Everyone wants deals .
And if you just started working in investment banking – or you’re going to soon – you’ve already done extensive research on how many deals your group does and the probability that you will get into Blackstone based on your expected deal experience.
You need deal experience for buy-side interviews, for your resume, and you’ll certainly need it when you go out for bottle service and your MD makes you pick up the bill.
The only problem: you’re not gonna get any (deal experience, not bottles).
Most likely, you won’t even close a single deal in your first year.
Here’s why all your deals will fail, and what you can do about it to land offers anyway:
Why Deals Fail
Usually when people – or overzealous news reporters – say, “Most M&A deals fail” they mean that most deals fail after the fact.
Company A bought Company B to expand into a new geography, and it failed when all their customers revolted and switched to a competitor; Company C bought Company D to “realize high potential synergies” and then it failed when Company D’s executives ran off and started their own firm instead.
But most deals never even reach the finish line in the first place – they die premature deaths, never having burst out of the womb and onto the front page of the Wall Street Journal.
And these premature deaths have nothing to do with whether or not you remembered to change the font size to 12 everywhere and capitalize all titles in that pitch book you finished at 3 AM last night .
Time Kills Deals
Mark Suster puts its well: “ Time is the Enemy of All Deals .”
But I would change it to: Time Kills Deals .
As the deal process drags on and on, both the buyer(s) and seller(s) start to lose interest; their financial and strategic situations change, and what once looked like a great idea now looks like as great an idea as showing up to Cain without the appropriate arm candy .
Time kills M&A deals most often in one of two ways:
- Endless Window Shopping – Bankers keep showing their client around to potential buyers, and no one expresses more than lukewarm interest. But no one says, “No” outright either, so they waste time sending over information and more information, all to no avail.
- Due Diligence Delays – One buyer submits a Letter of Intent (LOI) and wants to buy your client, but they get stuck in due diligence and need to learn all details of the seller down to what color shirt everyone wears. The 60-day due diligence period gets extended by 30 days… and another 30 days… and so on, ad infinitum until everyone forgets about the deal.
“Strike while the iron is hot” applies equally to relationships and deals: your chances of closing plummet if discussions (or flirtations) drag on and on and no one commits to anything in writing (or in other ways…).
Can You Fix This as a Junior Banker? No, not really. Unless you’re incredibly slow at responding to emails or finishing up work – which wouldn’t even happen or you’d get fired – you’re not responsible for deals dragging on and on. Blame it on red tape, ego, and politics (see below).
Price Derails Deals
Company A, your client, is trading at $20 / share. Your valuation says they’re worth $25 / share.
The buyer comes in and makes an offer for $30/share, a 50% premium over Company A’s current share price.
Easy deal, right?
The problem is that Company A’s 52-week average was $35 / share and they refuse to sell at anything less than that. Its current price of $20 / share is near its 52-week low, and selling now would be incredibly stupid despite whatever the valuation says.
Even if they missed earnings by 50% twice in a row, management always thinks “things will get better.”
This happens all the time and is one of the many reasons why buyers and sellers can’t come to terms on price.
Sometimes it’s less complicated than that: the seller simply refuses to sell for anything less than a sky-high price that values them far beyond what they’re worth.
Or the Board of Directors doesn’t want to go through with the sale because they believe institutional investor shareholders wouldn’t approve, or because they also think “things will get better” (don’t hold your breath – they only get worse).
Can You Fix This as a Junior Banker? No, unless you’ve developed the ability to mind-control executives as the newest member of the X-Men.
Do make sure your valuation is correct and that you remembered to adjust for capitalized leases and non-recurring charges in your EBITDA calculation, though.
The Terms Terminate Deals
There are pages and pages of non-price-related terms in the typical Definitive Agreement , and any one of them – or all of them – can derail your deal just as it’s about to reach the finish line.
The terms most likely to kill your deal:
- Management Retention – The management team only wants to stick around for a year, but the buyer wants them there for 3-5 years.
- Non-Compete – The buyer is OK with management team members leaving, but they don’t want them to leap to a competitor in the same industry. The managers don’t want to be restricted.
- Working Capital Funding – Some companies have working capital requirements because it takes them awhile to collect cash from customers, and so they need funding to keep their operations running in the meantime. Effectively this adds to the purchase price , which the buyer won’t be happy about.
- Reps / Warranties and Other Covenants – The buyer and seller both have to “promise” that certain points are true before the deal goes through – they have real customers, legitimate intellectual property, no lingering lawsuits, no crystal meth labs in the basement… Some of these are easy to prove, and others might be problematic.
There are dozens of terms that might cause problems – and the best part is that regardless of whether the deal happens, the lawyers still get paid because they bill by the hour and love to debate minutiae .
Can You Fix This as a Junior Banker? No, but you can “enjoy” watching the lawyers send endless paperwork back and forth and spend weeks “turning” documents and marking them up.
And be glad you don’t get paid by the hour or you’d have to do this crap all day as well (ok, I guess your work isn’t much better ).
Ego Executes Deals
The VP of Marketing wants to put himself in line to become CEO when the current one steps down next year.
Meanwhile, his chief rival – the VP of Business Development – has been one-upping him and got a 10% higher bonus last year. Plus, he was invited to a special event at the CEO’s house and their kids hung out together.
The Chairman of the Board has the hots for the VP of Marketing’s wife and wants to make a pass at her, so he’ll do whatever he can to make the VP think they’re on the same side.
The VP of Business Development brings the CEO your deal, and the CEO likes it – so the VP of Marketing gets nervous that his rival will move up the ladder and rallies everyone else to block it from going through.
Meanwhile, the Chairman of the Board still wants to hit on the VP’s wife and have his fourth affair, so he supports the VP and gets the Board to block the deal so that he gets invited to a dinner event at the VP’s house.
So now your deal will never go through, and it has nothing to do with the merits of the company itself – it’s 100% politics and conspiring behind closed doors.
This is not a soap opera – the above story happens all the time and while the details may differ, a few things remain constant: ego, the drive to move up the ladder , and office politics.
Big companies make “decisions” in mysterious and non-transparent ways, and dealing with this is just part of the game you’ll play as a banker.
Can You Fix This as a Junior Banker? No, but if your family happens to own a $100 billion conglomerate in your home country you might be able to bribe executives to make the deal go through (that was a joke , do not actually do that or you’d go to jail).
“Material Adverse Changes”
Your deal is going great – 5 PE firms have expressed interest, and 2 of them are already getting commitments from lenders.
And then… a financial crisis hits and kills the credit markets. Or we go into (yet another) recession and consumer spending drops 20%, which kills the company’s revenue.
Regardless of the type of deal you’re working on or the client in question, stuff you have no control over can always derail your deals.
It’s the equivalent of being struck by a lightning bolt, but the probability of a financial crisis or recession is significantly higher.
Can You Fix This as a Junior Banker? See above. Even with X-Men superpowers you couldn’t do much here unless the “Material Adverse Change” consisted of a hurricane or typhoon and you happened to inherit Storm’s abilities.
No Closed Deals – What to Do About It?
So in 99% of cases, you can’t do much when your deals fall through.
Not only are you unlikely to have closed any deals in your first year, you’re even less likely to have closed anything by the end of your first 5-6 months – which is when headhunters start calling about buy-side roles if you’re at a large bank.
You might think you’d be screwed when this happens, but think again: it doesn’t really matter .
Quoting directly from the ever-popular “ Private Equity Resumes ” feature:
“When picking deals to write about, what you personally contributed to the deal is more important than the size or “prestige” of the deal… writing about unannounced or dead deals is fine. Just don’t mention any names or anything that could be tied directly to a specific deal.”
Unless it’s a high-profile deal and you make it extremely obvious, you’re in the clear.
If something has already died or is in a quagmire, just pretend that things are fine and that it’s running along smoothly.
Use a description like “[Industry Name] Company’s $2 Billion Acquisition of [Industry Name] Company” – or even change the size to make it more anonymous – and write about what you contributed rather than dwelling on how things didn’t work out.
So if you thought of several extra buyers to add to the list, your analysis was used by senior bankers to bargain for a 5% better price, or you caught an error that might have really derailed the deal, make sure you write about all of that .
Otherwise, discussing dead deals is no different from normal deal discussions and regardless of whether a deal is healthy or died prematurely, everything is “in progress” to the interviewer in the room.
But Does This Issue Even Matter Outside of PE / M&A?
If you’re working in a group like ECM or DCM , you might actually get closed deals within your first year since deals there tend to be smaller, more frequent, and require less “custom” work.
They still fail all the time, but ironically it’s easier to get 100 willing investors to buy a new stock or debt issuance than it is to get 1 investor to buy 100% of a company.
If you’re in banking and want to move into something other than PE or corporate development, this issue of closed deals will still come up because even hedge funds and asset management firms will ask about your deal / client experience.
And the answer is the same: pretend it’s still ongoing even if it died, and leave out the names.
Got Closed Deals?
If you’re just finishing up your first year or you’re already looking ahead to the end of your first year, the answer is “No, probably not.”
Luckily for you, though, it doesn’t make a difference for recruiting.
And if you do happen to get lucky and close a few deals, go out and celebrate – you might even be able to pick up the bottle service tab this time.
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So what are ways that banks can get more deals closed? Can you write an article on that? Maybe all of the innovative ways that banks can increase the time to close and things that can prevent deals from falling through
There’s no way to boost your “close rate.” It’s just the nature of large deals – they often fall through. People are people.
I really need advice on my current situation. So I am a current first year and about to close an IPO but haven’t been staffed on any other deals/pitches/bakeoffs. In the beginnning it worked out since I was studying and working on my resume but now I’m concerned with my work product or if people in my firm don’t like me since the other two first years in my team have done at least 4-5 pitches each. Should I continue studying and ask for a deal here and there or be more proactive?
Any advice would help. Thanks!
You should be more proactive if the others have been staffed on more pitches/deals. Maybe point to the # of the deals you have worked on vs. the number that others have worked on and just ask if you could get a more even work distribution.
So true, am working on a potential M&A deals. We’ve been working on it for more than 6 months. The seller keep asking for some data and others alternative target company, and the seller keep saying they will sell the company if they think the price is right. U wanna the seller’s “right price”? Way beyond what we and the buyer think.
So basically, will be very challenging to close the deal, even for the next 6 month.
LOL…it’s true about the company soap opera bit. I am going to take my current experience and sell it to Telemundo (it just works better in Spanish).
Entourage is a great show! As you said, if you haven’t watched the show, you have no right to be in IB. But the show has ended, what a pity!
Any other show you might want to recommend?
Have you watched Mad Men?
Breaking Bad (best writing on TV and one of the best shows of all time in my opinion)
Game of Thrones
Thanks Brian,will check it out. Looking forward to your PE story.
Gotta love the Cain arm candy reference!!!
Yes, no article would be complete without a reference to AJ.
What is the difference between investment banking and corporate banking? Is the recruiting for IB separate from corporate banking as well? Thanks
Corporate banking is more about financing (sometimes sort of DCM-related) than M&A. It varies by bank but a lot of it is issuing loans to small businesses, auto loans, mortgages, etc. rather than working with companies doing mega-deals (but again, exceptions apply, some banks do it differently and sometimes it is more debt financing-related for large companies so similar to DCM). Usually they recruit separately but it depends on what corporate banking is most similar to at your firm.
What you mentioned is more like commercial/Business banking.
Corporate Banking is giving out loans (Revolver, term loans, bridge financing (for M&A etc..), backstop financing to big/medium corporations. Loan Syndications form a crticial part of it.
So when JP Morgan ( http://dealbook.nytimes.com/2011/03/31/jpmorgan-syndicates-20-billion-att-loan/ )provided bridge financing to AT&T for T-Mobile $39Bn acquisition, it will never keep all the loan on its balance sheet, rather will syndicate/distribute the loan to other banks. So corporate banking can deal with loans ranging from $20-30MM to billions, but the loan typically gets syndicated (after few months or immediatedly depending on the situation) and therefore the net hold for banks is ~10-25% of the total loan.
Bank loan is a “private” loan and plays a pretty important role in the Corporation and banks’ relationship dynamics. A lot of time you get internal projections and other informations from these corporations which are highly confidential because you are lender to them and is not available for public. This unlike when corporations issue public bond/note which is actually a lot of times backstopped by these bank loans. So in this case JPM will not only provide the debt for theacquisition, will also be your M&A adviser, lead bank in bond offering and in any equity or related offerings not just for this deal but for years to come! So lending brings in a lot of M&A/DCM/ECM revenues as well. Hence it’s a lot of time tied with Investment Banking group.
An Excellent reference can be found here:
Would corporate banking be a good alternative given the event that an investment banking position cannot be secured? More that management consulting or financial advisory in a Big 4?
Depends on what you’re looking for and your traits/abilities!
I’m pretty sure the not mentioning names note doesn’t apply in my/this situation but could you confirm:
If I’m in a buyside debt fund and we buy non-public lev loans of £40mm+ would it be acceptable to use names?
Why would you want to use names there? Just for more credibility when you discuss deals? I would still avoid using names if possible for dead deals.
What if the interviewer persist in asking? It happens all the time….
Just say that you can’t disclose the names because the deal is ongoing and they’re public companies. Doing so would mean insider trading, which they should be familiar with if they’re professionals in finance.