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March 31, 2009


For an I-bank, M&A advising is highly profitable, and there are many possibilities for types of transactions. Perhaps a small private company's owner/manager wishes to sell out for cash and retire. Or perhaps a big public firm aims to buy a competitor through a stock swap. Whatever the case, M&A advisors come directly from the corporate finance departments of investment banks. Unlike public offerings, merger transactions do not directly involve salespeople, traders or research analysts, although research analysts in particular can play an important role in "blessing" the merger. In particular, M&A advisory falls onto the laps of M&A specialists and fits into one of either two buckets: seller representation or buyer representation (also called target representation and acquirer representation).

Representing the target

An I-bank that represents a potential seller has a much greater likelihood of completing a transaction (and therefore being paid) than an I-bank that represents a potential acquirer. Also known as sell-side work, this type of advisory assignment is generated by a company that approaches an investment bank (also an investment bank may also make the initial approach and "pitch" the idea of the company being sold or merged) and asks the bank to find a buyer of either the entire company or a division. Often, sell-side representation comes when a company asks an investment bank to help it sell a division, plant or subsidiary operation.

Generally speaking, the work involved in finding a buyer includes writing a Selling Memorandum and then contacting potential strategic or financial buyers of the client. If the client hopes to sell a semiconductor plant, for instance, the I-bankers will contact firms in that industry, as well as buyout firms that focus on purchasing technology or high-tech manufacturing operations.

Representing the acquirer

In advising sellers, the I-bank's work is complete once another party purchases the business up for sale, i.e., once another party buys your client's company or division or assets. Buy-side work is an entirely different animal. The advisory work itself is straightforward: the investment bank contacts the firm their client wishes to purchase, attempts to structure a palatable offer for all parties, and makes the deal a reality. (Again, the initial contact may be from the acquiring company. Or the investment bank may "pitch" the idea of an acquisition of Company X to the acquiring company.) However, most of these proposals do not work out; few firms or owners are willing to readily sell their business. And because the I-banks primarily collect fees based on completed transactions, their work often goes unpaid.

Consequently, when advising clients looking to buy a business, an I-bank's work often drags on for months. Often a firm will pay a non-refundable retainer fee to hire a bank and say, "Find us a target company to buy." These acquisition searches can last for months and produce nothing except associate and analyst fatigue as they repeatedly build merger models and pull all-nighters. Deals that do get done, though, are a boon for the I-bank representing the buyer because of their enormous profitability. Typical fees depend on the size of the deal, but generally fall in the 1 percent range. For a $100 million deal, an investment bank takes home $1 million. Not bad for a few months' work.

Buyout Firms and LBOs

Buyout firms, which are also called financial sponsors, acquire companies by borrowing substantial cash. These buyout firms (also called LBO firms) implement a management team they trust, improve sales and profits, and ultimately seek an exit strategy (usually a sale or IPO) for their investment within a few years. These firms are driven to achieve a high return on investment (ROI), and focus their efforts toward streamlining the acquired business and preparing the company for a future IPO or sale. It is quite common that a buyout firm will be the selling shareholder in an IPO or follow-on offering.


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