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Role of investment bank in M&A process

Md Tabarak Hossain Bhuiyan | Published: October 14, 2019 21:12:06 | Updated: October 19, 2019 21:08:06


-Reuters photo

Mergers and Acquisitions (M&A) market in Bangladesh is in its infancy. But if we look at the corporate sectors of our country we see that the time has come to seriously think about the M&A market here. Though there have been a limited number of mergers, including directed mergers in our country, there are confusions and misconceptions in the minds of the stakeholders that pose challenges in dealing with the M&A process successfully. Such misconceptions, if not addressed properly, are going to cause serious difficulties in a market like ours.

 M&A is a strategy for business growth and expansion by creating synergies through asset reconsolidation and resource optimisation. There still exits a misunderstanding about the roles of different professionals involved in the process. Essentially, the M&A is all about a team work and at the minimum, the team consists of investment bankers, chartered accountants and lawyers. The process may require active participation of professionals involved in HR, IT, marketing and other areas depending on the nature, type and size of the companies. Valuation experts, in some cases, insurance experts are also required to be included in the team.

An investment bank has a huge role to play as an external advisor in any M&A process beginning with approaching a target company; then passing through negotiation, confidentiality agreement, valuation, due diligence, structuring and pricing, financing, managing the deals until the Post-Merger Integration (PMI).

The team work is required for both the target companies as well as for the buyer companies. Again, both sides require well versed internal working teams who must have ownership for their respective companies. The internal team is to be built with representatives from different departments of the respective companies. Successful M&A deals must involve the departments that include HR, sales and marketing, strategic planning, finance, operations etc. This is how M&As are strategic options for business growth. The typical strategic growth options refer to both organic and inorganic growth. Therefore, it is evidently clear that only chartered accountants and lawyers can not play adequate roles to make an M&A deal a success. Here it is imperative to acknowledge the role of an investment bank having its in-house professional team to be engaged as an external advisor.

An investment bank can, in fact, act as a financial advisor either to the seller or to the buyer or may negotiate with both the companies. Having said this, the investment bank is responsible for advising the client companies on matters relating to market dynamics, financial economies, industry trends, valuation and pricing of business of the target and deal structuring. From the seller point of view, investment bank identifies and makes initial contacts with the prospective buyers. Negotiation and evaluation of offers are also the responsibilities of the investment bankers.

Involvement of an investment bank is of particular importance in M&A deals between SMEs as well as private companies. Unlike the listed companies, these small companies lack market feedback and required information. The shareholders and management of such companies are often unaware of what their company is worth. In order to make their M&A succeed and increase value of the company, the SME owners have to adhere to the business-model driven M&A which calls for identifying what drives value of the company. Here it is hard to calculate and justify the value of a private company as opposed to a publicly traded company, as there is no existence of daily stock price in a private company. Therefore, in addition to the roles of the corporate lawyers and accountants, an investment bank having due expertise can help identify and quantify the outcome of a private company, achievable through M&A in an appropriate situation.

In accomplishing different types of mergers and acquisitions including amalgamations of large companies and conglomerates as well, investment bank has a role to play in terms of win-win benefits of M&A. In large corporate deals, the in-house capability of an investment bank may not be adequate to complete and close the M&A arrangements. In that case, an investment bank may engage professionals like lawyers, accountants, HR consultants, IT experts and others.

The role of investment bank is increasingly surfacing all over the globe due partly to globalisation, and substantially due to increased competition facing businesses today. As already mentioned, the M&As are seen as strategies for business growth through creating synergies. Business owners seeking to expand and/or grow their businesses are becoming more and more inclined to engaging investment banks as external advisors for M&A deals.

An ideal investment bank is expected to have due expertise in dealing with the valuation part of its role in calculating the worth of a business. Construction of financial models to assess the real world financial situation in terms of assets and portfolio of a business is one of the tasks of an investment bank. This task is critically important because it helps valuation of business, quality financial decision making and capital budgeting. Investment banks having expertise in providing business valuation service can also provide simultaneous services of buying and selling of securities. For example, if an investment bank has conducted the valuation of a target company that indicates the value of its securities in the stock market, and if the market value of the securities is less than the actual value of the business, the investment bank may recommend a merger or acquisition of the target company.

In sourcing the M&A deals, investment banks conduct market and industry studies relating to both the target and acquirer companies. Thereafter, they develop their own strategic ideas about both sides and approaches the two companies for merger or acquisition as the case may be. Sometimes, a target company may approach an investment bank to find an appropriate buyer and vice versa. In terms of financing an M&A deal, investment banks may determine the appropriate price for new securities, act as an issue manager and find buyers for those new securities.

 In Bangladesh, despite there being 58 investment banks, they are far from their roles in the field of M&A. The number one reason is that our M&A market is not yet conversant with the concept of M&A as a crucial business strategy. Though a limited number of M&A transactions have taken place, there prevails a misconception that only lawyers and accountants alone can perform and close M&A deals. Time has come to create awareness about the exact nature and functions of the professionals including the roles of investment banks in our country. Our corporate sectors, including the financial sector, have reached the stage of maturity of their life cycle rendering the situation favourable for M&A for sustainable growth of our economy through asset reconsolidation and resource optimisation. And for that matter, investment banks must come forward to begin their capacity building so that they can play their roles in the prospective M&A market in Bangladesh.

Dr. Md.Tabarak Hossain Bhuiyan, IM&A is Managing Director & CEO, PBIL.

tabarak@pbil.com.bd

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