Role of Investment Banks in M&As and Corporate Restructuring


Roleof Investment Banks in M&ampAs and Corporate Restructuring

Roleof Investment Banks in M&ampAs and Corporate Restructuring

Investmentbanks are financial institutions that assist governments,corporations and individuals to raise capital though underwriting orplaying the role of agents for their clients. These banks areprimarily involved in mergers, corporate restructuring, trading,issuance of securities and acquisitions. At the same time, thesebanks are involved in investment analysis, for their clients, riskinvestment and project financing among other range of primary roles.According to Fleuriet(2008), investment banks provideservices that are focused on the capital market as well as investmentadvisory. To explore these functions further, this paper will discussthe role of investment banks in the inmergers and acquisitions and corporate restructuring.

Mergersand acquisitions are strategic processes of consolidating differentfinancial structures of the two corporate bodies into one. Accordingto DePamphilis(2008)acquisitions involve the evaluation of a target company and takingover the business structure as part of the parent company. These twoprocesses involve the formation stronger organizations by combiningresources and assets (DePamphilis,2008). As aresult, investment banks play a significant role in the restructuringprocesses. At the same time, corporate restructuring is thereconfiguration of capital structure, management and assets to builda competitive corporate structure. Investment banks also play a rolein corporate restructuring that makes the institutions importantcomponents of the process. In performing this role, the primarypurpose of investment banks is to act as the client’s agents in theissuance of securities.


Provisionof sound professional advice is one of the most important roles ofinvestment banks in the processes of mergers, acquisitions orcorporate restructuring. The advisory role of investment banks isbased on the expertise that these institutions have in regard tocorporate financial structures (Halibozek&amp Kovacich, 2005).Investment banks have vast knowledge about the industry and thefinancial market environment due to their function of scanning theenvironment. Investment banks gather relevant information on thecapital market such as interest rates, cost of capital, financingsources and cost structures among other categories of expertise(Halibozek &ampKovacich, 2005).Due to this knowledge and experience, investment banks are able topredict the future of the capital markets based on the currentcontextual factors that are specific to each corporate body.

Asa result, investment banks provide a rich source of advice on thetype of financing that firms undergoing corporate restructuringshould opt for. In mergers and acquisitions, they provide advice onthe capital structure of the target company and the expectedimplications of the consolidation. In addition, they provide advisoryon the financial outlook of the target company, which helps theparent company to evaluate the financial viability of the plannedconsolidation (Weber,2013). Throughtheir financial consulting service, investment banks provide adviceon the corporate structure of a company that intends to restructureits capital. By evaluating the outcomes of the restructuring process,investment banks advise on the viability of the new structure inrelation to the prevailing capital market environment.

Theadvisory role of the investment banks in the processes of mergers,acquisitions and corporate restructuring is based on their functionof providing equity research. During mergers and acquisitions,investment banks carry equity research and securities research on therelevant industries of the firms involved (Fleuriet,2008). Theresearch focuses on the prospect companies on the firms that areconsidering mergers or acquisitions. This provides information forevaluating the benefits of the business consolidations in terms offinancial and organizational structures. The equity research providesinsight on the type of securities and capital items that areappropriate for a company that is considering undergoing corporaterestructuring (DePamphilis,2013).Moreover, the equity research entails credit research, macroeconomicresearch and investment opportunities for their clients.

Inaddition, investment banks provide strategic advisory services topotential acquirers on the type of companies to buy as well as theindustries to venture in. The advice is aimed at maximizing thestrategic competitiveness of the client company that is intending toacquire other companies (Halibozek&amp Kovacich, 2005).For instance, investment banks will be advice manufacturing companiesto acquire firms that will increase their competitive advantage inthe supply side as well as the market side. Therefore, the investmentbank will explore the potential targets in each side and recommendwhere the client gets more business value.

Businessand Security Valuation

Duringmergers and acquisitions, investment banks also play a role ofevaluating businesses and companies. The process of mergers andacquisitions involve the identification of target companies andunderstanding their capital structure. This is followed by theevaluation process where the parent company determines the correctvalue for the target company. This is the price that should be paidas a way of occupying the assets and business operations of theacquired company. Investment banks provide the valuation service andplay the role of determining the appropriate price for a business(Rosenbaum &ampPearl, 2013).During mergers, investment banks assist the two companies todetermine the value of each of its assets and the valuation of theirstocks.

Bydetermining the fair value of the companies in the transaction is animportant role of the investment bank as the third party to processof mergers and acquisitions. This gives the parent company and thetarget company to be confident of the consolidation process as wellas the determined value (Halibozek&amp Kovacich, 2005).In determining the value of the businesses involved in thetransaction, investment banks play the role in two main ways. One ofthe ways is acquirer representation, where the bank acts as the agentfor the company that is buying (Rosenbaum&amp Pearl, 2013).On the other hand, investment banks can play the same role as targetrepresentation, where they evaluate businesses on behalf of thetarget company.

Accordingto DePamphilis(2013), investmentbanks also play the role of valuing the securities that are issued inthe process of mergers, acquisitions or corporate restructuring. Somebusinesses engaged in such transactions may value their stocks higherthan the fair value in a bid to gain from the transaction. However,investment banks provide the fair values of the securities beingexchanged in the processes. This role is characteristic withinvestment banks because of their experience in the capital markets.In addition, they have expertise on the use of different valuationmodels to evaluate the stocks of different companies.

Inaddition, investment banks provide arbitrage service to companiesthat are engaged in mergers or acquisitions. This service isimportant when one company provides the valuation that is not inagreement with the fair value of its business by the investment bank(Iannotta,2010). Thismostly arises when the target company values its business value orthe value of its shares at an amount less than what the business isactually valued. In this case, the investment bank involved mayfacilitate the acquisition of the target company on behalf of itsclients with a view to profit from the valuation difference (Weber,2013). Thebenefit of the valuation service is gained by both the bank and theclient due to the experience and expertise of the investment banks.

Providingthe Financing Options

Oneof the main roles of investment banking is to assist the companiesinvolved in the transaction to finance the merger or the acquisition.This role places the investment bank in its context as a financialinstitution that plays the role of financing business transactions.The investment bank may help the acquirer to finance the acquisitionof the target company by introducing new securities into the market(Rosenbaum &ampPearl, 2013).During the issuing of the securities, the investment company can helpthe acquirer to sell the securities directly to the market. Thisoption will raise the capital needed for the firm to finance anacquisition.

Inaddition, the investment bank can decide to raise the finance for thecompany by underwriting the securities that are issued. This is wherethe investment bank offers to buy all the securities issued by afirm. In the processes of mergers and acquisitions, investment banksact as underwriters on behalf of the clients. The role ofunderwriting helps the transacting companies to complete the processof the acquisition and mergers within the planed time lines(Fleuriet, 2008).The main reason for entering into mergers or acquiring othercompanies is for strategic factors and strategic benefits. As aresult, the completion of the process within the right time isimportant, especially when the competitive advantage is the reasonfor the amalgamations.

Incorporate restructuring, investment banks provide financing optionsof the introduction of new capital sources. Corporate restructuringinvolves the acquisition of new capital and new financing sources asa way of changing the ownership structure. Most of the capitalstructure is restructured by selling some securities by issuing morecapital. Therefore, investment banks provide the mechanism andassistance of issuing financial securities. Where capitalrestructuring involves the repurchase of issued capital by buyingsecurities, investment banks provide the financing for implementingthe process (Iannotta,2010). Theprovision of capital for the company undergoing restructuring is donethrough agreements between the bank and the company, or between thecompany and financiers identified by the bank.

Inthe provision of financing to companies, investment banks also play arole of setting the market for the issued securities. This is inaddition to the role that they play of being the market makers. Bymarket making, investment banks look for buyers of the securitiesissued by the company raising finance for acquisition orrestructuring (DePamphilis,2010).Investment banks also play the role of advisor to the buyers bydirecting them to the firms that are raising capital through theissuance of securities. Through the diverse options explored byinvestment banks, the main intention is usually to assist the companyto raise financing for mergers, acquisitions or restructuring.

RepresentingBuyers and Sellers

Investmentbanks also play a role of linking the companies that are selling andthose that are buying for a deal. These banks do not wait to beapproached by the companies that are buying others or the companiesthat are looking for purchase. Instead, they carry their independentmarket study and identify potential sellers or potential buyers ofbusinesses. For instance, they represent potential sellers in a sale,a process called “sell-side work” to complete the transaction(Weber, 2013).In this role, the investment bank, provides advice and guidelines fordetermining an acquirer. This process involves the role of sellingthe memorandum of a company by contacting potential acquirers tocomplete the sale.

Inaddition, investment banks play the role of negotiating on behalf oftheir clients in the financial transactions. When carrying outmergers and acquisitions, some clients entrust the role ofnegotiation to competent investment banking institutions (Iannotta,2010). In thisregard, investment banks are left to carry out their primary role ofacting on behalf of their clients. In this role, investment banksnegotiate on behalf of the transacting companies based on whether thecompany is the acquirer or the target. By representing the acquirer,the investment bank will be actively involved in valuing the targetand recommending the best price for the acquirer (DePamphilis,2010). At thesame time, the bank will carry out the transaction on behalf of theacquirer as it seeks to complete the process.

Whenrepresenting the selling company, investment banks seek bidders andnegotiate for the price. On the other hand, investment banks play asimilar role in the restructuring companies. They providerestructuring ideas and identify strategic potential buyers ofsecurity or strategic partners. This is important for the companiesthat do not have market information or expertise in capitalrestructuring.


Investmentbanks play important roles in the processes of mergers, acquisitionand corporate restructuring. One of the roles is the provision offinancing for the processes as well the financing options forrestructuring companies or acquiring companies. Investment banks playthe primary role of acting in financial transactions on behalf oftheir clients in relation to capital and financing functions. In thisregard, they play the role of representing the target or acquirers inacquisitions and mergers. In addition, investment banks play the roleof valuing the companies that are involved in the financialtransactions of mergers and acquisitions as well as corporaterestructuring.


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DePamphilis,D. (2010). Mergersand Acquisitions Basics: All You Need To Know.Waltham, MA: Academic Press

DePamphilis,D. (2013). Mergers,Acquisitions, and Other Restructuring Activities: An IntegratedApproach to Process, Tools, Cases, and Solutions. Waltham,MA: Academic Press

Fleuriet,M. (2008). InvestmentBanking explained: An insider`s guide to the industry. NewYork, NY: McGraw Hill

Halibozek,E.P., &amp Kovacich, G.L. (2005).Mergers and Acquisitions Security: Corporate Restructuring andSecurity Management. London:Butterworth-Heinemann

Iannotta,G. (2010). InvestmentBanking: A Guide to Underwriting and Advisory Services.Berlin,Heidelberg:Springer Science &amp Business Media

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Weber,Y. (2013). Handbookof Research on Mergers and Acquisitions. Boston:Edward Elgar Publishing