Welcome to our 3-part series – Mergers and Acquisitions Made Simple! To kickstart, in this first post, we will first introduce you to the Investment Banking Division (IBD) and later focus particularly on Mergers and Acquisitions (M&A).
Introduction to Investment Banking Division (IBD) and Mergers and Acquisitions (M&A)
Investment banking is a vital sector in financial services, serving dual roles: advising on capital raising and executing strategic transactions. It’s essential to note that ‘investment banking’ and ‘investment banks’ aren’t synonymous. The former refers to a division within an investment bank, which generally also includes other three core divisions of the front office including Sales and Trading (S&T), Equity Research (ER), and Asset Management (AM). While the number of divisions may vary among banks based on their service structure, most full-service investment banks typically encompass these four main divisions.
Following are the differences between investment banking, commercial banking and corporate banking. Then, the main distinction lies in the fact that investment banking pertains to a financial institution providing capital-raising and strategic transaction advisory services. Investment banks cater to larger, more sophisticated entities, managing complex funding needs like bond and stock issuances, purchases, sales, and mergers. Whereas commercial banking primarily acts as a depository, offering loans and financial services to individuals and businesses. Commercial banks focus on individual customers and medium to large businesses, providing services like savings accounts, loans, and treasury management. Another commonly confused function is corporate banking, which is often a part of an investment bank, involves relationship management for corporate clients. Relationship managers, central to this function, handle client interactions, including potential balance sheet loans. When corporate clients require services like M&A or financing, relationship managers collaborate with specialists from relevant divisions, ensuring tailored expertise. This integrated approach allows financial institutions to offer comprehensive solutions, meeting diverse client needs efficiently.
An example of how further categorization is divided under IBD is illustrated below with two main divisions namely Capital Markets and Corporate Finance. Please note that not all banks are categorised like this, this is just one way of understanding the structure.
1. Capital Markets
Capital markets professionals help companies raise capital by issuing securities like stocks and bonds. They provide guidance on the timing, pricing, and structuring of these offerings. Capital markets experts assist in areas such as determining the IPO price and marketing the offering to investors.
2. Corporate Finance
Corporate finance experts work closely with companies to manage their financial operations strategically. They assist in optimising capital structure, cash flow management, and decision-making to enhance shareholder value. Corporate finance includes Industry Coverage and Mergers & Acquisitions (M&A), but the distinction between both roles within a bank would depend on the bank itself.
2.1. Industry Coverage
Industry Coverage in the corporate finance division of an investment bank are teams who advise on all deal types but only within specific industries such as Healthcare, Energy, Real Estate, Consumer, Financial Sponsors, etc.
2.2. Mergers & Acquisitions (M&A)
Main goal of M&A specialists is to guide companies through mergers, acquisitions, and divestitures, advising on the strategic aspects of these transactions. If there are two companies contemplating a merger, M&A bankers would evaluate the financial aspects, assist in negotiating the terms, and ensure a smooth transition. Not all mergers and acquisitions are bilateral – large and rare assets are often run through a competitive process where there may be multiple bidders and multiple bid rounds in the process. M&A bankers act as key liaison members between management and the bidders and are involved in all aspects of the deal until closing.
A merger takes place when two distinct entities collaborate to form a fresh, unified organisation. These mergers are typically consensual and involve companies of comparable size and scope. Meanwhile, an acquisition refers to one entity assuming control of another. Whether it’s a merger or an acquisition, the underlying objective often revolves around expanding the company’s market presence and enhancing shareholder value.
Buy-Side vs Sell-Side Comparison
In the world of Finance, Buy-side means working with the buyers and finding opportunities for them to acquire other businesses. Sell-side, on the other hand, means advising either the sellers or the buyers in a transaction with their clients interest at hand.
In the context of M&A bankers, a buy side M&A banker means that you advise the client acquiring the business, and a sell-side M&A banker means you advise the client that is selling their business. M&A bankers generally belong to the sell-side.
In short, the goal of the sell-side is to find a potential acquirer who is ready to propose a beneficial deal. On the contrary, the buy-side’s mission is to help clients generate capital from the acquisition.
| Buy Side | Sell Side | |
|---|---|---|
|
Goals |
Buy-side firms aim to help clients make successful investments and generate returns commonly measured by IRR or MOIC |
Sell-side firms aim to advise businesses on means to maximise shareholder value, through various transactions opportunities |
|
Roles |
Buy-side analysts, acting as stewards of capital from their investors, aim to maximise investor returns. They primarily do so through the analysis of transaction opportunities, and portfolio company management |
Sell-side professionals pitch strategies, raise capital, advise on transactions, conduct research, and build connections. They also act as key liaison members in a structured process |
|
Structures |
Buy-side professionals include analysts, asset managers, institutional investors, and retail investors |
Sell-side professionals include investment bankers, analysts, brokers, market makers, and corporate bankers |
|
Institutions |
Consists of hedge funds, pension funds, mutual funds, asset management firms, private equity firms, and companies |
Consists of investment banks, commercial banks, brokerage firms, and advisory firms |
Conclusion
We hope you have learnt more about the terms “IBD” and “M&A” in this blog! We trust that this has sparked your interest in learning more about this area of finance, so stay tuned for our other blogposts in the series – Mergers and Acquisitions Made Simple.