The M&A market is not what it used to be. Markets change all the time, and the M&A industry is no exception. Especially with COVID-19, the M&A market has been crazy the past couple of years. Helping us understand M&A market trends from a banker's perspective is Kunal Jain, Director at William Blair, Health Care Investment Banking.
“The greatest risk to deals is time. So we (bankers) have no interest in long exclusivity periods because we lose leverage.” - Kunal Jain.
Two years ago, before the pandemic, they usually gave the buyer an entire process of value-driving business diligence before signing the LOI. It was a very traditional process, followed by a whole phase of confirmatory diligence for the buyer to de-risk the transaction and confirm what they are buying. But not anymore.
When the pandemic hit, everything changed. And for a lot of reasons, there was a frenzy of buyers willing to buy businesses, which shifted the market to become seller-friendly. This also meant the market became more banker-friendly.
According to Kunal, they no longer run a traditional process because of this market trend. They don’t give out exclusivity to the majority of their deals anymore. And even if they did, it’s only for three to seven days. They keep the process competitive up until the very end. Once the buyer issues an IOI, they have six weeks to complete everything. Bankers now require confirmatory diligence to be 80% finished, with a fully-baked contract, including price combined with a full equity backstop, before signing the LOI. Only then, the buyer will get exclusivity and will have a week to review highly sensitive documents and sign the deal.
The strategic buyers are the ones that are highly affected by this change. They used to have leverage over PE firms because of their synergies, allowing them to bid higher prices. However, strategic buyers are at a disadvantage because of this compressed timeline of doing deals.
Unlike PE firms who only look at cash flows and can drop everything instantly and focus on acquisition, strategic buyers need to plan synergies and incorporate bureaucracies that come along with a big company, which significantly slows them down.
Kunal’s advice for strategic buyers is that if they want to compete in this market, they need to avoid a banking process in any way possible. They need to be aggressive in finding the business that they want to own and make it a proprietary deal.
Also, use technology tools to improve your pipeline management system, and be able to track targets before they can go public for auctions.
With all of these changes in the market, the true winners are the bankers. In Kunal’s experience, Not only are they getting more deals done than before, but they are also earning more from the deal itself.
They have now placed a kicker on top of their normal fees on every deal that they do. Any amount that exceeds the asking price of the seller, will be subject to a commission that can run up to 9%. Aside from their normal fees which are around 1.5% of the purchase price.
All of this is possible, because of the extreme competition that they have created in their process. They don’t care about the culture fit or integration planning from the buyer. Their loyalty lies to their clients, which are the seller, and the only thing that matters to them is the certainty to close.