Of all the businesses in investment banking, the task of providing mergers and acquisitions advice is the most profitable -- and the most volatile.
Deals can be hammered out over months and fall apart at a moment’s notice; financing can be impossible to get; or shareholders can rebel against a price they don’t like. Recently, it has been unusual for a merger to run smoothly from beginning to end. Rocky, litigious negotiations have been a feature of several major deals including the buyout of Clear Channel Communications and Dow Chemical’s acquisition of Rohm & Haas. “It used to be that a merger was done when it was signed,” observed Goldman Sachs Americas head of M&A Tim Ingrassia recently. “Now it’s not done until it’s done.”
M&A is traditionally a cyclical business, and professionals are used to the volatility and the career risk as the cycles pass. In a good year, it is not unusual for major banks to book $1 trillion or more of credit for mergers they advise on. Generally, mergers boom during good times and pull back when the economy slows and companies become reluctant to spend money. However, it is rare for merger activity to cease altogether. More often, investment bankers work on smaller deals during downturns, which intensifies competition as small “boutiques” compete for fees with big firms like Goldman Sachs Group Inc. and Credit Suisse (USA) Inc. This “middle-market” segment of M&A is usually stable throughout both upturns and downturns. The resilience of M&A is partly because mergers are as much a response to corporate weakness as they are to corporate strength; they are a good way to cut costs, expand technology, or grow into new businesses.
For those of you who don't know, M&A bankers come in two major forms: the technicians who structure mergers, strategize over financing, and work out the finer points of a company’s value; and the “relationship guys,” whose job it is to court executives and drive a hard bargain at the negotiating table. As banks have grown in size, both industry and M&A bankers are often under pressure to “cross-sell” to clients. That means not just offering merger advice, but also engaging colleagues from all over the bank to provide lending, derivatives structuring, pension management, and currency hedges for large or multinational companies that merge. Once a deal is closed, however, the investment bankers’ job is done, and many companies struggle on their own to plan out the most brutal aspect of a merger: the post-deal integration.
WHERE THE ACTION IS
The middle-market -- a vaguely defined area of deals worth $1 billion or below -- is likely to be the best bet right now for merger professionals.
Currently, mergers are keeping investment bankers busy at both big banks and small, but mostly because bankers are throwing all the effort they have into bringing a handful of deals to fruition. The beginning of 2009 saw a wave of consolidation in the pharmaceutical sector, for instance, with multibillion-dollar deals that included Pfizer, Wyeth, Merck, Schering-Plough, Roche and Genentech. Those mergers brought a clutch of rich fees to investment banks.
The rise of government intervention -- many bankers call it “meddling” -- has convinced some prominent M&A bankers to seek their fortunes at smaller firms or boutiques like Evercore Partners, Greenhill and Co., or Lazard Ltd. Such firms are small, resemble partnerships and are highly focused on M&A. That means bankers don’t have to worry about the government and can collect up to 10% to 15% of the fees that they bring in.
A step below that in the highly hierarchical, tiered system of investment banking is the middle-market, a heavily populated area of M&A advice that is highly fragmented. The middle market has traditionally been a stable source of revenues, which has drawn many refugees from big banks to start their own middle-market boutiques. Firms such as Jefferies Group Inc., Houlihan, Lokey, Howard & Zukin Inc., Sagent Advisors Inc., Harris Williams & Co., Robert W. Baird & Co. Inc. and many, many others are players in the middle-market.
The downturn is also a boon for foreign banks including Credit Suisse, Deutsche Bank USA, Barclays PLC and one ambitious Australian firm that has hired several prominent veterans, Macquarie Group Ltd.
Anyone who wants to work in mergers has to be armed with an MBA and tremendous physical stamina to make it through the 100-hour work weeks in which it is not unusual to start work at 7 a.m. and leave at 11 p.m. nearly every day. Flexibility is also key, because plans frequently change at a moment’s notice. All-nighters are more of a rule than an exception. Investment banks are hard on their youngest M&A trainees, in analyst or associate positions, who are consigned to late nights crunching numbers in Excel spreadsheets, making last-minute changes to “pitchbooks” that go out to clients, and otherwise being on call for tasks ranging from menial to more menial.
Investment bankers usually don’t get to meet clients until they are higher-level associates or vice presidents, a level that takes three to five years to achieve. In many cases, it can take 10 to 15 years to achieve the most senior level of managing director. Generally, managing directors maintain client relationships. They don’t have to crunch numbers, but they do have to bring in business, which includes brutal travel schedules, hundreds of client meetings each year, and considerable creativity and negotiating savvy.
M&A used to be called “a young man’s game,” given that many of its practitioners would work flat-out for decades and then retire early in their 40s. As a rule, careers are stretching much longer, and there are many working M&A bankers in their 50s and some even in their 60s.
GETTING THE JOB
To get a job as an M&A banker, first you have to apply to an investment bank. Investment banks generally rotate young employees through various sectors and units based on need, and M&A may not be in the cards right away. Once within an investment bank, young M&A would-bes would do well to get acquainted with the M&A side of the bank and make connections there.
Current M&A bankers, used to being shifted in times of crisis, are facing staffing cutbacks right now as it is traditional for big investment banks to shrink or get rid of their dedicated M&A groups in downturns. The firms often move those bankers into industry groups or assign them elsewhere; anyone who can’t be assigned is laid off.
M&A bankers generally have investment banking in their blood and don’t transition well into other financial industries like private equity/VC, hedge funds or asset management. They are, however, very versatile within an investment bank because of their analytical abilities and ability to adapt to change.