What does a Big 4 professional services firm do in terms of Transaction Advisory/M&A advisory?
Big 4 M&A typically has three sub-departments: Transaction Advisory, Corporate Finance, and Integration Services. Transaction Advisory does a lot of financial due diligence, which is coming up with a normalized level of EBITDA/NWC/net debt and analyzing the company’s historical performance. We don’t typically go through the company’s invoices for diligence, but we will perform reconciliations with the audited financials to gain comfort over the data. As you can imagine, there is usually a Transaction Advisory department in all Big 4 Firms because it is very accounting heavy.
Apart from diligence, we typically also help with the Buyer/Seller’s PSAs (Purchase and Sales Agreement) to make sure the transaction is defined in a way most favorable to our client. This includes purchase price adjustments, definitions, financial schedules, and etc. At times, we directly negotiate with the Buyer/Seller on behalf of our client as well.
In Canada, we also work closely with the Corporate Finance team to help with divestitures. Their team focuses on quarterbacking deals and operates like a boutique investment bank. We help with the financials portion of their work.
The integration team consults Companies on post-merger activities. They also help with diligence and quantification of synergies.
What are the groups that you would typically see in a Big 4 Transaction Advisory practice and who would they be looking to hire (from the audit stream, direct from university, experienced professionals in what fields?)
Since the work requires significant quantitative and accounting skills, audit is a great background to have when applying for TS. However, we also take candidates direct from university. For experienced hires, we rarely take anyone without a CPA.
Who do the Big 4 compete with for the transactions they engage in? What are some transactions that you would not compete with the banks for? In those mandates, how would you interact with the investment bankers?
Banks usually do not offer financial diligence as a service, either on the buy side or sell side.
Our Corporate Finance team competes with banks for private company divestitures, especially in markets where the oil & gas, mining, and lumber market have dried up. You sometimes see investment banks trying to get into $100m deals. Sometimes they go for even less than that if the Company has a great brand and would make a good tombstone. We don’t compete with banks for public companies.
What is the range of transaction sizes?
Low end usually equates to $10m deals. High end for us means anywhere from $1bn to $2bn deals.
What are some services in the M&A group and how would they be conducted? what are the responsibilities of a junior staff member and a senior staff member? (for instance what is the hierarchy -> associate -> senior associate -> manager -> director -> MD and what are the responsibilities for each)
Analysts and associates are typically expected to do a lot of the heavy lifting, i.e. monitoring the dataroom, manipulating data and performing analysis, and help with report writing. Managers are expected to lead the juniors and review their work while writing the key insights in the report. Senior managers typically perform reviews and basically delegate to the managers to do whatever else needs to be done. Partners will do the final review of the report.
How do you ensure that there is no conflict of interest across other professional services streams (audit/consulting/Enterprise risk)?
There are ethical walls in place in all Big 4 firms and we conduct conflict checks.
What is compensation like?
This goes without saying that Big 4 firms do not pay a lot. The compensation is not as much as an investment bank. We typically make a bit more than other departments in Big 4.
What are the hours like?
Hours are typically 9am to 6pm. Things could get really bad in Transactions and you could be staying till 1am. Our hours typically fluctuate a lot. However, there is typically no expectation for you to cancel your weekend plans last minute just because something has popped up.
Can you walk through a normal M&A process?
Usually it goes:
- Strategy and Target Search– the investment bank helps the Company devise a plan to divest. The investment bank contacts Buyers on behalf of the Company and send out a confidential teaser. The teaser is a one page summary that does not name but describes the Company.
- Preliminary Assessment – After the investment banker narrows down the potential Buyers, they send around a Confidential Information Memorandum which contains a lot of details around the Company. Interested Buyers will ask more questions, and the investment banker usually assists the Company in answering. The Buyer’s goal is to work out valuation during this phase, and their team would usually try to use the preliminary data provided to build models. Companies will also have a chance to meet with Management and ask further diligence questions. The initial meeting is important because you can usually tell if a Buyer is very interested or not. Buyers submit their EOI with an initial bid.
- Due Diligence – The Buyers with good bids get into the next round. They then do more diligence around the Company. At this phase, it should be more confirmatory, but sometimes in the first phase not enough information is released and Buyers get to do more detailed analysis during this stage. All Buyers still in the process submit a Letter of Intent, and the best one gets exclusivity with the Seller.
- Negotiation – The Seller and Buyer work together to make a Purchase Sale Agreement and negotiate to close the deal.
- Integration – After closing, Buyers being execution of their integration plan.
What sort of due diligence items would you want to collect?
The audited financial statements and trial balance is where we start with financial due diligence. Usually we would want to analyze monthly trends to see if there are any unusual fluctuations. We also analyze Management’s KPI reports extensively to determine how well the Company has performed over time.
How would you adjust financial statements for an acquirer?
The most common things that impact EBITDA we would adjust for:
- Non-recurring expenditures/revenues – this one is fairly obvious, basically one-off items like litigation.
- Out of period credits or releases – due to timing differences, there may be a credit or release if something was over-accrued last year, and paid less in the current year. This would result in a credit, which needs to be adjusted for. Accordingly, if it was under-accrued, than the debit would also need to be moved back to the previous year.
- Reserves – when a Seller has created a fictional reserve, or not put forward a reserve when they should have, we would need to estimate an adjustment.
- Audit differences– The auditors usually have error adjustments that may not have been corrected by the Seller.
- Fair market value – Companies sometimes don’t pay fair market value in related party transactions. We would adjust for these to make them fair market value.
There are others that I won’t go into detail, including currency, commodity price, minimum wage, capacity constraints, and etc.
What are some common problems in the M&A process?
Integration is a huge problem. A lot of times Buyers are so caught up with winning the bid that they leave the integration planning till too late down the road, and then it ends up costing the Company a lot of time and dollars to successfully integrate.
What are some trends in M&A that you are seeing right now?
Winner’s curse as it is a Seller’s market right now. Sometimes Buyers would forego a lot of value just to win the deal, but then they end up overpaying.
What are some exit opportunities? Other groups in restructuring, investment banking, etc.
- Private equity
- Investment banking
- VP Finance
- Corporate Development