How Investment Banks Execute M&A Deals | Step by Step

0:01This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome? That's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required, compatibility and availability varies 18+. Hello and welcome back to The Market Maker and today we are giving Stephen the opportunity to dust off his deal tombstones and relive the Canary Wharf glory days by deep diving into the mechanics of a typical M &A transaction.

0:39So expect this episode to go into how investment banks get buy and sell side mandates and how deal teams support buyers and sellers through from teaser to completion. It's going to be pretty heavy on the jargon side. However, if you ever wanted to know your sims from your LOIs or your bake-offs from your beauty parades and your locked boxes from your completion accounts, you're in the right place. This episode is designed for anyone looking to learn about the nitty-gritty of M &A, especially during, of course, application season, which we're in at the moment. Also, quick shout out to long-time listener Giuseppe Cepizia, who suggested that we do an episode dedicated to deal mechanics, you ask and of course we listen so here we are on this subject and final thing we're going to put a link in the show notes to an audience survey it's only take you a minute so if you are a regular listener please do take a moment fill that out would really appreciate it it's going to help shape the show for 2027 and our strategy is well underway for so Stephen how are you and yeah set this up for me.

1:47How do you want to tackle this? Yeah, thanks Ant. I like that intro. I like the concept of the Canary Wharf glory days. I don't know whether that's an oxymoron, if anyone's ever been to Canary Wharf. There weren't a great deal of glory days there. I was speaking to someone the other day and I was telling them about the fact that I would get up before the light of day, get into the office, ride the tubes, whatever it might have been, get into the office, go down for lunch and everything was underground. So you'd have your lunch underground, then you'd get back into your office, you'd stay at your office, you'd get your dinner underground in the rabbit warren that is Canary Wharf, and then you'd wait around until you can get a taxi back.

2:33So glory days, maybe not, but... Well, you got lunch. You just said you got lunch and then. I mean, come on. Oh, yeah. Yeah, absolutely. There's an interesting thing about any, M &A or anyone in finance is they're both relatively well off and extremely tight. So, you know, I wanted to not only get my salary, which was pretty good, but I also wanted everything to be paid for by the bank. That's the key. Yeah, the tinfoil sandwiches still exist on my desk. Everyone who knows me knows well. anyway so look we're going to get into something quite technical today and i think it's quite important we talk about the deal room as a podcast concept and we talk about ipos and deals and mna and we haven't done a proper life cycle analysis of a typical mna deal certainly not within the last couple of years and yes we went pretty technical last week for anyone that listened to the UBS episode.

3:35I think one of the commentators gave me 60 % of a Toblerone for my ability to bring common equity tier one ratios to life. What's the reward for bringing M &A deal mechanics to life? The reward is I've had contacts with the global head of trading with UBS who's listened to the episode and has a few things to say might be coming on the show in due course to set the record straight kind of yeah so stay tuned oh my gosh this is a live conversation i'm having trying to work it out it could be a a three a threesome for us uh steven going on on common equity ratios is, oh my gosh, there you go. Well, look, now I know that the big dogs are listening.

4:27Need to sharpen up my act. Get out of the sauna. Yes. All right. So let's start. It's really, really hard to do a typical M &A transaction. Let's just get that out of the way from the off. M &A transaction, one company buying another company or buying a spinoff or subsidiary of another company. This can range from two parties that know each other extremely well, that have been talking and are doing what's called a bilateral transaction, where there's no auction process. The seller isn't up for sale. There's just one buyer and one seller coming together. It can involve private equity, what we call sponsors, private equity firms, buying companies or private equity firms exiting from one of their portfolio companies.

5:18And that has its whole flavor as well. There's a huge, huge difference between buying a public company from a process perspective and a technical mechanics perspective versus buying or acquiring a private company. So we're going to try and do our best to give a kind of archetype. and we're going to set up a bit of a straw man and we're going to focus on a typical private company sell-side transaction. But to add a little bit of flavor, we're also going to reference the big M &A transaction that happened last week, which was Schneider Electric's$22.6 billion all-cash acquisition of product design company, software company, PTC.

6:09So we're going to use that just to kind of give a bit of flavor to some of the different elements as we walk through from how do investment banks get the mandate for a buy side or a sell side, all the way through to the process and all the way through to the completion mechanics. So that's how we're going to do it. Yeah, you mentioned how do they get the mandate? So maybe we could start there. We've talked in many episodes before about how these MDs, these rainmakers will have all these relationships. There'll be all these proposals bubbling along in the background where they're watching sector trends or consolidation.

6:45So yeah, talk me through before the deal's even happening, what does that part look like in reality? Yeah, there are so many different ways that a bank can get introduced to a particular deal or introduce themselves to a company that is contemplating selling themselves or buying another company. And I'm just going to give you four, four ways that a bank might get on a mandate, right? So the first, not particularly obvious one, but the first is that a client, a company wishing to buy or a company wishing to sell, directly engages your bank. Now, this tends to happen if there is a totemic rainmaker type figure that is the go-to person for that particular subsector, right?

7:36There are only so many lower mid-market education technology M &A bankers based in the UK out there, right? So it's likely that if you are a growth education technology company, there are two or three banks, investment banks that you would approach, interestingly enough. And again, if you multiply like that and talk about very big companies. Then you've got the likes of, if you remember, Michael Grimes from a few episodes back, the Morgan Stanley banker who missed out on the top tier of the SpaceX IPO. It's those types of rainmakers that might induce or encourage a company to go, all right, I'm going to go straight to Morgan Stanley.

8:22I'm going to go straight to Goldman Sachs. That's option number one. Number two, and again, this is part of the nuance of fees for investment banks. There's a cross-selling or a historic relationship with a particular company. And this can be everything from a corporate banking relationship. So, you know, HSB has held a relationship with company X for 30 years and they have done all of their trade finance and their payments and their cross-border transactions and all of this stuff. So HSBC becomes kind of first in line to at least pitch for a potential buy side or a sell side mandate. And actually, in the case of the Schneider deal, it's Morgan Stanley, which is a long, long, long standing advisor to the company and society general, SOCGEN, providing a 22 billion euro bridge facility.

9:23so they have put up a mat well they put up the bridge facility for this massive deal and that is going to that's going to compel uh schneider to put msn ms on the actual advisory right on the mna advisory does that also allow in your hsbc example for them to go lower on the price because they get the uptick elsewhere in the broader relationship so does it make it also more compelling on a price perspective. Yeah, absolutely. And there's so much stuff going on in the negotiations between, let's say HSBC, or let's say Morgan Stanley in this case, put up the 22 billion euro bridge financing facility.

10:10They say, we're only going to do this if we get the lead advisor role on the M &A and we're going to package it together into a decent overall fee. However, obviously within the bank, you've got individual teams, you've got a financing team and you've got an M &A advisory team that have separate P &Ls, right? And separate bonus structures. So you're not going to want to skim too much, right? You're friends and colleagues, but you've still got your own bonus to look after, right? So actually more often, by the way, it tends to happen that the advisory, the investment, the M &A advisor gets the mandate and then brings in the financing colleagues afterwards.

10:55So if I was a sophisticated operator working at HSBC in the banking team, as much as I'm wooing potential companies and CFOs and clients, am I wooing other parts of our internal business to get friendly with them, to try and get them to be passing on business internal flow? Yeah, I think it's all about hierarchy and who is the apex predator within an investment bank. If I'm the M &A advisor and I've got lots of very, very good relationships with large corporations that are going to do deals, then I'm the one that is being wooed by the rest of the bank, right? If I'm working in syndicated finance or if I'm working in debt capital markets, I will be going, hey, M &A bankers, any interesting pitches coming up?

11:46Anything that I can jump on top of? I jump on, right? So it usually happens that way. So anyway, that's number two. Number three, in the UK, we have this concept of the corporate broker or retained advisors. So these are investment banks that are longstanding retained relationships. like if you remember when we spoke about Sainsbury's a couple of months ago, UBS is one of Sainsbury's corporate brokers and therefore was front in first in line to do the Argos transaction. So you've got this kind of long-standing corporate broker relationship. But most of the time we go to number four, which is that the bank, Morgan Stanley, whatever it might be, directly pitches to a prospective client who is looking to acquire a firm or sell itself to its competitors.

12:40So if we've had a board meeting as a company and we decide that we want to go out and buy a company or we decide that the time is right to spin off a division or we decide that the time is right to sell the company, we will go out to a bunch of banks, a bunch of investment banks and issue what's called a request for a proposal. And this is where the wonderful terms beauty contest and bake-off come into the... Have you ever heard of these terms, Amt? We've talked about bake-offs, but not beauty contests. I don't get invited to many beauty contests, as you would imagine, Stephen. What I like about this, so beauty contest and bake-offs essentially mean the same thing.

13:31It's a bunch of banks pitching to win the business of helping a company buy another company or helping a company sell. So it's just a kind of pitching process and an RFP process. But because it's investment banking and we like to sound snazzy, we talk about beauty contests and bake-offs. But those two names in and of themselves are relatively instructive with regards to the decision-making process of the companies that are looking to buy and the companies that are looking to mandate. Firstly, beauty contest. So there is an assumption there that all of these banks are coming with their RFPs and they're coming with their approach to the transaction, the potential valuation range of the company if they're looking to sell the company or the valuation range of the company that's looking to be acquired and a little bit of cleverness within their pitch deck, right?

14:33But at the end of the day, it's kind of a beauty contest, right? It's who puffs me up the most, who makes me, you It's a very subjective thing, a client, a company choosing a particular advisor. And it's not necessarily down to the cold, hard, quantitative work. And the second phrase, Bake Off, also is quite illustrative or quite instructive. Bake Off basically suggests that we're all cooking the same thing, right? If you've ever watched the Great British Bake Off, you all cook the same thing. or you'll bake the same thing, and it all comes out slightly differently. So this is basically a homogenized process.

15:17You're all putting together roughly the same pitch. All of the ingredients are the same, and it's just which pitch turns out to be the tastiest, I guess. So I'm assuming that AI is revolutionizing the quantitative, the part that could be replicated because it's largely all based on the same, principally the same data. that you're calculating the models to project out what the deal, the transaction could look like. So it's the human narrative, is it? The flair, the creativity that creates then these subtle edges that allow you to win these mandates. Would that be right? Yeah. So I think there's probably two elements here, isn't there?

15:58There's narrative and then there's trust. So narrative, we are telling the right story. We're the right people in the room. we're the right team for you we are creating a relationship we are telling you the right story about your company we're puffing you up a little bit if uh you're potentially trying to get a sell side mandate saying hey you are you're you know you're a sexy company there's gonna be a load of people want a load of other companies and strategics and sponsors wanting to buy you so there's that whole narrative storytelling relationship side and then there's the trust experience reputation side if i'm doing an rfp as a potential sell side company with a sell side mandate i'm doing a rfp and i've got two investment banks coming to pitch doing a little bit of a beauty contest or a bake-off and one of them is a is a a new kid on the block who hasn't done any transactions in my space who doesn't really know the same people that i know relative to someone that's done the last three big uh infrastructure software deals and and that's the company that you're probably going to pick the latter so there's a lot there about trust and expertise and reputation that goes beyond as you rightly said the aiable quantitative maybe slightly more modeling side.

17:27Well, one more is that you often see that the way we've described it now is that it's a winner takes all scenario. But often when you see this, you know, I think about not an M &A transaction, but if I mean, well, even the one you mentioned is Schneider Electric, I'm sure there was more than one, but you think it's a SpaceX IPO, for example, I can't remember how many that was 20, let's say. So what's that like? Like the creds with winning these, and the optics of it. And then also working with another, like if I'm Goldman Sachs and I've got to work with JP Morgan and Morgan Stanley, like how does that work in practice?

18:05Yeah, this is where it gets really interesting. So in the case of the Schneider Electric deal, Schneider had Morgan Stanley as its lead advisor and Goldman Sachs as its financial advisor, slightly more junior position. It's not like an IPO, which would have 20 or 30 underwriters and arrangers because you need to raise a bunch of money. M &A is a little not like that. But what you might have is you might have a Morgan Stanley, who is the lead advisor, who is basically doing everything. then you have a maybe one or two junior banks kind of a co-advisor position and usually they are given based on either the fact that the company has a very long standing banking relationship with that particular bank but they don't really trust that bank to do the actual advisory work and the execution work, or that bank has provided a massive debt commitment or financing commitment.

19:09And therefore they go, hey, look, we're going to provide you with a big bridge facility. We're going to do a big underwrite on the bonds, whatever it might be. In exchange, we just want a junior cred, like a co-advisor cred. And I know it sounds lame because actually the M &A teams don't really do much. It's still the Morgan Stanley, the lead advisor, that does 90 % of the work, 95 % of the work. It's just for the purposes of league tables, you get league table and you know M &A bankers, they're hyper competitive. So you love a league table. You want to get a cred to put it, to bump up your position on the league table.

19:52It's not worth quite as much as leading or being a lead advisor. So you're going to get these weird positions where you're named, but you're not really doing much. Occasionally, you will have two banks that actually split some of the roles of going through a process of selling or going through a process of buying. But that's where it gets very complex because you've effectively got two competitor banks having to come together on the same side of the transaction and go, all right, hey, I want to do A, B, C, and D in terms of the execution of the deal. You're going to do X, Y, Z. So I've got it down in terms of there's the actual technical details of it, the quantitative aspect.

20:42Then there's the narrative, the puffing. How much of it as a percentage you would say is down to fee structure?

20:52Google Chrome. You think you know a browser, but Gemini and Chrome? That's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required, compatibility and availability varies 18+. Depends on leverage, as most things in the world of finance do who has got the leverage if this is if this is a very if this is a very sexy deal or moreover if this is if you are pitching for a sell side band-aid the leverage usually lies more on the side of the of the company as of the client as opposed to the bank and therefore fees start to get kind of slightly more heavily negotiated and i'll go on and talk about why being on the sell side is slightly more favorable in a second.

21:51But also on the flip side, it's so, it kind of haggling around 0.1 or 0.2 % of the total deal value as a advisory fee for the, you know, and choosing the cheaper option at the expense of getting the better option is invariably not going to be the right idea, right? This should be something that you pay for what you pay as much as it takes to get the very, very best. Because the very, very best sell-side advisor might get you 150 million quid for your business instead of 120 million quid. So you've got an extra 30 million. I don't care if I'm paying an extra 0.3 % because you've got me an extra 30 million for my business.

22:41So it comes down to like, you just pay for quality, right? But I mentioned being on the sell side is better. And there's a little bit of a note here on fee structure. So if you get a sell side mandate, i.e. you are responsible as an investment bank for helping a company go through an auction process and sell, A, the fees are a little bit higher because you are organizing a full process. You've got lots of different bidders. You're owning the data room. It's a really big, complex process. And it tends to be more of a percentage of deal value fee structure because incentives in that instance are very much aligned.

23:27So my incentive as a banker is to maximize the amount that the company is selling for incentive. So a percentage works really well. Whereas on the buy side, when you're an investment bank that is advising a company that wants to buy a company, more often you see a fixed fee. Because if it was a percentage fee, there's a slightly perverse incentive for the investment bank that is advising the buyer to go, yeah, yeah, yeah, pay more, pay more, because I get a slice of the increased value of that deal. So there's just a little bit of nuance there around the fee structure. All right. So let's go on to the next part then.

24:10Let's say I'm interested. I found my potential advisor. What happens next? Yeah. So firstly, the investment bank, again, Morgan Stanley, in the case of the deal that we've been referencing, Morgan Stanley will have to go through a bunch of background checks to make sure that they can do this deal. They probably would have done that before they've won the mandate, by the way. But They'll have to do the typical know your customer KYC checks to make sure there's no funny business with Schneider and they're not operating in territories that are sanctioned or there's no money laundering implications or whatever it might be.

24:53And then probably more importantly, they need to do a conflict check. They need to make sure that the Morgan Stanley US team are not pitching and are not winning the mandate for the PTC sell side, right? Because PTC is the company getting sold in the States. Schneider is the French company buying. And you don't want to be in a position where you've won a mandate on the buy side in France and you've won a mandate on the sell side in the US. And they're both Morgan Stanley mandates, right? So you need to make sure that you're absolutely clear of any conflict of interest. The next thing you need to do once you've won this mandate is you place the client and the potential counterparty on a watch list or a quiet list, which basically means A, that what we call in the business Chinese walls are fully erected.

25:48so no one else in the bank can get access to any information certainly material non-public information that might influence the way that they do their business just quick question like i'm just thinking from the trading floor's perspective my clients on the phone they've got wind of a rumor that i'm not aware of as the trader because the bankers are on the other side of the bank having these talks somehow they've got the rumor they're saying and i need to i need a two-way price on schneider electric right now and then my machine what it just goes like how am i informed because as soon as i see the quiet list don't i isn't that breaking a chinese wall because the fact that they're on the quiet list and i can't trade to stock anymore for my client how does it work in practice i i think i think the the more appropriate way of answering that question is the trader working for Morgan Stanley on receipt of hearing this rumor about Schneider is not allowed to phone up the M &A team and go, hey, I've heard this rumor, dot, dot, dot.

26:55I think they just have to continue business as usual. They're still allowed to trade on behalf of their clients. What is not allowed to happen is anyone working in or around the deal team to have any position, personal position in Schneider. And that is very, very actively and heavily monitored. And as soon as you get in on a deal, every piece of communication, if it wasn't already heavily monitored, is even more strenuously monitored. And by the way, this is a deal team of maybe six or seven people, five or six people. There's usually an MD, director, a couple of associates, a couple of analysts.

27:36So these are not big teams. and it's quite, I've got in my notes here from our researcher Darius, there is a staffer. Have you come across the dreaded staffer in the world of MMA? When I heard the word staffer, I thought of like a chief whip in parliament who goes around doing the bidding of the prime minister when he needs to get a vote through parliament. It kind of sounded like that. It kind of is. It's really weird. It's such a weird position to be. So staffer typically, or certainly in my day, Stafford was like an associate director or maybe director level. So they weren't the head honcho, but they were the one responsible for allocating resource, human resource to different projects and different deals.

28:20So as I've said before, in previous episodes, there would be the spectre, the looming vampiric specter of a staffer lurking around, wandering up and down the aisles of desks at 5pm on a Friday, and you do not want to catch the staffer's eye. Because what they'll do is they'll go, hey, Stephen, what are you working on this weekend? And obviously, you're hoping to God that you're working on nothing. And you go, oh, well, actually, I've got quite a few, I don't know, comps to do for this particular pitch that's coming up. And then one thing will lead to another and you end up getting staffed on something that starts at 5pm on Friday.

29:01So this staffer wields unbelievable power and it's often the type of personality that quite likes that power as well, I think. Yeah, one can imagine what that's like. All right then, so we're kind of into it now. We're into a so-called step one. So I guess this is the prep work. So what does that actually entail and what's the involvement on the advisor's side? Yeah, so I'm going to take this from a sell side perspective. So I'm going to walk through it as if we were a bank advising a company that is selling. We can also talk a little bit about the role that the buy side and their advisors are playing as we go through it.

29:39But just to provide a little bit of a caveat, super important, we're talking here about a multi-stage sell-side auction, which is much more common with a private company sale process. It's a little bit different in a public company sell-side process. And we'll talk about it in a bit more detail. But the competitive tension for a public company sell-side process often happens due to much more kind of quiet, targeted, softly, softly approaches from a buyer to a public company that might be interested in selling. And then obviously, if there is an announcement here in the UK, you can get into this public company bidding war, right?

30:32As we saw with EasyJet and we did an episode on it a few weeks ago. So this process that I'm going to speak about now is more focused on private company sales, right? So if I am a investment bank that's won a mandate for a company that's about to sell, that's thinking of selling, you're going to start with a kickoff meeting with the management team to learn all about the company, really get up to speed with the products, the business strategy, the financials. You're going to get a whole heap of documents from the company. Some of them are going to be in really good conditions. Some of them are going to be quite unstructured and you're going to be fishing around for a bit of management information.

31:11You might be fishing around for a little bit of, yeah, for financial information. You're going to be asking a lot of questions because you're starting to prepare the bulk of material that's going to help sell this company, right? At this point, by the way, it must be mentioned, the deal gets a pretty cool project name. You must have heard of some of these project names to keep it nice and confidential. So Project Apex, that was SpaceX, if you remember that one. Or very famously, Project Hanks. This is a really nerdy, weird one. But Project Hanks was the code name for Verizon's plan to buy AOL.

31:56And this is after Tom Hanks in You've Got Mail, a romance that plays out to the sound of AOL's email alerts. Wow. I always find this funny with investment banking or investment banks in general, because you'll get the, on the research side, you'll get these analysts writing macro reports and it'll be like using a song title from like Connie Minogue to be like, oh, it's spinning around or something and then you get the bankers doing these references to movies you're like yeah finances or geeks on the mainstream it is and everyone thinks they're also extremely clever because they've made a pretty obvious or even obtuse link that isn't very clever but anyway so yeah you've got a deal name project razor project hall project whatever it might be right and from then on you start setting up your virtual data room so these are companies well these are hosted by companies like data sites deal room or intralinks which i think is the one that we use back in the day this is where you're going to put all of the information that's eventually going to be seen by the prospective buyers at the same time as you're starting to get all that material together, you are drafting a teaser.

33:17You would have heard this phrase, a teaser. So this is a very, very short, maybe one to five page anonymized overview of a company that is now being put up for sale. And obviously the project name gets in there as well. So this could be a, you know, a Project Hanks or a Project Razor or whatever it might be. Remember, by the way, this is for private companies, not for public companies. If a public company was going through this process and they put out a teaser and it had some financials in it, it would be so easy for the potential buy side, the buyers to just Google it and figure out what companies in the market.

34:00So this is very much the teaser and the anonymized project code names are much more of a private company concept at this stage, at least. So anyway, the buyers, this could be a list of 10 potential buyers. It could be 20, it could be 30, depending on the universe of potential buyers and depending on the sell side company's request. Maybe they want to keep it very small. Sometimes sellers don't want to sell to particular competitors, direct competitors. So they might say, no, you can't send this teaser to this company or these companies. There will likely be in a big, large process, there will likely be a combination of strategic buyers that the teaser is sent out to.

34:51So that is other companies in this space that might be interested in buying and also sponsors, private equity firms that would also be interested. So these teasers get sent out, very, very short, high level. If a number of prospective buyers come back and go, yeah, I'm really, really interested. I want to see more. I want you to open the kimono and let me in to your data room. I will sign an NDA, a confidentiality agreement. I will show an indication of appetite, right? Or an indication of interest. That is the first stage. None of this is legally binding. This is just, we are starting a little bit of a relationship here.

35:39We're starting to flirt. There might be 5, 10, 15, 20, 25 companies that have expressed their interest, that have signed the NDA, and then get access to the data room, which is phase two. At this point then, when they sign the NDA, is that like a standard template document or the lawyers already heavily involved even at this point in the flirtation stage? Yeah, you'd want to get the lawyers in relatively early. I think the NDA for a vanilla for a standard deal will be relatively boilerplate. But you are going to, in the same way as if I'm trying to sell a company, I want to line up my bankers very quickly, I'm going to want to line up my lawyers very soon after because the first part, the first, let's say the first half of any sell side process is weighted probably 80, 20, 90, 10 bankers to lawyers in terms of value add advisory.

36:44You know, the lawyers will be opining, they'll be helping with the NDA, they'll be doing bits and bobs. But then as you move more towards the drafting of the sale and purchase agreements, doing things like completion mechanics, all of this stuff, the lawyers start to take a much, much bigger role and start to become equally as important, if not more important than the bankers as you get towards that completion stage. Do you know if these big law firms then, like the Magic Circle, would they have a long-term retaining contract with specific investment banks or does it just go from deal to deal?

37:18Or are they tied to a particular MD and they follow the individual? I don't think that there is a clear retainer relationship, but there are preferred law firms within investment banks. I remember not working specifically within M &A, but working in a different department within HSBC. We had two favoured law firms that knew us extremely well, that helped us out. If there was a transaction that required a little bit different specialism. We would go further afield. But yeah, you find the people that you like working with, right? Because these are very, very stressful processes. And if your working style is different from the lawyer's working style, then you might rub up against each other and that causes issue.

38:09But you shouldn't, if we get onto stage two now, you shouldn't be at that stage yet. You shouldn't be rubbing up against anyone at this stage. So stage two, early discussions and negotiations. So this is the point, this is the time period where the potential buyers have access to a number of things. They have access to the data room. So the confidential information memorandum is released and revealed to them. So the SIM, as we call it is a long document and you know 50 100 150 pages tends to be put together by a combination of the investment bank analyst and the investment bank associate that's working on behalf of the sellers huge big document extraordinarily complex detailed high quality it's really seriously impressive of bits of work and a lot of very very late nights obviously as as you start to hit onto kind of deal deadlines and all of this stuff.

39:16So prospective buyers will obviously now know the name of the company, which is important. Still, they'll have their own project code for the potential acquisition. And you're going to get to see the confidential information memorandum. You are going to get to see the process letter. And that basically says, all right, what are the rules of the first round? what's the deadline for bids and what other stuff is going to become available in terms of information for the buyers, right? In the data room over the course of the next few weeks. You also get to ask questions, possibly more fielded by the banks than the management at this stage, because you're still very, very early stage.

40:04So if I'm a prospective buyer, I will work through my investment bank to ask questions to the company that will be fielded by their investment bank, right? So you're still in this kind of early-ish stage, but you're starting to feel each other out, right? Then if you get to a place where you feel like you want to stick a number on the table, remember this is an auction, if you want to stick a number on the table, there is a deadline and you need to give, and again, it's different in different countries. So I'm kind of dancing around some terminology here. You need to submit an indication of interest by the deadline set out in the process letter, which gives your purchase price with how you are going to fund it and any information on certainty of funding, any assumptions around the price, any veto rights or mandates on completion mechanics, what due diligence needs to be carried out, proposed timetables, and even some information about what the post deal structure might look like.

41:21So that is kind of, yeah, that's stage two. You mentioned the word auction. And I remember when I bought the house I'm sat in right now, and it was one of those where there was an auction. It was open for one day and everyone piles in, sees the same thing. And basically it's all bids in. But what you can do is just go, right, have a conversation with the broker and go, I want you to take this off the market. I'm going to put in a bid that's so good, but I want it conditionally to expedite this process. Let's just wrap it up. So does that exist in this setting as well? For sure. So that's called a preemptive bid, right?

42:00And you're absolutely right. I remember selling a house and someone came to view it on a bank holiday and said, look, I'll give you X above the asking price if you take it off the market this evening. That is your preemptive bid, right? And it tends to happen more in very competitive, hot deals, right? um and again it's it's that from a seller's perspective it's the trade-off between certainty you know i'm going to get this you know this person's got this this company's come along and is is offering me this price and it's it's off the table and i don't have to go through all the faff of the second round bids and then the exclusivity periods and things like that versus the fact that you're missing out on a bit of that competitive process.

42:51Because remember, we're not yet in the best and final stage of the process yet. You're just through to the next stage, which tends to be anywhere between three, four, five, six, seven potential buyers, maybe slightly less, maybe slightly more, depending on the nature of the transaction. And that's when the kimono really fully gets opened. The data room becomes extremely well populated. There is a lot of due diligence that has been commissioned by the sellers. So this is things like vendor due diligence compiled by an external consultant that is an expert at figuring out the nature of the way that the company generates its revenue.

43:38But there'll be, obviously, and that's commercial due diligence as well, legal due diligence, financial due diligence, etc. Almost everything is in this data room and it is intended to bring the three to six potential buyers to a stage that they feel comfortable submitting what's called a letter of intent or in the UK, a binding agreement. So that is this process. And that's where, by the way, the potential buyers will meet with the management possibly a number of times. They might do site visits. They might, they're really starting to understand the nature of this business and get properly, properly under the hood.

44:23You know, the infographic where they have, say, like Nvidia, and it's this like circular financing system. In my head, if you've been explaining this. I've been thinking about the banker who then talks to his lawyer, who then goes to the consultant, who produces then views about the AI for the 2030 vision, which fuels the bankers to have more narrative to go back to the sell side mandates that they have to win. And it almost feels like, I mean, you and I come from different academic backgrounds, but this feels like for someone who was, let's say, outside the castle walls of the Oxford-Cambridge institutions, that you guys would dominate this ecosystem.

45:09Gosh, yeah, no, you're absolutely right. I was actually just looking up, there's a popular philosopher, I think he'd probably call himself called Rutger Bregman. And he talks about the Bermuda Triangle of talent. And he's trying to get more people to work in purposeful industries. And he says that management consulting, corporate law and financial banking are the Bermuda Triangle of talent. Look at that. I've fallen foul of quite a lot of that. I have never read a philosophical book in my life. And there you go. I already know the theory here. So yes, there's a lot, you know, there's a lot of money to be made in and around these deals, And with some credence, because they're extremely complex and require very high analytical skills and attention to detail and work ethic and things like that.

46:00But anyway, let's move on. We're knee deep in due diligence. There are three to five potential buyers. There is a deadline where they have to submit their LOI or their binding bid. LOI usually is more focused on US kind of mid-market deals. The terminology binding bid is UK and European. They're somewhat legally binding, but not as legally binding as signing the sale and purchase agreement, which is the thing that comes next. So the fourth stage, you've gone from sending out the teaser to doing reading of the confidential information memorandum and submitting your indication of interest to go into stage three, which is a much deeper stage with a fewer, smaller number of buyers.

46:52And then you have stage four, which is closing. You as the sell-side bank have taken in all of the bids that have got much more comprehensive funding plans. You need certainty of funding. You need to know how you're going to afford to buy this. A lot more meat on the bone of the prospective buyers and what they're willing to offer and how they're willing to structure it. So step four, Saleside Bank works with their clients and they need to figure out which one of these bids is the most attractive. It's obviously not always the one that's the highest number because the one that's the highest number might not be a particularly favorable counterparty.

47:36It could be a competitor. They might not have as good a funding package or as good a certainty of funds. There might be some regulatory concerns about the potential buyer. So you have to go through all of these considerations. Once you land on the buyer, you go, hey, you are our preferred bidder. Well done. You now get an exclusivity period. And this exclusivity period, the main process, the main things that you do here, if you followed a proper process, is the buyer will do probably what's called confirmatory due diligence. A lot of the due diligence would have already been done. This is not intended to be another nine-month process or whatever it might be.

48:23It should just be dotting of the I's and crossing of the T's, but also the final drafting and the signing of the sale and purchase agreement. And that sale and purchase agreement is the thing, is the legally binding thing that says, I am going to buy your company and we can now announce it, et cetera. So all of those final negotiations, those final bits of due diligence, the tweaking of the legal terminology within section four, paragraph, whatever it is, page 156 of the spa that's what goes on during this period so this is where the lawyers are earning their keep then at this point they're working yeah 20 hours days yeah this is where the clifford chances and the link laters and the fresh fields really really get stuck in and support with a lot of this the legal documents but also the disclosure letters which the seller lists exceptions to its warranties lots of stuff on warranties and conditions precedent and things like that transitional service agreements again this is all about it and payroll and completion mechanics new employment or incentive arrangement what's going to happen to the employees within the team that is being within the company that's being sold you start to think about this and you start to realize the rippling cascade of complexity that involves proper lawyers doing their job.

49:56But hopefully you get to stage five, which is closing. You have done the deal, which is very exciting. We're only one more stage away from finishing. Hold on, the deal's just closing. It's post-closing. The staff is about, hold on, The staffer's walking the aisles again. Look, I mean, I think even the most hard-headed, horrible staffer would give you maybe a little bit of grace if you've just worked on a deal that has closed and you've been working on it for nine months. You're going to get to go to the closing dinner, right? And the closing dinner is really fun because most of the time you work on deals that don't go anywhere or you put in a first round bid and you don't get it or whatever it might be, not only do you get a closing dinner, you also get a tombstone, also known as a deal toy.

50:50Have you seen these knocking around? Deal toy sounds slightly leaky to me. So what are we talking about here? Yeah, we've always called them tombstones. So this is a kind of pretty lame, another pretty lame investment banking tradition where the md and maybe the director on a deal um the lead advisor or whatever it might be will get a little tombstone and we call it tombstone it's kind of laminated very hard to describe it but maybe we'll put some pictures up um they're called lucites laminated kind of things tombstones that you put on your desk that basically say you know hsbc lead advisor to company x on the acquisition of company y 2006 right and the lamer you are the more tombstones you have all around your desk to show how cool and how many transactions you've worked on it really is very cool this industry i think there's i think some of these bankers need to go and see a psychiatrist if they're if they're putting their uh their egos tied to these tombstones they've got some and they need to look a little deeper in their soul i think I tell you what, before the end of this episode, because we're going to call it, we might end up doing a little bit more on the joys of lockbox mechanisms and completion mechanics and things like that next week.

52:13But what I've done just to wrap this episode up is I've put the Schneider Electric PTC transaction through Claude, through Gemini and through ChatGPT. and I've asked these LLMs, I've asked these chatbots to give me a tombstone, you know, an M &A lead advisor tombstone. I don't know whether, Ant, we can put these up somewhere. Yeah, absolutely. We'll show them on the screen. And then you can pick, leave a comment and let us know which one you like best. I absolutely know which one my favorite is. And I'm not going to give it away. I'm going to leave it up to you. Yeah, cool. All right. Well, yeah, hopefully you found that useful.

52:53Check out the show notes. I'll put a bit of a breakdown of some of the words and terminology we shared in this episode and then yeah we'll pick this up for a second part but thanks as always steven yeah thanks and mr monopoly here miss me monopoly is back at mcdonald's with millions of prizes a 2027 cheap charity a carnival cruise vacation gift cards from doordash and best buy he'll then play in the mcdonald's app get your bag no purchase necessary 50 U.S. and D.C. age 18+. See play at mcd.com for rules and play at mcd.com slash amoe for info and playing without purchase by mail by November 2nd.

53:29Chance card game ends November 8th. Game ends November 22nd, 2026. See rules for prize details. Monopoly is a registered trademark of Hasbro.