Role of Investment Banks in Mergers and Acquisitions

The Mergers & Acquisitions deal value in the Indian market clocked more than $41 billion in the first half (January-June, 2019). US-based businesses accounted for more than a quarter of all inbound investments into India during the period, followed by those from Japan and China. The M&A space in India is primarily led by private deals. A business might choose to merge with or take over another in order to inorganically gain access to new markets, cutting-edge technologies and top-end talents, as well as in the form of ramping up revenue.

Shares of stock-market-traded companies are openly bought and sold in public view with transparency. Besides, listed businesses are subject to mandatory public disclosures of all their material information such as board decisions, operational details, data on top management (e.g., remunerations), and audited financial statements. Besides, these companies are always on the radar of equity research analysts and the media.

In contrast, mid-sized privately-held companies lack visibility in the major part on the M&A circuit. Since these businesses have limited options to raise capital, they are often weighed down by liquidity issues. As privately held businesses don’t have the obligation to disclose financial information to the public, in private M&As, the buyer treats the seller’s disclosures as the baseline of the transaction. However, there are provisions to hold the seller accountable for any undisclosed material information after the deal is signed. But, this might well be a tortuous route to take.

In the absence of expert and well informed intermediaries, such as investment banks that screen and evaluate competitive bids and superior offers, the buyer and seller in the private M&A landscape, might face challenges due to partial or total lack of actionable information. Alternatively, one party in such an M&A deal might possess greater material information than the other and unduly benefit from it.

Investment banks can add value to the process in terms of realizing an optimal M&A deal, thus creating a win-win proposition for both the parties. M&A advisories can help drive healthy competition by bringing multiple buyers or sellers to the table. This, in turn, allows both the parties to structure the possible deal that results in the highest value for buyer and seller while reducing risk through carrying out due diligence and adopting best practices.

Contrary to popular perception, an M&A team in an investment bank handles a lot more than just plain vanilla M&A. Their activities include taxation, accounting, financials, as well as legal and regulatory compliance. M&A advisory firms usually comprise of experts with a deep and accurate understanding of complex acquisitions, takeovers, slump sale, multi-firm mergers, divestitures, restructuring, exit planning, and demergers. Most importantly, by shifting M&A operations that are essentially complex, time-consuming, and resource-intensive to a reliable and skilled investment bank, businesses can continue to focus on their core business activities during the deal phase.