Before the (Banker) Bake-Off, Cultivate a Great Chef or Two

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They were immortalized in literature by Tom Wolfe as “Masters of the Universe” in Bonfire of the Vanities.

Michael Lewis described them as “…a breed apart, a member of a master race of dealmakers” with “vast, almost unimaginable talent and ambition” in his book, Liars Poker.

At one time, 44% of Harvard’s MBAs went into finance and more than 1 in 10 became investment bankers.

But, following the financial collapse in 2007, and the dissolution of famous firms like Salomon Brothers and Bear Stearns, a lot of talent left moved to hedge funds and private equity. Venture capitalists replaced investment bankers as the media’s celebrated dealmakers.

The Economist even wrote stores like “Banks? No, thanks!” detailing how graduates from leading business schools were more drawn to consulting and tech firms than investment banking.

While they may not be seen as the other-worldly beings that they were in times past, I continually promote investment bankers as a wonderful resource for entrepreneurs, executives, board members and investors. Moreover, having worked a variety of bulge bracket and boutique firms, I find investment bankers to be among the most generous in sharing their knowledge and insights to develop long-term relationships with prospective clients.

I find investment bankers to be among the most generous in sharing their knowledge and insights…

If you want to know what’s really going on in your industry, talk to an investment banker. And, while most business people think about investment bankers demonstrating value in the context of transaction execution, you should cultivate these really smart people before the bake-off… that is, a capital event like an IPO or a sale.

Here are six reasons why.

1. Information about industry trends. Investment banking firms tend to organize their marketing efforts around an industry focus, they have likely competed for engagements or potentially represented similar firms in your sector. The preparation for these projects is intense and requires significant research and background information. Meetings with bankers can provide an opportunity to learn about important industry trends and recent events and these discussions provide you with a low-pressure opportunity to learn more about their qualifications.

2. Insight about your competitors. Investment banking firms frequently attend industry events and may meet with management teams of businesses that compete with your business (whether they win the mandate or not) and often have insight into the business of your competitors.

3. Advice on your business strategy. Investment bankers see lots of businesses and exits. This experience provides them with a knowledge base to render sage advice on strategy, positioning, pricing, and distribution, etc. Coupled with their knowledge on the values of the businesses upon exit, investment bankers can be an excellent source for advice on strategy.

4. Introduction to executives. Investment bankers active in your industry sector are networked with executives or aware of executive changes. As your business grows and evolves, you may be looking to add an executive to your team. Investment bankers can be an excellent source for introductions to potential hires.

5. Referrals to sources of capital. Venture capital and private equity firms frequently engage investment bankers to work with their portfolio companies. As a result, they have a significant number of contacts with these capital sources. As a growing business, you may find that you require additional capital that does not warrant an engagement of an investment banker. Bankers are happy to provide referral to potential sources of capital as it endears them to you as a prospective client and equity sources for providing a potential opportunity.

6. Feedback on your pitch. Since Investment bankers have the opportunity to review plenty of company pitches, they can provide great feedback on the company presentations. Sharing your pitch while developing a relationship with an investment banker is an excellent opportunity to learn about their qualifications in potentially representing your business in the future.

Take note of tombstones for recent transactions in your sector as to which firms are active and target developing relationships with these firms. In addition, BankerAdvisor is a resource for discovering and learning about investment banking and M&A advisory firms that may help you identify firms with a track record focused on your industry sector.

Mike Casey

Mike Casey

Mike Casey is TechCXO’s co-founder and a partner in the Finance/Operations practice. See his full bio.

Catabasis Pharmaceuticals

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Catabasis Pharmaceuticals

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THE CHALLENGE

Building and financing a drug discovery platform company.

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THE SITUATION

Within two months of creating Catabasis Pharmaceuticals, the company’s two founders had developed an innovative approach to drug discovery and development.

Catabasis wanted to build a portfolio of new medicines for their focus area.

Catabasis had initially funded the company through a round of convertible debt but needed a financing plan, an infrastructure and systems to move forward.

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TECHCXO INTERVENTION

TechCXO provided overall strategic direction as well as finance and operations systems — everything from cash management to budgeting and forecasting to advising on organizational and employee needs.

TechCXO helped to hire the company’s full-time in 2013 and has continued to provide financial leadership through the recent IPO.

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THE OUTCOME

Catabasis raised several rounds of equity financing to fund its development and expansion. TechCXO helped to develop the company’s financial and operational capabilities. Catabasis had its initial public offering in June 2015 (CATB) and now has two Ph2 assets in the clinic as well as a robust portfolio of investigational new medicines for the treatment of various disease indications.

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“TechCXO has led finance and key operational functions from our founding, through early capital raises, to our IPO.”

Jill Milne, Founder & CEO

Catabasis Pharmaceuticals

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Negotiating Price

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When it comes to negotiating a price in mergers and acquisitions, there are, of course, two very different perspectives: those of the buyers and those of the sellers.

The buyer wants upside, efficiencies, strategic fit and certain parameters met. The seller wants fair value (or maybe a little more than fair value) for their company. Effective negotiators get deals done by bridging the two perspectives. Below are some useful maxims for the respective sides.

The buyer wants upside, efficiencies, strategic fit and certain parameters met. The seller wants fair value (or maybe a little more than fair value) for their company. Effective negotiators get deals done by bridging the two perspectives. Below are some useful maxims for the respective sides.

Sellers

Valuation. What’s my company worth? There are many variables to valuation but you can get in a reasonable range to begin negotiations with the right information. First, there are comparables in your industry. If your firm is private, look at market capitalization and ratios for similarly-sized and positioned companies that are publicly traded.  NOTE: There is a discounted valuation for private companies versus public companies. In the past, public companies were worth significantly more — the valuation gap ranged from 30-50% plus. That dynamic has changed, but it is important to note that a private company discount still exists.
Along with public company valuations, you can also research M&A and other transactions in your sector for similarly-sized companies. Another standard and popular gauge is the historical revenue per employee calculation.

Strategic Assets + Future Value – We’ve talked before about the importance of the Seller’s Story. Specifically, negotiate a price based on the value your company brings to the acquirer; determine how you can accelerate their growth and/or enhance their value, then negotiate off that prospect. That means highlighting strengths be they geographic, unique market niches, key customers, market dominance, service abilities and more.

Buyer’s Disclosure – We often think of disclosure from the seller’s side, but there is also a buyer’s disclosure that can help the seller’s valuation. Buyers use a logical process for acquisition targets and pull together for their investment banker or consultant marching orders to find companies in a certain space or market sector with the specific attributes. The company will have obtained Board approval to seek companies with these attributes. Ask investment bankers callers what these attributes are – you might even ask for a document the I-bankers have prepared for their client. Do this right at the initial stages of inquiry and then build your story along these sought attributes.

Pay Only for Strategic Fit. Avoid price discussions until you thoroughly understand the acquiree’s business; put you best people on the project team until you validate the strategic value proposition and only pay for that. Remember: No amount of back office rationalization or tax benefits can justify an acquisition; the value always comes from expanding and penetrating new markets.

Buyers

Price: Keep it Simple. Adhere to the KISS rule of simplicity when establishing a price range / multiple for acquisitions price. Keep the variables few and simple. This will increase the likelihood that both parties are focused on the good of the combined entity post closing.

Room for Growth. Set a price with room to grow the multiple in order to make the purchase “accretive” to your company’s value. If the acquiring company is valued at say 10 times net income, the target price of the acquisition should be less than or equal to 10 times earnings. That way the acquisition itself helps increase the value of the acquiring company. Acquiring for more than your valuation will result in negative value to the purchaser. Also, price represents perceived value which should represent the ability to disrupt a new market with new advantages; base pricing on the asymmetrical competitive advantages.

Demand (from yourself) a Post-Deal Plan. Due diligence is not complete until a 6 to 12 month post deal plan is in place. Without it, you don’t really understand strategic fit and can’t justify the deal. Post deal plan should center on quick market wins demonstrating new strategy.

Keep Savings for Yourself. Cost savings through shared assets, like software and licenses; shared services like accounting, legal, HR and marketing; and share operations, such as facilities, belong to the buyer and should not be part of the price negotiation. There is always risk in not achieving the savings.