The next type of investment banking services we will examine are advisory services, comprising assistance in transactions, like mergers and acquisitions (known as M&A) and debt restructurings. M&A services became increasingly popular in the 1960s when a binge of conglomerate build-ups took place. The main investment banks understood this line of business can be profitable, because M&A deals occur multiple times, while IPOs are a one-off event. As we already said, M&A stands for Mergers and Acquisitions. We talk about an acquisition, when a company buys another company’s shares or assets. We have a merger when the buying company absorbs the target company. The target company ceases to exist after the transaction, as it is merged into the buying company. In every M&A process, there are at least two parties. One of the companies is called the Buyer or the Buying company, and the other one is called the Target, which is the firm acquired. The Buyer company can offer a compensation to the Target company’s shareholders in several ways. They can offer a cash compensation, a stock package of the new entity, or a combination of both. The technical name of the amount paid is called “consideration.” There are several reasons M&A deals play an important role in a company’s life. Top managers understand that, sometimes, it is cheaper to acquire something that has been already created, rather than trying to generate it internally. In addition, businesses are so complimentary that their combination can unlock a great deal of savings, efficiencies, and opportunities. We will focus on these aspects in the chapter dedicated to the mechanics of M&A services. Why do companies need help when acquiring other companies? Investment bankers are ideally positioned to provide valuable M&A insights to their clients, as they know their business and the industry in which they operate. Sometimes, an investment bank advises several firms from an industry and can gain perspective through multiple points of view. In addition, industrial companies do not have the expertise to carry out these deals. Several technical aspects must be addressed. Issues such as finding bidders or targets, communication with these bidders or targets, acquisition of financial information, negotiation with legal, technical and financial due diligence advisors can be overwhelming for a company that has carried out very few, if any, M&A deals. Even some of the largest companies lack scale to carry out big deals without hiring an advisor. In any transaction, there are two possible roles that Investment bankers can have. They can be “buy” or “sell” side, depending on who hires them – the Buying or the Selling company. This makes a world of difference. All banks prefer to be on the sell side, as a transaction is likely, and commissions are almost guaranteed. Buy side investors get paid in a more complicated way. They receive a retainer (a fixed amount which covers their costs) and a success fee, in case the firm they are advising purchases the target. Buy and sell-side bankers have different tasks. Investment bankers hired by the firm to be sold focus on finding a large number of bidders. They work closely with the company, trying to prepare it for all questions asked by buyers. Sell-side investment bankers provide their valuation of the business and suggest a minimum bidding price. They are also responsible for coordinating the entire sales process and work closely with the advisors of bidding firms. When hired by a buy-side company, investment bankers are mainly responsible for providing strategic advice on whether the target company is attractive and would fit nicely with the Buyer’s existing business. Buy-side advisors must provide their valuation of the target business and have to estimate the amount of synergies the transaction would generate. One of the crucial factors that determine how successful an M&A deal would be is the price that the buyer pays to the seller. Usually, investment bankers’ valuation of the target business has a direct impact on the amount the bidder will pay and on the amount the seller wants to receive. Company valuation plays a crucial role in Equity Capital Markets, too. Therefore, later in this course, we will spend a significant portion of time on various valuation techniques. Our goal is to prepare you to the fullest. You will learn how to perform DCF, Multiples and LBO valuations. We’ll learn how to value a company, once we’ve covered all Investment banking lines of business. Besides M&A, many investment banks engage in restructuring services. These services are necessary when a firm cannot service its debt and is in danger of going bankrupt. I’m sure you can imagine how tough it is to work on these transactions and assist companies in deep trouble. What leads to the distress of a company? Why would a company borrow money it can’t repay? Well, the simple answer is that things change, and sometimes, unforeseen circumstances can materialize. There can be several reasons. Some companies can have operating difficulties. These are problems with their core business. Or companies can have financial difficulties – situations in which the core business is profitable, but interest payments are having a detrimental effect on cash flows. So, the two main alternatives are a private workout and a formal bankruptcy procedure in court. Most lenders prefer a private workout, because it provides them with faster results and a higher recovery rate. Investment bankers play an active role in negotiating with lenders and preparing a recovery business plan. It is their job to ensure the company will have sufficient cash in the first twelve months of the restructuring plan. These are the two main advisory services offered by investment banks today. In our next lesson, we will learn about the trading and brokerage area – the golden goose of Investment Banking, nowadays.