“Investment banks are experts in the process, and set a very good rigour around the steps to be taken and the setting of timetables that need to be kept in order to move these activities along expeditiously.”
“A loan might be drawn down from a bank, and then once the transaction
is completed, the company will raise equity in the capital markets or raise bonds to pay back that initial loan.
“This is because raising money from a bank can be done relatively quickly. In comparison, raising money from the capital markets can take considerably longer. So institutions will use money from the bank in the short term and go to the capital markets to pay back the bank’s fi nancing.”
While banks play an essential role during M&A transactions, it is also important that banks maintain good relationships with insurers and reinsurers before and after transactions, argues Sennott.
“I’ve worked with a number of investment banks and I prefer working
terms and conditions and to agree what works and what doesn’t work. This means that the advisory banks play an important part in bringing the two factions together.”
Banks will also work with senior management on issues that infl uence
the overall valuation of the transaction, argues Cook. “This is probably the most important service they provide,” he says. “If
something is worth ‘x’, the bank can tell us how to structure the deal to get to ‘x’, i.e. will it be a cash and stock deal, or an all-cash deal, or some combination of both? What does it mean to our overall results? Will it be accretive or dilutive?
“This means running all of the mechanics behind the economics of
a transaction, so that it is an attractive proposition to management and shareholders on both sides. Any deal needs to not only be accretive, but also look attractive for the long-term future of the company. So structuring the transaction is a very important function.”
But while investment banks play a signifi cant advisory role, the corporate
arms of banks often play a different but equally critical role in M&A activity—through the provision of bridge fi nancing.
“Where there has been an underwritten offer, we will provide money to
undertake the transaction that will bridge some other kind of capital-raising,” says Seb Kafetz, relationship director at Lloyds Bank Corporate markets.
with those that have made the effort to get to know the company when a deal has not been imminent,” he says.
“This is very important to me, because it is what is unique about your company that can make or break a deal. It is essential in establishing a connection with your potential M&A target. The better your bank knows that, the better able they are to help you work through the process.”
Cook agrees. He says that building long-standing relationships becomes
essential when so much trust has to be given to an institution. “We look to work with people who we have worked with in the past and
have had positive experiences with,” he says. He adds that the size of the bank should refl ect the size of the deal on the table.
“Part of it is the overall fi repower, so to speak, of the bank itself—so for
a large transaction, you are going to want to use a large investment bank with a signifi cant amount of resources and a whole spectrum of services available,” he says.
“Similarly, for a smaller transaction, you are probably going to use a smaller investment ban, as you are probably not going to need the full range of services. These would also be the transactions they are used to doing, so they have the expertise to match.
“This means that you really have to scale your investment banking decision to the transaction that you are contemplating.”
September 2011 | INTELLIGENT INSURER | 33
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