During the M&A process, financial service firms play a significant role alongside the purchasing and target companies. Whether directly or indirectly, they influence the success of M&A deals.
For example, investment banks are typically central players in M&A — they provide advisory services and help in raising capital, while venture capitals can finance the transaction by investing in selling or buying companies.
Financial market firms can be divided into sell-side and buy-side firms. Sell-side firms analyze the market and pitch a seller’s company to potential buyers, while the buy-side works is to identify investment opportunities for clients.
In this blog post, we will explore the ins and outs of both the buy side and sell side, along with their roles in the M&A process.
Buy-side and sell-side: What are they?
Deeply understanding the buy-side vs. sell-side difference in M&A is crucial, as it will help you to:
- Communicate more effectively
- Know what to expect from an M&A process
Let’s learn what is the main difference between the buy- and the sell-side in M&A.
What is a buy-side in an M&A transaction?
Buy-side implies financial service companies that help their clients find profitable acquisition opportunities, complete a deal, and assist with integration. They include private equity firms, pension funds, asset managers, hedge funds, venture capital firms, institutional investors, and retail investors.
|Example: An asset management firm has funds that invest money in alternative energy companies. One day, the VP of equity sales at a major investment bank calls a portfolio manager from the firm and tells him there’s an upcoming initial public offering in a company from the alternative energy sector.|
What is a sell-side definition in an M&A transaction?
Sell-side is represented by firms that find buyers for their clients. They analyze an industry and organization and prepare marketing materials for sale. Sell-side firms also assist in negotiating the M&A transaction. Sell-side might include M&A advisory firms, investment banking, commercial banking, market makers, and corporations themselves.
|Example: An investment company sought to sell a company and asked an investment bank to lead the deal. An M&A advisory firm was hired to conduct analytical sell-side research.|
Buy-side vs. sell-side comparison
Buy-side vs sell-side are distinct in objectives, tasks, roles, and companies engaged, as well as involvement in due diligence and integration processes. Let’s discover their key differences in detail.
The objective of buy-side vs. sell-side
The major objective of the buy-side analyst is to find a company that aligns with a client’s strategic goals for acquisition and promises the best investment returns — whereas a sell-side analyst aims at selling securities or a company at the best price.
Main tasks of buy-side companies vs. sell-side
The following are the steps both sides take to achieve the objectives mentioned above. Some of the activities may overlap because, at the end of the day, their common goal is a beneficial deal:
Buy-side analysts typically deal with:
- Fund management
- Conducting internal research
- Creating an M&A strategy that aligns with the overall business strategy and business model
- Sourcing potential acquisition targets based on specific criteria identified in the M&A strategy. It includes monitoring sell-side analysts’ offers to buy securities
- Conducting thorough due diligence of the target, including equity research
- Negotiating the transaction terms
- Planning and carrying out the integration process of the newly acquired company
At the same time, a sell-side firm assists its corporate clients with the following:
- Help raise money
- Consult on major transactions
- Analyze industry trends and competitors
- Conduct private equity research
- Valuate a company
- Perform extensive financial modeling
- Outreach potential buyers for selling traded securities
- Pitch the acquisition opportunity to potential investors
- Coordinate a due diligence process
- Facilitate the overall M&A transaction process
- Choose the best acquisition option
Financial companies that may be involved
Here are buy-side firms that may assist with M&A transactions:
- Private equity firms
- Hedge funds
- Life insurance companies
- Institutional investors
- Pension funds
- Mutual funds
- Retail investors
By contrast, sell-side entities generally include:
- Investment banks
- Stock market brokerage firms
- Commercial banks
- M&A advisory firms
- Market makers
- Сorporations (their corporate development team)
Roles from buy-side firm vs. sell-side firms
Buy-side vs sell side team may include:
- Portfolio managers
- Asset managers
- Buy-side researchers
- Lawyers specializing in M&A
- Due diligence specialists, e.g. financial analysts, accountants, and industry experts
- Fund managers
While sell-side vs buy side team is made up of:
- Many sell-side analysts
- Investment bankers
- M&A advisors
- Financial analysts
- Marketing specialists
- Lawyers specializing in M&A
- Due diligence specialists that collect documents required for due diligence
- Execution team: logistical and administrative functions
Sell-side vs. buy-side risks
M&A transaction is a complex and multifaceted process. One of the sides might overlook small but impactful details that result in an M&A deal failure. Here are some lessons you can learn from them.
The sell-side risks include:
- Misevaluation. A famous example is the Mattel and the Learning Company merger. As a result of the acquisition, the Learning Company’s perceived value differed drastically from its actual performance.
The buy-side risks in its turn are the following:
- Poor integration processes resulted in cultural problems. A clear case in point is the failed attempt of Daimler (Germany) and Chrysler (US) merger. Daimler believes that its products are inferior to Chrysler’s.
- Due diligence oversight. One of the examples is Caterpillar and ERA merger. In 2012, Caterpillar took a $580 million write-down due to due diligence oversights on its part and long-term accounting misconduct at Siwei.
Sell side vs buy side in an M&A transaction process
As you discover the potential buy-side vs sell-side risks of the M&A move, you understand how it is critical to go through each stage thoroughly and why the whole preparation process can take years.
Research stage: Organization vs. strategy
At this stage, the sell-side analyst is busy reviewing the company state and industry, performing financial modeling, and providing the most accurate business valuation vs. the most attractive.
Then the sell-side equity research analysts pack the insights into a sales memorandum – a well-structured and easy-to-read document that will be shared with potential buyers.
At the same time, buy-side money managers review the state of the purchasing company and its strategic goals to develop an M&A strategy.
Matching stage: Marketing vs. screening
At this point, a sell-side investment banker identifies and contacts potential buyers with teasers and NDAs. The idea is to reach as many as possible relevant buyers to create competition and end up selling securities at a better price. Additionally, the sell-side team prepares management presentations.
Buy-side analyst’s job here is to list potential targets that match the client’s M&A strategy. At this stage, they might heavily rely on industry reports from trusted sell-side players in the financial market.
Based on its own assessment and information from the sell-side, the buy-side team sends an offer (a Letter of Intent — LOI) to the target company.
The sell-side’s role is to raise capital, so they will strive for a maximum fair price and choose among several offers.
Due diligence stage: Provide vs. check
Due diligence is one of the most significant and complex stages of an M&A transaction process. Buy-side investment managers analyze financial, legal, operational, and strategic risks and opportunities, reviewing a long list of target company documents.
The role of the sell-side at this stage is to provide access to all potentially relevant documents to the buy side of capital markets and meet all their requests during the due diligence process.
At this stage, the parties will negotiate final terms. After conducting thorough research and gaining additional insights, the buy-side can offer a lower price. The sell-side is likely to agree at the late stage.
Parties sign an official contract. The sell-side then announces the transaction. After that buyer and seller may be required to obtain regulatory approvals. To expedite the process investment bankers work as intermediaries and exchange all necessary documents between all parties.
Post-transaction involvement stage
Integration is the most challenging stage in M&A transactions. Many M&A deals fail because of cultural crushes and other poor post-closing steps.
The buy-side firm oversees the integration of the acquired business into the buyer’s operations with the aim of achieving expected synergies.
Benefits of using a VDR for both sides of an M&A transaction
Virtual data room (VDR) software is a secure online platform that allows both the sell- and buy- sides to access sensitive documents and data related to the M&A transaction, ensuring seamless due diligence and integration processes.
Let’s consider key benefits for both sides in real M&A cases.
A buy-side example is DealRoom’s client AppHub — an e-commerce software provider and ecosystem for e-commerce apps. Here is why they use VDR software.
- Enhanced professionalism. AppHub tried several virtual data rooms and they still faceв unexpected costs, challenges onboarding new members, and as a result of poor organization, they have to make many redundant requests. They were looking for a solution to increase professionalism in the eyes of their targets. Due diligence tools, audit logs, and analytics from DealRoom helped AppHub increase efficiency, quality, and accuracy.
- Enhanced communication. With VDR it is easy to discuss everything on one platform, the onboarding process is really fast, and communication with different parties is organized.
- Real-time document exchange. A virtual data room facilitates any requirements for document storage and distribution. Document requests and reviews are made on the platform without multiple email exchanges and downloads. With DealRoom, AppHub eliminated redundant requests due to live updates and filtering.
A sell-side example is an iDeals’ client Terradatum — a leading market analytics provider for the real estate industry. Here is why they use VDR software.
- Better insights. In iDeals, for example, you can check what documents were viewed and how much time was spent on each page. Terradatum was interested in tracking how buyers engaged with their documents and the progress of each bid.
- Competitive advantage. With a virtual data room, the company can exchange information with several buyers simultaneously and react to emerging opportunities super-fast. Data room deployment takes 15 minutes and hundreds of new users can be added in a minute. Besides, Terradatum’s documents are regularly updated and always ready for new offers.
- Control. VDR software provides advanced permission management features. In a data room, a company can control individual access to documents and even pages. In 2015 a growing Terradatum considered both buy and sell options, so it was essential to have an easy and secure platform to handle all opportunities.
- Buy-side and sell-side companies represent buyers and sellers in M&A transactions.
- There isn’t a strict distinction between the buy- and sell-side of the financial market. Some financial firms may represent either side.
- The main distinction between the two sides is their objectives. Buy-side strives for better investment decisions, while the sell-side looks for the most successful investments.
- Common M&A transaction process consists of the following stages: research → matching → negotiation → due diligence → closing → integration.
- Virtual data room software can make your M&A transaction process more secure and faster, especially if you handle several opportunities at a time
Is Goldman Sachs buy-side or sell-side?
Goldman Sachs, as an investment bank, is primarily known as the sell-side of the capital markets. Goldman Sachs also has a buy-side arm called Goldman Sachs Asset Management.
What are examples of buy and sell-side?
The main examples of buy-side are institutional investors (Allianz Group), private equity firms (The Blackstone Group), hedge funds (Citadel), and mutual funds. The sell-side includes investment bankers (Goldman Sachs), and M&A advisory firms (McKinsey & Company).
Is hedge funds buy-side?
Yes, hedge funds are usually associated with the buy-side. A hedge fund pools capital from investors and uses a variety of strategies to generate profit.
Do investment banks do buy-side M&A?
Usually, investment banks play the sell-side role in M&A transactions. Though they may take a buy-side and provide advisory services for large acquirers or private equity firms.
What is a sell-side investment banking product or service?
The main role of investment banks is to raise money for companies, governments, and other organizations. In the context of M&A, the investment banking industry provides sell-side advisory, valuation and pricing, deal marketing and negotiation, due diligence assistance, and deal structuring.
What are the fees for you as a company planning an M&A transaction?
If you are on the sell-side, most advisors charge a flat 8% to 12% commission if the company is under $1 million. For businesses priced up to $100 million, aside from commission, a sell-side firm will get fixed income in the form of up-front fees. If you are on the buy-side, you will be charged a management fee (around 2%) and a performance fee (typically 20%).