to Select an Investment Banker
This article is intended to help
CEOs, entrepreneurs and boards of
directors make better decisions when hiring an investment banker
for an M&A engagement. The article discusses the three most
important criteria–experience, commitment and character.
transaction will have obstacles that must be overcome. The seller wants
the highest price and the buyer wants the lowest price. These are
diametrically opposed positions. It is no wonder that issues crop up.
Experience is far and away the most important capability that an
investment banker can provide for the client. The broader one’s base of
experience, the more effective the banker will be at solving the
problems that inevitably occur.
First of all,
what does the company want to accomplish by hiring an investment
banker? There are usually three primary objectives:
1. Get a
2. Close it with the best buyer, at the best price and best terms.
3. Close the transaction in a timely manner, with the fewest problems,
and a minimum of disruption to the company.
face a dilemma when choosing an investment banker to sell a company for
less than $30 million. Should they choose a small boutique firm? Or,
should they choose a larger investment bank?
firm may have more people and resources; however, there is always the
possibility that the transaction will be turned over to a junior staff
person. Generally transactions under $30 million do not receive full
attention from larger investment banks. They simply cannot earn a large
enough fee to make it worth their while.
firm often provides greater attention and more personal service on
smaller deals. Remember—you hire the person, not the firm.
There is a
pervasive myth that contacts or “knowing a space” is the primary driver
for selecting an investment banker. I am frequently asked: “Do you have
any contacts in the XYZ industry?” or “What space have you worked in
lately?” I am rarely questioned about my skills or experience. Many
CEOs and boards mistakenly believe that successfully closing
transactions is all about contacts or industry knowledge.
$30 million are a different situation. The technology market space is
like the Wild West. The landscape is vast and things are changing all
the time. Access is not a problem. CEOs of tech companies are
interested in knowing which companies are for sale. Making the contact
is simply not an issue.
competency that an investment banker brings to a transaction is
overcoming problems and negotiating the price. Making contacts is the
investment bankers have three qualities that enable them to close
transactions successfully and get the best price for their
clients—experience, commitment and character.
with the broadest experience will have the greatest depth of skills for
resolving problems. Experience enables him to effectively manage the
process and close the transaction at the best price.
Experience embodies six key aspects:
- Experience with strategic value
- Experience in technology markets
- Experience with similar size transactions
- Negotiating experience
- Deal savvy
with Intangible Value
almost always strategic, not financial, in technology M&A
transactions. Value is not a function of a company’s earnings, but
rather a function of the company’s technology, intellectual property,
engineering team, etc. Strategic value is almost always greater than
The right M&A advisor will have a depth of experience
negotiating transactions in which the value is strategic.
the dynamics of technology markets is critical. These markets are
fast-moving and fluid. An investment banker with experience in the
technology markets will have a better understanding of how to close
transactions in this rapidly changing arena.
sector in the early stages of growth has different dynamics than a
consolidating sector. The motives for acquisition differ. In addition,
adjacent markets are more important in strategic transaction. The best
buyer may reside in an in an adjacent market, not the core market.
Experience with Similar Size Transactions
pervading myth is that deals under $30 million should be run by the
same process as large M&A transactions. A $300 million deal is
a totally different transaction than a $5 million or $10 million deal.
Large transactions utilize the two-step auction process which is not
appropriate for smaller technology deals. Plus, there are many more
buyers for an $8 million company than for a $300 million
bankers who try to run an auction process on small deals are trying to
put a round peg into a square hole. The best price and the best terms
are not achieved for the client. A negotiated transaction, on the other
hand, takes more time and effort but produces superior results. Do not
assume that the process that works for large deals is appropriate for
negotiators have three key skills: people skills, communication skills
and problem-solving skills. Closing a deal
means working with people. The more experience an investment banker has
dealing with many types of buyers, the better job that banker can do
for his client.
experienced deal maker anticipates issues before they come up. He heads
off minor problems before they become bigger problems. About 40% of all
transactions blow up at least once. It takes experience to get these
deals back on track and concluded successfully.
and creativity are the qualities that separate the great deal doers
from the good deal doers. Tough problems demand that the investment
banker take an out-of-the-box approach. Can the banker approach the
problem with an imaginative mind set?
Deal savvy is
presented last because it is the most elusive. It is difficult to
define, but you know it when you see it. Deal savvy means simply
knowing how to make deals happen.
enables the banker to deal effectively with bluffs, false objections
and other impediments. An investment banker with deal savvy can work
effectively with uncertainties and moving targets. He will find a way
to get the deal closed.
investment banker give fully committed attention to the client? Is the
deal large enough to get the banker’s interest? What priority will be
given to the assignment?
important because transactions can reach an impasse. When the going
gets tough will the banker stick with it, scratching and clawing his
way to close the deal?
attention is something you should demand. Who will be the individual
working on your assignment? Is it a senior partner or will the
assignment be handed off to a junior associate?
embodies trust, integrity and chemistry. Integrity takes two forms in
the context of a transaction. The first is integrity with respect to
the client. The investment banker should have the integrity to inform
the client about all aspects surrounding the transaction, even the bad
aspect of integrity relates to negotiating. Negotiations are more
fruitful when each side trusts the other side. A banker who is
constantly shifting his requests or positions does not generate trust.
The sale of a
company is one of the most significant transactions in many peoples’
business lives. You should enjoy and respect the people with whom you
are working. The principals of a company will be spending a good six
months with this advisor so choose wisely.
The broader an
investment banker’s experience, the more skilled he or she will be at
overcoming the problems that inevitably occur. It is only through
experience that a banker develops the rich talents that aid in closing