping them plan their timing and go-to-market strategies
- Deploying our knowledge of the client and its industry to craft a set of key points that form a compelling investment thesis—then assembling marketing materials such as the "Information Memorandum" to convey these points
- Identifying and contacting potential buyers, managing information flow and holding strategic discussions with interested parties
- Establishing a formal bid process for the company, reviewing bids and helping select a buyer
- Setting up an online diligence "data room" and serving as the primary liaison between the buyer (and/or its advisors) and seller during due diligence
- Helping negotiate the final terms of the deal
On a buy-side engagement, the investment bank's responsibilities include:
- Evaluating the potential target and its industry to set a preliminary valuation
- Assessing the strategic fit of a potential target with the client; identifying and, to the extent that it's possible, quantifying synergy opportunities
- Crafting a bidding strategy and helping draft proposed terms of purchase
- Identifying potential issues in the diligence process and following up accordingly
- Analyzing the buyer's capital structure to determine the correct transaction financing; helping the buyer find financing
- Helping negotiate the final terms of the deal
On an IPO, the investment bank's responsibilities are very similar to those on a sell-side M&A transaction, insofar as it's responsible for positioning the company to prospective investors, drafting marketing materials, conducting investor outreach and determining a reasonable valuation. However, instead of appealing to only one buyer, there are several buyers, so a "road show" is conducted, where management meets with and presents to several potential investors.
Extensive buyer-seller negotiations characteristic of an M&A transaction don't happen as part of an IPO. There's also the extra step of the shares entering the market—they need to be distributed through the bank's sales desk. IPO candidates will often enroll more than one bank to complete the actual sales and distribution portion of the IPO process, thereby leveraging more investor relationships.
How does the size of the transaction impact the investment bank's role?
The responsibilities listed above will be the same regardless of the size of the transaction. From the banker's perspective, though, some subtle differences generally hold true for public versus private deals. For instance, on the sell-side of larger, publicly traded companies, there is a smaller universe of prospective investors because financing is a constraint. Another difference is that for middle-market deals, bankers rely a lot more on our industry connections to test the M&A market, while for public company deals, information regarding corporate strategy, terms of precedent M&A transactions, and financial performance are openly available and easily accessed via public filings and press releases.
As a banker working on middle-market transactions, you get to see and manage a greater part of the overall process. Because the deals we do at Meridian are typically for private or family-owned businesses, we're walking individuals through the process of selling a company that they built themselves. So, there's definitely a human aspect and a sense of a private deal's impact that is different from those involving publicly traded companies.
What are the different roles played by members of team as they work to source deals, perform due diligence and bring a transaction to the finish line?
It's always a team effort, so it depends on the particulars of the situation and the transaction. But generally, the division of work is as follows (in reverse order of seniority):
Analyst – the analyst is responsible for much of the legwork that goes into sourcing and executing transactions. This includes putting together PowerPoint presentations and Excel models, organizing files and information, doing industry research, taking notes on calls and meetings, and tracking and recording sourcing and execution activity
Associate – the associate is responsible for checking the analysts' work, coordinating the creation of PowerPoint presentations, talking to clients and executing on day-to-day transaction tasks
Vice President – the vice president supports business development efforts and manages deal execution. They take the lead on shaping messaging for pitchbooks and deal marketing efforts, and help handle communications with clients and prospective investors
Managing Director – the managing director is responsible for business development and sourcing deals, and also helps guide deal execution. Most of an MD's time is spent building relationships, meeting with potential clients, and staying abreast of industry and transaction trends
How and why do firms come to specialize in certain sectors, such as aerospace, for example?
Sector-specific firms are formed based on the same logic that all businesses are: Somebody recognized a market need and set out to fulfill it. Usually, these firms are founded by individuals that worked within an industry group at a larger investment bank for several years and saw an opportunity to provide better services that larger investment banks cannot offer. These firms differentiate themselves based on independence, senior-level attention and thought leadership, among other factors.
What are the most commonly overlooked items by business owners when preparing to sell their companies?
- Keeping good records. Due diligence is a key part of a transaction, and the ability to fulfill requests and address potential issues will make the process go smoothly and could even increase transaction value. First, financial records should be accurate and transparent. Identify and document any material one-time fluctuations—for example, nonrecurring expenses related to opening a new facility. Keep track of off-balance-sheet and contingent liabilities. It's also a good idea to have your financials reviewed or audited by an accountant at least annually to verify their accuracy. Second, keep all records and paperwork organized and in a safe place. As part of diligence, buyers will often ask to review legal contracts, tax returns, patents and copyrights belonging to the business, and insurance policies, among other items.
- Defining and being able to explain company strategy. The value of a business in a sale is based on the buyer's expectations of future profitability, so it's important to showcase the company's potential. It's helpful to have a roadmap of company strategy for the next few years. The plan should include realistic opportunities to grow the business and increase profitability. It must also consider current industry trends and competitive backdrop. Some of the opportunities within the roadmap may be immediately actionable; many will require additional capital and resources to implement. To increase value, a business can take steps to implement some of these strategies ahead of a sale. For instance, could the company decrease raw material costs by switching suppliers? If so, switch suppliers now—a forecast is more credible if there's tangible evidence of results. For the initiatives that can't be implemented now due to resource constraints—such as acquiring a competitor or building another factory—have a defensible estimate of how this would impact the financial statements and how much up-front capital is required.
- Building a team of trusted advisors. Numerous professionals are involved in an M&A transaction, including investment bankers, lawyers and accountants. A business looking to sell should start assembling a team a couple of years in advance. Select an investment banker based on industry expertise, advisory experience, and personal chemistry. It's essential that an advisor is trustworthy and committed to a company's success. Even if a business is not yet ready to sell, a good investment banker will still help prepare for a successful exit by providing insights on important considerations such as valuation, transaction structure, timing, and go-to-market strategy.
- It is also important to have an investment banker ready to engage in case the company receives an unsolicited acquisition offer. If this happens, it's a bad idea to negotiate with the potential buyer yourself because you will almost certainly leave value on the table. If you're serious about accepting a potential offer, your investment banker can evaluate the offer, help manage the diligence process including confidentiality concerns and, most importantly, create a competitive process to ensure that your business gets the best possible valuation. Another reason that it's not too early to start building a relationship with a banker is that we are paid when we close transactions and not by the hour – our up-front advice is free of charge and our goals are completely aligned with yours.
What one thing, above all, does an investment banker do that's indispensable on every single M&A transaction?
Everything we do on a transaction is carefully designed to optimize the outcome for that particular client. With sell-side M&A, that largely translates to obtaining the best sale price, but of course there are other considerations with selecting a buyer that we help our clients weigh as well.
Giovanna Burns, a VP with Meridian Capital, plays an essential role in transaction execution and supports the Seattle-based firm's business development initiatives. She has provided advisory services to middle-market companies across various industries on transactions including buy-side and sell-side engagements, IPOs, debt issuances and growth equity raises.