Today I'm going to take you behind the scenes of what it's like to work on a $6
billion investment banking M&A transaction
What's up everyone my name is Ben and welcome to rareliquid a channel where I
draw from my experiences as a former JP Morgan investment banking analyst to
cover videos about tech investing and career advice
In case you're new to the channel, I post videos about tech investing on the
weekdays and videos about career advice on the
weekends. With that said, today's agenda looks like this.
I'll first give you the background behind the deal that I worked on
I'll then talk about what I did as the analyst, and lastly, I'll discuss three
insider secrets This video will be a part of my
investment banking playlist on my channel, so check that out if
you're interested- I have some videos about how much bankers make,
why I left investment banking, a day in the life of an analyst and things like
that Alright so first up let me give you
some background behind the deal an M&A or mergers and acquisitions
transaction is pretty much exactly what it sounds
like- you're helping your client either buy another company or
asset or you're helping a company sell itself or
some of its assets. During an M&A deal, an investment bank pretty much
runs the entire process just as a realtor would during a house sale
and obviously it's just really helpful to have an experienced
party run the entire process for you if you're selling the house or company
let's say to get you the highest possible price
and if you're trying to buy then the lowest possible price or the best
deal. In investment banking, you're either on the buy side which means that you're
helping your client buy a company or you're on the sell side which is where
you're trying to help the company sell itself or its
assets. For this deal that I was working on Medtronic was
our client and if you're not familiar with them they're the largest med tech
company in the world the market cap is somewhere around 167
billion dollars We were helping Medtronic sell its
medical supplies business and this was the largest asset sale that Medtronic
had ever done in its 68-year history, so this was a
really big deal for not only the client but also our MD and
just the overall group that I was in at JP Morgan. We were
co-advisors to this deal with another bank called Piper Jaffray
and it's kind of common sometimes for these really large transactions to have
multiple advisors and basically our job as the investment bank was really to
reach out to as many potential buyers as possible
and have Medtronic sell its assets at the highest possible price,
and as banks, you're incentivized to also do this because you get a percentage of
the total transaction so the higher the transaction price at the
end when you're actually selling, the more you earn in fees. Next up, let me
give you some info about what I did for the deal as an analyst. The very
first thing that happens to you as an analyst is you get an email from your
staffer that says that you'll be working on a transaction
and when I got this email, I basically was like okay this is going to be a big
transaction I'll probably work 70, 80, 100 hours a week for the next few
weeks and I'm not going to really have that much
time for anything else. The following day, my associate and I would meet at my
managing director's office and he would give us the rundown of who the potential
interested buyers were, what the process was going to look like, and
what kind of analysis we would need to be doing and in this particular
deal, we had both strategic buyers and financial sponsors aka private equity
firms interested in the asset and so basically what this meant was we
would have to do our standard valuation analysis which was trading and
transaction comps and discounted cash flow analysis, but for
our financial sponsors, we also had to do a leveraged buyout or
LBO analysis. In case you are interested in learning more about trading comps, you
can check out this video I made here and then if you're interested in
learning more about discounted cash flow analysis you can check out this video
here Also, if you want to really dive deep
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off but anyway going back to the transaction this was back in around 2017
so I was about two years into the job, but I'd actually never built any LBO
analyses except during training and so what's
kind of funny interesting about this whole situation was that
Medtronic was paying JP Morgan millions of dollars for this deal
and for an analyst who had pretty much never run the analysis that he was
running for this like huge six billion dollar deal
Of course, they never really knew that and I would also say that this happens
all the time in banking where analysts or even
associates sometimes get thrown into the fire and into
situations that they haven't really been in before
and in my situation the associate I was working with was really sharp and
thorough- she checked all the work that I was doing as
associates do and so there was never really a huge risk that things would go
wrong Most M&A deals are done within a super
super short time frame and so I had to build out a draft of the
LBO model by the next day, so I think I remember staying around
until like 3, 4 a.m that night working on the model
and I remember I was also just looking at my old teammates' LBO models to kind
of get a feel of what the structure should be
and what kind of assumptions I need to include in there, how to build out the
switches and the flexibility for the model, I was also even going on youtube
and googling concepts that I didn't know so really I was kind of learning as I
was building The rest of the valuation work that I
had to do the trading comps transaction comps DCF were things that I'd already
done before so they were relatively easy or
straightforward and so the rest of my responsibility for this transaction was
really just building out the presentation
for the upcoming meeting with Medtronic's CFO. This was probably the
coolest part of the transaction for me and it's because during that call since
it was such a high profile deal we had the global healthcare JP Morgan
Vice Chairman on the call, a lot of senior MDs, the Medtronic CFO,
and the Medtronics team and all these people who
are paid millions of dollars to you know do whatever work they do and I
got to listen in on how they thought about the whole
transaction, overall industry strategy, how to negotiate,
what they thought they could do to increase the competitive tension within
the whole deal making process, and so yeah it was just a really
interesting discussion and of course I was just on mute not saying a single
word- nobody knew who I was pretty much on
that call except the the team, the MDs that I
was working with So yeah that's pretty much a summary of
the transaction and what I did I would say that this is a very very
simplified version- I think what's you know really hard to explain
is just all the detail of you know for example our LBO model that we had I
probably sent it back and forth 30 to 40 times if
not more with my associate and the team and
also with the presentation that we're building because we would have to change
our assumptions all the time, we would have to
see if we could increase the price if we got like a higher bid from one of the
potential buyers, and so there was a lot of back and forth, a lot
of other parties involved like the legal teams and the other banks that we were
working with, the management team, so there's a lot of coordination and stuff
that involves that is involved in an M&A transaction
but yeah I don't want to bore you with all of those little tiny details
Ultimately, the transaction was announced on April 2017 and Medtronic sold
its assets for 6.1 billion dollars to Cardinal Health-
we helped draft the press release and all the major news outlets published the
articles about the transaction, so I guess this is one of the cooler
parts about banking is that you get to work on these deals that transform
companies and industries and some of them I guess get somewhat
worldwide attention. Before moving on to the next part of the video, I would
really appreciate if you could help support the channel by smashing that
like button and feel free to subscribe if you
haven't already. Next up let me share with you some insider secrets about the
M&A process The first one is true amongst all
well-run M&A processes and that's that competitive tension
is manufactured. In most M&A transactions there are two rounds of bids and it's
pretty much like an auction process but it's all blind- meaning that nobody knows
what the other person is bidding and in the first round is basically
where we get all the potential buyers and have them
do their valuation work and submit their first round bids on what they want
to buy the company or asset at. Then the bank on the sell side part of the
transaction which in our case was JP Morgan for Medtronic would evaluate
those first round bids which pretty much just meant okay who
are our top bidders and all the ones that are kind of
lowballing or don't seem like they're really super interested based on their
offer- they would be cut and we would have a
second round with a smaller pool of interested buyers
At this point, in the second round the companies who are involved as potential
buyers usually are super super interested in
the asset and just imagine yourself if there was only one I don't know car that
could be bought amongst you and five other friends
and you had to write down on a piece of paper what your bid was
and you were in the second round so a bunch of other people were cut
and you don't know what anyone else is going to bid but you really really want
that car right? So you're incentivized to put as
high of a price as you can without going way too over what the
actual car is worth. So if you're a good banker then
you understand this whole process right? And so you want to
manufacture as much competitive tension as you can,
and you can't necessarily tell the buyers you know hey your
bid is too low we have another bid that's offering higher but you can kind
of subtly slip them information about hey your bid's not competitive
enough- if you're gonna want to actually buy this company it should be higher
You know I've never been a managing director myself of course and been in
those discussions but this is kind of stuff you hear in the grapevine
and so yeah that's what you do as a really senior banker
and the ones who make a lot of big bucks uh and the reason why banks get paid so
much is that they can kind of create this
competitive tension to increase the transaction
price at the very end to as high as it can possibly be. So tying this all back
to Medtronic and Cardinal Health basically the 6.1 billion dollars that
Medtronic got- you know they were our client and they
were super super happy with this because this was kind of on the high end of what
they thought that the assets were worth The second insider secret is that
valuation is kind of more of a justification process and
much more of an art rather than a science. What I mean by this is that you
know at the very beginning we would try to as
independently as fairly as we can value Medtronic in this case
their assets and what we thought they were worth, but you know after we do all
that evaluation work and we get into the bidding process to sell the
assets then it's not like we're gonna be like hey this buyer bid
way too much we think that you should sell for a lot less you know
and so basically if someone bids higher then what we would do is kind of adjust
our assumptions in the model to basically be
able to say yep we can justify you basically selling
your assets for this much So what this also means is that if
you're on the buy side meaning you're trying to buy an asset then I do think
valuation is a lot more important and basically you don't want to
overvalue what you pay because then you'll get a bad return on investment
right? But if you're on the sell side like most investment banks want to be
then basically you're able to just do the valuation work to get a baseline of
what your assets are worth and then the rest of it's really left to
what the buyers are willing to pay The third insider secret is just that
announcing a deal may not be as interesting as you might
think. Basically as an analyst, you're working on these really high profile
intense transactions 80 to 100 hours a week you're putting
your heart and soul into every day and then all of it culminates into
finally announcing the deal and releasing the press release
and the announcement gets made to all the bankers in your firm
and you get a bunch of emails saying like congratulations from your
colleagues from people you know and also sometimes people you don't know
After, you might get a few days off and this doesn't mean that you don't go into
the office it still means that you're going and
maybe instead of leaving at midnight or whatever you're getting off at like 9 pm
or something like that and you don't have as much work,
but if your group and firm has good deal flow this usually means that after a
week or so you'll be staffed on another transaction
and the whole cycle will repeat itself and so if you have done or closed a lot
of transactions, then pretty much in your second year
announcing a transaction feels pretty good for like the day
and you also get to you know like slap it on your resume or like put it on your
LinkedIn or whatever but you know that's pretty much it. I
will say though that usually if you work on pretty interesting transactions and
usually interesting means larger deals then I will say that you
definitely learn a lot like. For this example, just working on that entire lbo
analysis and being able to listen on calls from
upper level management teams at these really big firms and a lot of like
senior level people at JP Morgan like all this stuff was a super super great
learning experience and you know if you want me to share
actually some more about the deals that I worked on
I do have a lot more that I have worked on and so if you want me to make more of
these types of videos then please let me know in the comments. All
right, so before I let you go I did want to let you know that I'm
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below lastly just as always thank you so much for watching hope to catch you in
the next video thanks so much and peace out