M&A has been a very popular business in investment banking, especially in the healthcare industry in the US. The reasons lie in that M&A can help companies quickly obtain technologies, talents, customers and market access. Besides, investment banks can earn high commissions from facilitating M&A deals. Both corporates and bankers have incentives to conduct more M&A transactions. In the article, there are multiple insightful perspectives on the drivers and motivations behind the prevalence of M&A deals in investment banking.
M&A enables rapid asset & capability acquisition
The article mentions that M&A has been very active in the healthcare industry in the US in recent years. Through M&A deals, companies can quickly obtain technologies, talents and customers from the acquired companies. This allows them to enhance their capabilities and offerings in a fast manner. Additionally, acquiring companies can directly tap into new markets and customer segments by taking over their competitors or related businesses.
High deal fees drive investment banks
As illustrated in the first article, investment banks can earn lucrative advisory and financing fees from facilitating M&A transactions. As deals become larger and more complex, the fees collected grow bigger. Hence investment banks are incentivized to originate and execute more M&A deals for their clients. Bankers need to put in long hours to analyse the target companies, prepare proposals and negotiation materials, and ensure smooth deal execution.
Corporate consolidation incentives
Nowadays markets are highly competitive. Companies need growth to satisfy shareholders and strengthen their market positions. Organic growth through product innovation or marketing can be slow and risky. Inorganic growth through M&A provides a faster and more reliable approach of business expansion, if good targets can be identified and acquired at reasonable valuations. Hence large corporations are motivated to seek M&A opportunities.
PE funds’ exit channel
The article also points out that M&A serves as an exit channel for investments by private equity funds. After investing in companies for a few years, PE funds look to exit at high returns through selling the companies to strategic acquirers or via IPOs. M&A provides a more reliable exit route compared to unpredictable public markets. Thus the active investments by PE in past years have also fueled more M&A activities recently.
In summary, the high level of M&A activities in investment banking is driven by both corporates and bankers. For corporates, M&A enables faster growth and digital transformation. For bankers, fat fees incentivize them to facilitate more deals. The prevalence of PE investments also adds to the M&A momentum.