We surveyed private equity firms, investment banks and mezzanine lenders to get a pulse on the overall market sentiment surrounding M&A. We wanted to solicit the wisdom-of-the-crowd to report on current conditions and to capture what industry participants collectively think about likely future outcomes.

300 M&A professionals representing 267 unique firms completed the survey that was open for 24 hours – 78% from M&A investment banks and 10% from private equity firms.

While we often think about investment banks being large-scale entities, the truth is, most investment banks are quite small.

Pulling the number of deal makers per firm from our M&A Research database at Private Equity Info, I found the median investment bank has only four deal makers. Said another way, half of the investment banking firms have 4 or fewer deal makers.

Further, 90% of the investment banks have 12 or fewer deal makers.

The histogram below shows the breakdown.

The challenge for all investment banks at any given time is cultivating quality deal flow. In this case, “quality deal flow” means businesses with these attributes:

1. Growing revenue streams, (preferably recurring)
2. Stable, increasing cash flow
3. Scalable
4. Non-cyclical products or services
5. Low CapEx required to achieve growth
6. An excellent management team
7. A diverse customer base
8. A motivate seller

With corporate valuations at historic highs (in 2018), business sellers operating “quality” businesses tend to have the mindset that they should hold longer. They delay an exit because cash flows are good, and the company continues to grow. Further, using the recent historical performance of their company to forecast growth prospects plus applying recent high valuation multiples, leads many company owners to rationalize that they should continue to grow the company because it will be worth even more in a year or two.

I recently spoke to Ian Wooden with the investment bank IJW in Montreal, Canada. With some minor edits, the text below captures our conversation surrounding middle market investment banking, cross border M&A and recent trends he sees in the M&A industry.

I’ve been asked the following question on several occasions:

If a publicly traded company is being acquired and it has cash in the bank, would the acquirer need to pay more to include the value of the cash?

It’s kind of a technical question, and the answer is somewhat unintuitive initially, but fairly straight forward once explained with a simple analogy.

Short Answer

The calculation for Enterprise Value (EV) – the actual value of the company – subtracts cash.

EV = (market cap) + (debt) + (minority interest) + (preferred shares) – (cash and cash equivalents)

If this seems backwards, keep reading.

Integrity between principles can be considerably more valuable than specific deal points in an M&A transaction.

Late one evening, back in my investment banking days, we were hammering out the final points of an acquisition contract for our client to sell his engineering firm to a much larger corporate buyer. We were in a large conference room at the law office with several representatives from the buy-side (including the CEO), their lawyer, our clients (a majority owner and two minority owners), our client’s lawyer and two bankers – one of which was me.

Humor can be a powerful tool to push through negotiation barriers in M&A transactions. I remember one sell-side deal in particular where humor, brilliantly applied, probably saved the day.

We were negotiating the final points of the acquisition contract. In the conference room that evening were the two owners from the sell-side (our clients), the CEO and CFO from the buy-side and two bankers – one of which was me.

When investment banks work on transactions involving private equity, do they often use the same law firm to close the deal? I probed the data to find out…

This one minute video demonstrates how to best search our database of investment banks to quickly find and connect with targeted deal makers.

Visit the Video Library to watch more tutorials.

While some investment banks specialize in certain industry niches, most middle market boutique investment banking firms are industry agnostic. There’s a practical reason for this.