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Tag: financial modeling course

Investment Banking – Understanding the Deal – The Deal Process (III)

Posted on by Imarticus Learning

As we discussed in
Investment Banking- Why do Sellers use an Investment Banker (I)
Investment Banking- Understanding the Deal: The Pitch Process (II)
So now that the banks have pitched for the deal by showcasing their industry knowledge, negotiation and deal prowess and asset valuation, one bank is chosen to exclusively market the asset and execute the deal. The business of developing relationship and signing mandates by going to meetings, researching the industry and pitching is called origination. It is often done by the business development team in large bulge bracket investment banks like Goldman Sachs and JP Morgan. Once the deal has been mandated and a Client Agreement has been signed, the execution team takes over. In a boutique bank like Avendus or Mape, same teams often specializing in an industry handle both origination and execution.
The deal process for buying and selling are slightly different and today we will be focusing on selling an asset. A typical advisory structure.

This is the usual process of a deal
1. Preparation –Diagnostics and Consolidation of information- this is where the execution team visits the site and spends time understanding deal nuances, strategic considerations like potential valuation and transaction process once they look at all the information.
•Review The Business, Financial Results & Prospects
•Develop & Refine Financial Forecast
•Gather Financial & Legal Due Diligence Material
•Analyze Structural Considerations, Including Tax & Accounting Issues
•Review Tactical & Strategic Considerations
•Analyze Structural & Timing Considerations
• Create deal Collateral including Information Memorandum, Financial Model and Teaser
2. Planning– Establish Valuation Based On Standard Valuation Techniques
a. Review Strategic Options In Light Of Valuation & Structural Goals
b. Analyze Transaction Structure Alternatives
c. Assist In Development Of Appropriate Acquisition Contract
3. Marketing– Use deal collateral and contacts to
a. Position Company To Appeal To Specific Buyers
b. Identify & Screen Potential Buyers
c. Prepare Management Presentation
d. Develop Data Room and coordinate site visits
e. Conduct Marketing Process With Strict Time Guidelines
f. Minimize Business Disruption
4. Due Diligence and Bid Evaluation–
a. Compare & Analyze Bids & Considerations
b. Evaluate Company’s Options
c. Due Diligence by Buyers
d. Analyze Tax & Structural Impact Of Proposed Transaction
5. Negotiation- Negotiate pricing through auction rounds. There are different ways in which you sell or buy a company (See box below) but all of it involves a fair amount of negotiation and many rounds of it. A couple before the due diligence and a few after.

a. Negotiate Price
b. Negotiate terms of sale or SHA and SPA terms
c. Negotiate R & W terms
6. Documentation and closure- A primary legal process but also important for bankers as they coordinate everything. This is one of the reasons why bankers wear many hats. A salesperson, a lawyer, an accountant and sometimes even the local errand boy.
Every part of this process is delved into in detail in FMVC and Diploma in Corporate Finance, India’s leading programs in Financial Modelling and Corporate Finance.

 

Investment Banking – Why do Sellers use an Investment Banker? (I)

Posted on by Imarticus Learning

If you looked at the economic times headlines today, you would have read how the Government has shortlisted three Investment Banks, also known as Merchant Banks, to manage the stake sale in the SUUTI portfolio companies. (Source)
This means the government has mandated Citibank, Morgan Stanley, and ICICI Securities, to sell their minority stakes in various listed and unlisted entities on their behalf. What does this mean? And how would the transaction take place? In this post and the next series of posts, we will try and understand how a deal takes place, what happens and what Investment Bankers actually do. These posts will help you prepare for Investment Banking and Corporate Finance interviews as this is a common question. This is part of our interview prep module in our FMVC course at Imarticus Learning, one of India’s leading Financial Modeling and Valuation courses.
Why do they need a banker at all?
I mean after all who knows your company best, you or an outsider. You, of course. And why should you really pay 4 percent of what you get to someone when you could do it yourself. Well Investment Bankers add immense value to a deal and this is why most major transactions use one.

  1. Most companies don’t have the expertise– Investment Bankers bring with them specialized knowledge on how to sell something. How to package a product in a way that showcases it best to optimize value. But how do they know the company well enough to do that? Well, they work very hard to gain both a broad working knowledge of the industry and specific knowledge about the sector. So yes, while you know your company very well, they probably know the industry, your competition, both domestic and international as well as you do and perhaps even better in some cases.
  2. Most companies don’t have the time– Are you going to focus on running the company or selling it. Selling a business is an extremely time consuming process from gathering all the information, to putting it together in one place, to contacting buyers, scheduling meetings, doing site visits and taking care of documentation. It’s also an important job; you can’t just put your EA on it, however good she might be. So do you pull your most efficient person out of their current job, or are you better off hiring someone who does this day in and day out?
  3. Being objective– Value is a very subjective thing. You might believe your company is work x but the market and the buyers might value it at Y.  Because you are too close to the transaction, sellers find it very hard to take an objective view because the value of a company is marred by conflicts and emotions. Yes, finance is a minefield of aspirations, attachments, ambitions, hard work, years of toil and legacy. Less said about inflated egos the better. So having a banker that can assess value from the outside is not just helpful but critical in achieving your objective.