A deal flow is the aggregate value of all potential merger and acquisition deals which are being analyzed by an M&A adviser. These deals are categorized and put into a ranking system; the top dozen or so are considered for solicitation for engagement with the full package, including teaming and assessment of financial feasibility. According to Fintalent’s deal flow consultants, the remainder will be solicited in a gradual process as opportunities arise or on a case-by-case basis.
How to find prospective buyers
In order to solicit bids for engagements, M&A advisors will typically create portfolios of prospective deals that they present to prospective buyers. This means that they need to identify target groups of sellers with similar ownership, company size, industry sectorals or geographies so as not to overwhelm buyers with too many disparate offers. This group is known as a deal universe.
The methods used to solicit bids for engagements are traditionally classified as an Open Bid solicitation, or a Closed Bid solicitation. The former approach is more common in situations where there are only one or two buyers who would be interested and willing to take on the deal; in these instances, the advisers will simply contact the buyer directly without going through the process of creating a portfolio of prospective deals. On the other hand, when there is a greater number of prospective buyers who are interested in a deal or are willing to take on multiple deals simultaneously, the M&A adviser will go through the process of creating a portfolio.
In order to create a suitable portfolio for potential buyers, M&A advisers use deal flow analysis. This involves identifying prospective target groups which have similar characteristics (e.g., similar ownership structure, size and industries) and which match up with the business requirements of potential buyers. These target groups are then categorized as they form part of a deal universe. The groupings made in this manner are known as ‘partnerships’ or affinity groups which reflect the same or overlapping ownership affiliation or industry specializations.
Once the target groups have been categorized and listed, an analysis of each of the deals within the affinity group is undertaken. This analysis involves identifying which deals are most likely to be bought by a particular buyer, which deals are likely to be sold together and which could potentially create a conflict of interest with another buyer if they were bought as a pair. The information gained from analyzing the deal flow is then used to determine whether or not it would be economically viable to solicit bids for engagements on all or some of these deals.
The process of soliciting bids for engagements usually takes place before the M&A adviser has started examining any actual deal within an affinity group. This is because the sale price of a particular target group will influence whether or not that group is worth examining in further detail. If too many deals exist within an affinity group and selling prices are low then the M&A adviser may not bother to examine these deals in any more detail; instead it is assumed that none of these deals are likely to be sold on. On the other hand, if selling prices are high, then the M&A adviser will probably examine these deals in order to assess whether or not there is sufficient value in them to merit the cost of creating a bidding portfolio and soliciting bids for engagements.
Furthermore, even if all of these deals are evaluated and deemed suitable, certain complications may arise from the nature of the deal. Buyers will often ask to be kept in the loop of developments regarding these potential deals in order to ensure that there is no conflict between them and another buyer. In other instances, buyers may require a separation fee for taking on a deal or they may simply not wish to be burdened with multiple deals simultaneously.
The M&A adviser must weigh up all of these factors and determine whether or not it would be economically viable to solicit bids for engagements on all of these potential deals. If it would not be viable, then the adviser will typically choose to solicit bids for engagements on a selection of deals within the group.
In order to receive sufficient bids from buyers and ensure that these bids are of sufficient quality, the M&A advisers will often make use of ‘teaser’ presentations in which the prospective deals are briefly outlined. Buyers are then given a period of time in which to submit a bid. The bid is usually made public so that other potential buyers are aware that they have been beaten to a deal by another prospective buyer and may decide not to place any further interest in it.
Once a bidder has been selected for bidding, the M&A advisers then continue to work with this buyer to reach an agreement on the terms of sale. This involves negotiating a price and terms of settlement which are acceptable to both parties. Once this occurs, the sale is closed and the deal becomes binding on both buyer and seller.
