By Victor Paquet and Pierre Six (Mergersight Operations) & Carlo Leopardi and Tommaso Arona (Boston University partners)
Walkthrough
IB Process
A common interview question that you might come across is the simple: What does an investment bank do?
However, just like with any other question you might receive, an interviewer is likely to ask follow up questions in order to solidify your technical background as a candidate. Learning more about the behind the scenes process of an investment banking deal is one of those topics that are likely to be asked about.
First, a clarification. Within investment banking there are MANY various functions. Depending on the institution, activities such as wealth management and asset management may fall within the IB structure. As such, we are limiting our conversation of investment banking deal cycle to advisory and financing activities. Now we can get started.
(1) Idea creation
This is the stage where the purpose of the transaction comes to life. There are two main ways for a deal to take place. The first is the investment bank pitching a solution to the company in question. The other is the company coming up with the idea and accessing the capital markets in order for this solution to be satisfied.
Ex. Apple decides to raise money for a new project in Europe. They call banks to structure the deal.
Ex. Goldman Sachs pitches to Apple the acquisition of OpenAI as they see several synergies.
(2) Bake off
Once an idea takes place, a bakeoff is held. This is a preliminary process where the company looking for a banking solution hears different proposals from investment banks across the street. Be minful that as an analyst you will be heavily involved in the creation of these pitching materials. At the end of the bakeoff the client chooses an investment bank to help out on the deal.
Ex. After Apple’s decision to start a new European project, they call investment banks across the street to intiate negotiation talks.
(3) Due Diligence
Although the size of deals varies significantly, whenever a company uses investment banking services the transactions are usually of large size meaning that thorough research and procurement of materials is necessary to move forward. This process is called due diligence. During this step bankers thoroughly comb through financial statements and verify all information is up to date. Any discrepancies will be reported in this step.
(4) Valuation
This is the step where the deal starts to come alive. Bankers in this process work out the terms of the proposed transaction. The specific details of a deal are worked out in coordination with management as their interests want to be accounted for. This is the step where valuation skills such as DCF, Comps and LBOs will come into play.
(5) Documentation
This is an additional step slightly outside of investment banking purview. In this process of the deal, law firms are included and expected to add their input to the transaction. This is where the legal documents are created and the formalization of the transactions begins. This is also where regulatory approval will be factored in if the size of the transaction is large and there might be legal questions.
Ex. Wachtell, Lipton, Rosen & Katz take care of legal documentation in the Chevron acquisition of Hess.
(6) Roadshow (Optional)
Depending on the type of transaction this is where a roadshow would begin. A roadshow is where an investment bank will attend meetings with investors aiming to pitch their solution to them. Traditionally a roadshow takes palace in an IPO (Initial Public Offering) deal.
Ex. Barclays holds a roadshow pitching the Arm IPO to global investors.
(7) Closing/Post Deal
After all of the above steps are completed, the deal is said to be closed. The transaction that was taking place has been completed with success. However, the closing of the deal sometimes just signifies the start of a new process. For M&A for example, merely completing the transaction is just the start of the integration process between the two companies.
A final note. These steps are very general and may differ drastically from function to function within an investment bank. The general idea however is that there is a (1) pitching process where banks try to win over the deal, (2) a structuring process where banks create the terms of the deal and (3) a closing process where the transaction becomes complete.