01 May 2022
What is M&A
M&A can be a daunting field to unpick, but once you have peeled away the facade of acronyms and jargon it becomes significantly more palatable. M&A, which stands for Mergers and Acquisitions, is an umbrella term for the combination of two businesses. This is typically done one of two ways, via a merger of two similarly sized companies, or an acquisition of a smaller company by a larger one. M&A activity can occur for a variety of reasons, some of these include wanting to enter a market faster, accelerate growth by taking advantage of synergies, or even eliminating a future competitor.
M&A Reasoning
As previously mentioned, M&A activity is often a direct result of a company's need for inorganic growth. However, this growth can come in many forms, diversification, tax purposes, and improved market share are some of the most prevalent.
Diversification is used by companies to protect against changing market conditions. It allows organic growth to continue in the industry the company is diversifying into. One downside associated with this is the risk of reduced returns, multi-business companies tend to return lower than average when compared to the markets. As a result, many companies choose to spin off other business groups to allow autonomy and development free from the larger corporation.
Finally, a company can choose to improve market share via merging with a similar-sized competitor or acquiring a smaller one. This is known as a horizontal merger/acquisition. Typically these have increased synergy potential as well as there's more likely to be redundancies, cross/upselling opportunities, and more. However, it's well known most synergies are hard to achieve in practice and as a result, although capturing a larger market share, could result in a loss in profitability. Furthermore, if a company is seemingly building a monopoly in a particular sector regulatory bodies will more than likely prevent further growth.
Sell-Side
Sell-side bankers spend their time finding potential buyers for clients' companies, forecasting future growth of the newly formed entity, and generally working as the middleman between companies looking to sell and any potential buyers.
This tends to be where a majority of graduate jobs in investment banking lie as Buy-Side is seen as an attractive exit opportunity to individuals already in IB, leading to arguably, a more competitive job market. The main players on the Sell-Side are bulge bracket banks and boutique M&A advisory firms which tend to work with much leaner deal teams and often specialise in one industry or sector.
As a result of the client-orientated aspect of sell-side banks the hours can be much more unpredictable. Often as a junior banker, you can expect to have to complete tasks and respond to seniors at what would usually be considered anti-social hours. Junior bankers can be expected to utilise a range of tools, most notably Microsoft Excel and Powerpoint to produce models and pitchbooks respectively. Whilst not being in a client-facing role, the materials junior bankers produced are used by Partners, MDs, and VPs when consulting with potential clients and in information packs (called teasers or CIMs) to persuade potential buyers. Most of these materials are research directly related to the upside potential of the entity formed during the merger/acquisition and are primarily used to entice potential buyers by showing them “what could be” if they decided to proceed with the acquisition. This research will include a variety of factors including facts about the current size and growth potential of the industry, synergies that could be achieved, and possible long term strategies that could be implemented to get the most value out of the transaction.
One bonus as a result of these long hours though is the salaries. With base salaries for a first-year analyst reaching up to £65k in London, often accompanied with hefty bonuses of up to £45k. With a total compensation package totalling up to £110k2, it's easy to see why investment banking is an incredibly enticing career field for university graduates.
Buy-Side
Buy-side bankers are those found in venture capital and private equity firms. These firms are typically either looking to either invest in high growth potential companies as a venture capital firm would, or acquire businesses via leveraged debt transactions, or an LBO, to grow and later sell the business for a profit as private equity firms do.
The main difference between the buy and sell-side is the type of work carried out. Buy-side bankers tend to spend a majority of their time sifting through the financial statements of the company being purchased. Ensuring the projections stated by the sell-side analysts are accurate.
Although usually considered to have better working hours than sell-side, buy-side bankers still work on deals and as a result will have to occasionally pull especially long hours or be called on for work during anti-social hours. However, since they are typically the clients that the sell-side are catering to this is less frequent and pressure often comes from internal sources rather than a need to get work done for a client.
Another point people often make when arguing for the buy-side is the salary and opportunities for career progression. However, these differences are not often as cut and dry as people may assume. Sell-side hierarchy is arguably as flat as the buy-side, with a well-established career path. Recent studies have shown that analysts moving to private equity from investment banking in London are required to take at least a £25k pay cut3 with salaries around the £75-85k mark.
Both the buy and sell-side offer unique benefits and have several defining points. The sell-side is much more client-orientated, with analysts working round the clock to deliver a well-presented pitch, whilst the buy-side is unpicking this information and double and triple-checking it. Even though investment banking analysts can make close to 30% more than an equivalent position on the buy-side, this comes with the trade-off of sometimes excessive working hours and workplace intensity. Ultimately, either side is an incredibly good career choice with excellent growth opportunities.
Conclusion
M&A is a diverse and engaging field, offering people the chance to apply both analytical and interpersonal skills. Though an intense career path, it's rewarding both financially and intellectually. With so many industry-specific groups within firms, there are plenty of opportunities to specialise and work on deals that genuinely interest you. And working with some of the world's most driven and intelligent individuals is sure to set you up with a network that's second to none in terms of professionalism and growth potential.
