Most of us are aware that Investment banking is a division within banking that broker transactional relationships between corporations and governmental bodies and private investors. But mergers and acquisitions is another ball game.
In this article, we discuss how to navigate the potential minefield of M&A and what investment bankers do in mergers and acquisitions.
We also provide recommendations on the ways one can learn investment banking to improve their career prospects.
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Mergers And Acquisitions: An Overview
There are several activities included within the ambit of investment banking such as underwriting, sale of securities, facilitating reorganizations, and broker trades. But, perhaps the most important function of an investment bank is the end-to-end management of mergers and acquisitions.
In simple terms, an acquisition is when a company purchases another and positions itself as the new owner. A merger is when two companies of equal footing join forces to become a single entity. For example: When Daimler-Benz and Chrysler merged in 1998, both firms ceased to exist and a new firm called DaimlerChrysler was formed with new stocks.
Similarly, there are other transactional activities that fall under the bracket of M&A. Some of the others are:
- Consolidations, where a new company is created by combining the core businesses while abandoning the older structures. This is done with approval from stockholders of both companies.
- Tender Offers, where a company buys the outstanding stock of another firm at a price different from the market price. Most tender offers end in mergers although sometimes the acquiring company continues to exist as a unique entity.
- Acquisition of Assets, where one firm directly acquires the assets of another firm that has typically declared bankruptcy.
- Management Acquisitions, where a firm’s executives purchase controlling stakes in other firms.
Companies keep acquiring other firms mainly for two reasons: eliminating competitors by acquiring them and growing by acquiring new product lines, intellectual property, and human resources.
What Investment Bankers Do In Mergers And Acquisitions
An Investment Bank’s role in M&A can be categorized into two buckets: seller or target representation and buyer or acquirer representation. The banker performs either of these two roles on behalf of his investment banking firm.
An investment banker undertakes and oversees the following activities in any M&A transaction:
- Representing and guiding the acquirer in determining the value of the firm being acquired, structuring the offer, negotiating the deal on their behalf, and so on.
- Representing and assisting the target company to determine the market value of the company, providing legal advice during the negotiation process, and broker the best deal for the sale.
- Advising both parties vis-a-vis market economy, industry trends, deal structuring, market dynamics, and pricing.
- Performing market research and using their network to connect the seller with the best buyers.
How To Be Successful As An Investment Banker
An investment banking job is a highly lucrative career path that promises long-term stability and growth as well as a hefty remuneration. Because of the high-stakes nature of the job, companies prefer to invest in candidates with high potential and a strong background.
To become an investment banker, formal education in finance is highly recommended. Most hiring teams in investment banks look for candidates with a strong aptitude in finance, law, strategy, and operations. Similarly, prior apprenticeship or internship experience in investment banks also gives a candidate a competitive edge over others.
If you are seeking a growth avenue in your career as a finance professional, then entering the world of investment banks is a wise choice. For a working professional, a good way to learn investment banking is by enrolling in an online MBA in Investment Banking and Equity Research degree.
Having an MBA will have a candidate earmarked for top managerial positions in the most prestigious divisions within investment banking such as M&A.