Merger and Acquisitions (“M&A”) in Investment Banking (“IB”) 

M&A Overview¹

M&A is a process of helping corporations and institutions find, evaluate, and complete acquisitions of businesses. M&A involves combining business entities and assets through a series of financial transactions.

The M&A process encompasses all stages, from building acquisition strategies to due diligence, finalizing the deal terms, and closing the deal. Depending on the deal’s complexity, it can take six months to several years and demands certain expertise in screening and research, due diligence, valuations and financial modeling, capital raising, communication with investors, deal negotiations, etc.

M&A Process²

This intricate process involves various stages.
Here’s an overview of the M&A process:

Build an acquisition strategy

The buyer/seller needs to define the objectives and strategize how to pursue the acquisition/sale. The strategies include determining M&A criteria, analyzing trends, and screening and shortlisting appropriate targets/acquirers.

Knowcraft Analytics (“Knowcraft Analytics” or “Knowcraft”) determines and discusses the key criteria for identifying potential targets. We help screen potential targets from the buy-side and the sell-side and collect relevant information about them, including company description, headquarters, revenue, employees, and contact information. We screen the targets based on industry, geography, company status, revenue, growth, and margins.

Connect to the buyer or seller

IB professionals usually work with corporate development to get through gatekeepers and start conversations with C-suite executives or business owners on the other side of the deal.

Knowcraft assists in this process by preparing the relevant marketing materials, including teasers and confidential information memorandums (“CIMs”). A teaser, typically one to two pages, contains enough information to provide the potential purchaser with sufficient detail to understand whether it would like to pursue the acquisition of the target company/business without divulging any confidential or sensitive business information about the said target. A CIM is a detailed document, usually 20-50 pages, including information about the company, financials, market position, and products and services.

Perform a valuation analysis

Once a connection has been made among the organizations and both parties have chosen to continue down the M&A path, the prospective targets will be reviewed.  Valuation is done with the help of a complex financial model that considers the target firm’s current and projected financial results. Investment bankers are responsible for giving proper and relevant suggestions to the firm on any deviations from this valuation.

Knowcraft prepares a detailed document request list (“DRL”) to initiate the valuation process. We carefully select the valuation methodologies and apply them to determine the fair value/fair market value or investment value/intrinsic value of the company/assets. The valuation model is presented to the client along with the report, which includes articulated results and justification of the value determined. It also evaluates the target compared with the competitors/industry peers through operational and financial benchmarking, including financial metrics growth, margins, and multiples.

Knowcraft also assists in building financial forecasts for the target firm. We examine historical performance, current trends, and future growth expectations to estimate the target’s future financial outcomes. This helps identify future costs and revenue trends that influence strategic goals and policies in the near or long term.

Start the negotiations

As part of the valuation process above, Knowcraft does sensitivity and scenario analysis considering changes in forecast drivers and deal and financing terms. This would enable the construction of a reasonable offer, which could be a cash offer, a stock offer, or both. It can also include contingent payments. Once the initial offer has been presented, the two companies can negotiate terms in more detail.

Due diligence

Due diligence thoroughly reviews every aspect of the target entity, including products, customer base, financial books, and human resources. The objective is to ensure no discrepancies in the information provided earlier based on which the offer was made.

Knowcraft assists in an in-depth analysis of every aspect of the target company’s operations, including the company’s historical and forecasted trends, assets, and liabilities, and provides a comprehensive Quality of Earnings (QoE) report. As part of the QoE report, we do revenue analysis, proof of cash analysis, and net working capital analysis. The QoE report also analyzes EBITDA for the historical periods, considering factors including adjustments proposed by Management, non-operating, non-cash, non-recurring adjustments, and normalization of expenses and income.

Finalizing the deal terms and closing the deal

The final steps include negotiating the final terms of a deal and executing the final contract. Knowcraft assists in this process by analyzing the effect of M&A on the cap table, including determining the amount and timing of the payoffs to the various target stakeholders (equity and debt) as a result of the M&A as well as a change in ownership and capitalization details after the M&A.

Global M&A Trends³

M&A activity

M&A activity by quarter

From Q1-Q3 2024, Global M&A deal value increased compared to Q1-Q3 2023, which is a sign that the M&A market is slowly gaining traction.

M&A Deal Count by Sector

M&A Deal value ($) by Sector

M&A Percent Deal value ($) by Sector

M&A Count by Size Bucket

The deals in size bucket of $5.0 billion and above (marked in light grey in data labels), the industry holds a meagre number of deals.

M&A Count by Size Bucket

M&A Percent Deal value ($) by Size Bucket

M&A Activity by Acquirer type

M&A count by acquirer type

M&A value ($Bil) by acquirer type

Acquirer Type by Sectors for 2024

PE Deal Count – Add on status

Median M&A EV/EBITDA multiples – PE

M&A EV/EBITDA multiples by Buyer type

M&A EV/EBITDA multiples by Sector

U.S. M&A Trends⁴

U.S. M&A deal activity increased in October 2024, going up 9.1% with 1,202 announcements compared to 1,102 in September. However, aggregate M&A spending decreased, with 18.9% less spent in October than in September.

U.S. Merger Metrics:

Overall M&A Multiples and Premiums at a Glance:

U.S. Middle Market Multiples and Premiums:

Middle Market is defined as deals valued between $1.0 million and $500.0 million

U.S. Sector Activity:

As of October 2024, health technology, electronic technology, miscellaneous, and consumer durables have seen the highest increase in M&A deal activity compared to October 2023. Compared to the same period one year ago, the sectors that have seen the most decline in M&A deal volume have been commercial services, finance, and distribution services.
The highest deal values were in technology services, followed by consumer services and consumer non-durables as of October 2024. In October 2023, the highest deal value was in energy minerals, followed by finance and technology services.

Deal Value as of August – October 2024 vs August – October 2023

U.S. Strategic Buyer

Considering Knowcraft’s focus, the average P/E multiples in the range of <$10 million, $10 Million – $24.9 million, and $25.0 million – $49.9 million is 10.4x. For the targeted deal sizes of <$10 million, $10 million-$24.9 million, and $25 million – $49.9 million, the aggregated transaction values are $2.6 billion, $5.7 billion, and $11.2 billion, respectively.

Median Industry Enterprise Value to EBITDA Multiples:⁵

Median Industry Enterprise Value to Revenue Multiples: