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The basics of investment banking M&A: Process, services, fees
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The basics of investment banking M&A: Process, services, fees

investment banking m&a

Investment banks play a significant role in the financial world. One of the most popular services provided by investment banks is merger and acquisitions (M&A) advice, for which they usually charge 2-10% or more, depending on the size and complexity of the deal. 

What do companies get for this fee? What is M&A in investment banking? What are the steps of the M&A investment banking process? Keep reading to learn the answers.

What is M&A investment banking?

Merger and acquisition investment banking (M&A banking) is an investment banking service or division that assists companies involved in M&A deals to execute transactions successfully.

The primary responsibilities of an M&A investment bank typically include identifying interested buyers or targets, developing a comprehensive M&A strategy, providing financial advice and valuation services, conducting different parts of the due diligence, participating in business negotiations, and helping with the post-integration process.

Additionally, investment banks may assist clients in raising capital for companies through various capital market instruments such as equity or debt financing.

Furthermore, an M&A investment bank manages the regulatory and legal aspects of the deal, conducting regulatory due diligence, collaborating with a legal team, identifying potential legal issues, and providing guidance on these critical aspects.  

As a result, investment banks serve as trusted advisors throughout the entire M&A deal process, from initiation to post-merger integration. A regular investment banker is, therefore, required to have a in-depth understanding of capital markets, expertise in business valuation, and a wide range of analytical, strategic, communication, and technical skills.

While M&A is a core focus for the majority of investment banks, including big names, such as J. P. Morgan, Goldman Sachs, and Morgan Stanley, their service range is wider and may include capital raising, underwriting for an IPO process, industry research, and advisory services on joint ventures, hostile takeovers, and buyouts.

Note: If you are considering starting a fund, explore the requirements to start a hedge fund or learn everything about merger arbitrage funds in our dedicated articles.

Key steps of the M&A investment banking process

Here are six main steps involved in the investment banking mergers and acquisitions (M&A) process:

  • Initial discussions and analysis

The first step is meeting with potential clients, identifying their goals and preferences, and discussing various potential buyers or sellers. The bank may also perform an analysis of the M&A market trends.

  • Valuation

The next step is to conduct a financial analysis of a potential buyer or seller with the purpose of determining the true value of their business. For this, different valuation methods can be used, such as comparable company or precedent transaction analyses.

  • M&A strategy development

Once the target is identified, the bank develops a comprehensive M&A strategy that outlines the transaction’s objectives, the target’s financial analysis, valuation metrics, deal structure, and integration planning.

  • Due diligence

At this stage, investment bankers analyze a company’s historical and projected financial results and assess its operational performance by reviewing financial statements, legal contracts, industry reports, etc. The process usually requires a secure space for storing and sharing sensitive information, such as a virtual data room.

  • Negotiations

M&A investment banks participate in the negotiation process between a prospective acquirer and seller and advise on the terms and conditions of the transaction, including the purchase price and warranties. On this stage, a pitchbook investment banking is also involved.

  • Deal completion

The banks assist the client in negotiating the final terms of the deal. Thereafter, the two firms sign definitive agreements—legal documents that record the terms and conditions of a business transaction between two parties.

  • Post-merger integration

The integration of a new company is a complex process that requires careful execution and, if done incorrectly, may result in the failure of the entire transaction. To minimize risk and ensure a smooth transition, investment bankers advise clients on various aspects, such as organizational structure, management, and operational issues.

Differences between sell-side and buy-side investment banking

As the names suggest, buy-side investment bankers work with the buyers and help them profit from the acquisition, while sell-side bankers work with the sellers and help them achieve maximum value from the sale.

Let’s learn the differences between sell-side and buy-side investment banking in more detail.

What sell-side investment bankers do 

Here’s what investment bankers do when participating in sell-side transactions:

  1. Establish objectives for a transaction
  2. Conduct business valuation to determine the fair market value of the target and identify potential deal-breakers
  3. Ensure that a company is ready for sale and consult on what can be done to improve its marketability
  4. Create a list of potential buyers and contact them
  5. Prepare for the due diligence process
  6. Develop marketing materials and pitch books to present a company to potential buyers
  7. Negotiate with buyers
  8. Assist in transaction execution and facilitate deal closure
  9. Provide guidance on post-merger integration to ensure two companies successfully integrate into one business

What buy-side investment bankers do 

Here’s what investment bankers do when participating in buy-side deals:

  1. Set goals for a transaction
  2. Analyze global markets, economic, and M&A trends to identify potential risks and opportunities of the transaction
  3. Help buyers identify potential sellers with attractive investment opportunities 
  4. Contact target companies, provide them with information on the potential transaction, and assess their interest
  5. Value target companies 
  6. Conduct due diligence to assess their financial performance and identify risk factors
  7. Negotiate with the seller and ensure the transaction terms and conditions are acceptable to the buyer
  8. Support transaction execution and facilitate deal closure
  9. Help to integrate a newly acquired business into the existing company

How much do investment banks charge for their services?

The fees charged by investment banks vary widely depending on the investment bank, size, industry, and complexity of the deal. However, there are certain fee types you can expect when calculating the final cost of investment bankers’ services.

Retainer fees

A retainer fee is a fixed amount paid to the investment banker despite the transaction’s successful completion. Such an approach is advantageous for two reasons. First, it motivates the banker to handle the transaction properly. Second, it commits a buyer or seller to a particular course of action—to either acquire or sell a company.

Depending on the investment bank and deal size, the approximate retainer fees can be:

  • Monthly: $5,000-$25,000 per month
  • One-time upfront: $25,000-100,000
  • Milestone-based: $50-100,000. 

Success fees

In this case, a success fee is paid on the successful completion of a transaction. There are three main benefits of this fee structure. First is potential savings as there is no fee in case of a transaction failure. Second is the motivation for the investment bank to get the best possible deal. Finally, the fee structure is normally easy to understand.

Here’s a rough guideline of ranges of success fees:

  • $0-10 million: >10%
  • $10-100 million: 3-10%
  • $100 million-$1 billion: 1-3%
  • >$1 billion: 0.5-1%.

Key takeaways

  • M&A investment banking is an investment banking service that helps companies execute M&A transactions successfully
  • The responsibilities of an investment bank include identifying interested buyers or targets, developing a comprehensive M&A strategy, conducting valuation and due diligence, participating in negotiations, and assisting in post-merger integration
  • The main difference between buy-side and sell-side investment bankers is that the first work with the buyers and help them profit from the acquisition, while the latter work with the sellers and help them achieve maximum value from the sale
  • How much investment banks charge depends on deal complexity and can vary from $5,000 per month to $100,000+ one-time upfront payment.