Tag Archives: M&A Deal Origination

Mergers and Acquisitions, or M&As for short, have long been bases of corporate tactics, through development and diversification, among many other factors that impact competitive advantage. The origination stage, whereby the potential transactions are identified and pursued, is very critical to most successful M&A outcomes. In recent years, technological advances, sector-specific trends, and innovative strategies have greatly altered the very landscape of M&A deal origination. The report discusses the positive dynamics driving the M&A deal origination.

 

Booming M&A Market

The global M&A market has been stupendous, considering solid and robust activity in the origination of deals. Global M&A deal volumes increased to around $3.7 trillion during the year 2023, according to Refinitiv. That volume reflected a 9% increase from the previous year’s total of $3.4 trillion. This upward trend underlines a very vibrant market where the origination of deals is flourishing.

Key Trends in M&A Deal Origination

Key Trends in M&A Deal Origination

Technological Advancements

Improved Data Analytics

Integration of technology has transformed the M&A deal origination process. Currently, advanced data analytics and AI form the heart of identification and evaluation processes for potential deals. Over 60% of the major investment banks and advisory firms have begun using tools based on AI and machine learning to Boost deal sourcing and valuation processes in an offer to enable better identification of target companies, predictive market analysis, and efficient due diligence.

Analytics and Machine Learning

Innovative applications of machine learning algorithms are used today for the prediction of potential M&A deals. Companies that take predictive analytics on board for origination close 15% more deals than other firms that still take the standard mode of origination. This is because predictive models are able to adequately propose promising targets given past historical data and many market conditions, thus enabling proactive actions by firms.

Industry-Specific Trends

Technology Industry
It appears that technology M&A deal origination value closed at $1.2 trillion as of 2023, having covered over 30% of the global M&A market in terms of value. This proves the significant interest in acquiring innovative technological competencies and digital assets.

Healthcare Industry
The M&A deal origination in health care peaked at about $800 billion in 2023. This figure is an increase of about 12 percent compared with the figure of the previous year. As per the Merger market, this trend continues. This indicates broad consolidation and innovation in health care, pharmaceuticals, and biotechnology with new, more efficient, and sophisticated healthcare solutions.

Geographic Diversification

Emerging Markets

Emerging markets are now increasingly becoming more attractive for M&A deal origination, especially because of prospects for growth and an expanded consumer base. Cross-border M&A involving emerging markets escalation (15% to 650 billion dollars in 2023). This rise in transactions reflects a positive trend in deal origination, where companies are actively looking for growth opportunities in high-potential areas.

Regional Growth

Growth in areas such as in Asia-Pacific and Latin America. As compared to last year EY pointed out that the Asia-Pacific region represented 35% of global M&A deal origination volume in 2023. An increase of 10%. Growth within these regions is influenced by a good economy and an increased emerging middle-class population, together with the development of investment opportunities.

 

Strategic Deal Origination Approaches

M&A Deal Origination- Strategic Approaches

M&A Deal Origination- Strategic Approaches

Proactive Outreach

Probably the oldest yet most efficient M&A deal origination strategy is active outreach and relationship building. Companies that are involved with possible targets through networking and partnerships are in a position to source many valuable opportunities. Even Deloitte, also found it to be a key indicator, where firms, that went out actively to solicit opportunities, have a 30 percent greater chance of closing deals than those that rely on incoming inquiries only.

Leveraging Industry Expertise

It is important to identify and analyze potential M&A targets using industry knowledge and experience. Companies employing sector-related insights during the building of strong ties within an industry are more likely to identify the potential earlier on. This has been supplemented by data from the M&A Research Centre, which indicated that 45% of completed deals were sourced through industry relationships and expert networks, thereby further validating the value addition arising from sector-related knowledge for the origination of a deal.

Innovative Deal Structures

Flexible Deal Terms

More businesses are also showing greater deal origination success because of innovative deal structures and more flexible terms. Increasingly more businesses are turning towards creative approaches like earn-outs and contingent payments to facilitate a deal. According to a Bain & Company report, deal structures have become more flexible allowing negotiations to not be very contentious and much more appealing, with proper interest alignment between buyers and sellers.

Strategic Partnerships

The companies are also origination deals through strategic partnerships and joint ventures. These involve collaborative arrangements that result in companies getting into partnerships or collaborations with other companies to explore opportunities before undergoing fully-fledged acquisitions. The Harvard Business Review contributes this idea by claiming that partnerships of such natures offer understanding and thus make the easier flow

Positive Impact of ESG Factors

Sustainability and ESG Investments

Environmental, Social, and Governance (ESG) factors are increasingly influencing M&A deal origination. With increasing attention to ESG at both the strategic level and in line with company’s long-term priorities, there has indeed been a surge in the number of deals across sectors that support the sustainability goals. According to EY, by 2025, ESG-oriented M&A deal origination will account for 25% of total M&A activity, with the trend already beginning to turn the corner into a more responsible, impact-driven direction.

Increased Transparency

Although ESG is increasingly gaining prominence, on this occasion this has driven more openness on deal origination. Companies employ greater advanced due diligence that evaluates both the proposed target’s ESG performances with a view to potential acquisition, thus typically creating more high-quality deals and aligning the same with broader corporate responsibility goals.

Magistral’s Services for M&A Deal Origination

Market Research and Analysis

It encompasses an in-depth market study to identify trends and potential target companies.

Target Identification

Utilizing advanced analytics and databases to pinpoint strategic acquisition targets based on specific criteria.

Valuation Services

Providing accurate valuation of potential targets using various financial models and metrics.

Due Diligence Support

Offering thorough due diligence processes to evaluate the financial, operational, and strategic fit of potential deals.

Industry Expertise

Leveraging sector-specific knowledge to identify opportunities and assess market conditions effectively.

Relationship Building

Facilitating introductions and networking opportunities between potential buyers and sellers.

Transaction Structuring

Assisting in designing flexible deal structures that align interests between parties, including earn-outs and contingent payments.

ESG Advisory

Providing insights into Environmental, Social, and Governance factors to ensure alignment with sustainability goals in M&A activities.

Strategic Partnerships

Advising on joint ventures and partnerships as preliminary steps before full acquisitions.

Post-Merger Integration Planning

Offering support in planning and executing integration strategies post-acquisition to maximize synergies and value.

 

About Magistral Consulting

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates, and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modelling, Portfolio Management, and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The article is authored by the Marketing Department of Magistral Consulting. For any business inquiries, you can reach out to prabhash.choudhary@magistralconsulting.com

AI and other advanced data analytics are changing the origination landscape of deals in terms of sourcing, valuation, and due diligence.

Growth as well as increasing consumer base in the emerging markets, with a major surge in cross border M&A, especially in 2023.

Pro-active outreach as well as the use of industry expertise are excellent strategies; firms that are networking proactively have a higher success rate.

ESG factors have gained significant influence over the course of M&A as almost a quarter of the deals are likely to be ESG-related by 2025. This will once again increase transparency and align with the overall corporate responsibility objectives.

Introduction to Deal Origination Services

Making a deal is imperative for a Venture Capital or a Private Equity firm. That is the business they are in. However, behind every successful deal that attracts investment, there is a pipeline of multiple other deals that are curated over time. Deal origination services deal in populating and updating that deal pipeline.

Every fund has an investment philosophy or mandate to make deals that are relevant for its purpose of delivering outsized returns. Some specialize in early-stage investments like Seed or Series A while others prime for late-stage investments like M&A or Series D and beyond. Whatever is the fund mandate, it’s imperative for every private equity or venture capital fund to populate the deal pipeline, so that the deals that fit every criterion could be fructified as and when required. For Hedge funds and Fund of Funds, deal origination concerns about stocks and funds respectively. Deal Origination for Investment Banking also works on similar lines.

Scope of Deal Origination Services

Private Equity Deal origination or Venture Capital Deal Origination services understand in detail the fund philosophy or the mandate. It is then broken down into actionable categories for the selection of targets. For a typical early-stage VC fund, for example, would be interested in SaaS product companies, where the product development has been done and the company is looking for commercialization in the space where the fund may have connections to bring in the early clients. This breaks down into requirements in terms of the industry of the target, industry where target’s clients are, revenues, geographical presence, employees, team, and their background, and suitability to deal terms like management ready to give majority stake, etc.

Once the profile of an ideal deal is finalized, the search begins for the potential targets, where the deal could be fetched.

Population and Update of Deal Pipeline

The deal pipeline is continually updated for the right deals. Every new deal that is originated finds a place in the deal pipeline. This also works for M&A deal Origination. As not all the details about the private companies are available in the public domain, primary research along with secondary research is employed. Details of the deal origination process are explained below

Deal Origination Services

How A Deal Pipeline is Populated?

Here are the most common ways of populating the deals pipeline:

Secondary Research

Secondary Research is the backbone of finding suitable deals. The analyst looks for the private and sometimes public companies satisfying a given set of criteria like revenue, stage, team, geographical presence, etc. Information on all relevant parameters is collected to shortlist the right target

Primary Research

Once the target is shortlisted the analyst gets in touch with the company to collect other information and understand the intent of the company to raise funds. All the information collected is duly captured in the pipeline sheet or Deal Origination platform

Accelerators

Accelerators, Incubators, and other similar Associations provide a current set of targets that are looking to raise funds and have been primed to do so. Getting in touch with such organizations provides important inputs to the deals pipeline. Sometimes these organizations distribute information through regular newsletters which need to be studied to populate the pipeline for the appropriate targets

Platforms and Events

Some multiple platforms and events help startups in raising funds. These platforms are continually looking for investors to fund their member startups. The analyst usually takes the membership of these platforms to receive periodic information

Deal Databases

There are multiple deal databases along with private company financials. Each geography has a specialized database. Sometimes databases also specialize in a given industry. Deal terms on databases help in arriving at the company valuation which is useful in the deal execution stage

Introduction to Deal Execution Services

Once the pipeline is populated and the opportunity is shortlisted for deal-making, deal execution services come into play. Deal execution services help in preparing documents that go into deal-making and negotiations involved therein.

Activities in deal execution are Financial Modeling, Valuation, Due Diligence, Strategy, Business Development Support, and Deal Documentation

Deal Execution Services

All that forms Deal Execution Services

Financial Modeling

Financial modeling serves as a host of purposes. It analyzes if the proposed acquisition, buy-out, M&A, or investments makes sense financially. It also helps in fine-tuning the financial future of the proposed asset. Revenue, profitability, and costs are forecasted to finally arrive at a proposed valuation. The financial model also takes into account the cost of capital and analyzes various exit opportunities for investors. The financial model also suggests if the investment is viable and is going to provide the expected returns to the fund. The financial model analyzes various investment scenarios too, and how key investment parameters change in all those scenarios. Financial Models have been traditionally prepared on the excel sheets but increasingly there have been multiple software products to aid the modeling and reduce the analyst errors.

Valuation

Valuation is one of the key metrics for the investment decision. It is calculated differently for different types of companies and their maturity. For public companies, the DCF Model along with comps from similar companies gives a comprehensive view. For private companies, it’s usually based on multiples prevailing in the industry. Valuations change in various business scenarios of optimistic, pessimistic, and realistic business outcomes.

Due Diligence

Due Diligence makes sure that investment is right and will meet its objective in terms of expected returns from the asset. Due Diligence checks thoroughly the financials of the company. All the assumptions made to forecast the financial future are double-checked. Due diligence also checks for the track record of the team as professionals. All aspects of Corporate Governance are verified in detail. Legal battles, statutory or government actions on the company are looked at. Due diligence gets into details of finances, strategy, assumptions, marketing, people, team, and everything else that is important. For smaller assets, it could be done in a few weeks, whereas for strategic investment it can go on for months. A data room is set to comb through the huge amount of data and information.

Strategy Formulation for Portfolio Companies

In terms of Deal Execution either the strategy is prepared or already prepared strategy document is vetted. A strategy document is put to attract co-investors and set the expectations from the management. Strategy or plan for the next 5 to 10 years is prepared. The input from the strategy document goes into financial modeling and revenue forecasts. If Strategy is already in place, assumptions are rechecked to make sure the document is robust and achievable. Annual budgets are also derived from the strategy documents.

Business Development Support for Portfolio Companies

Immediately after the deal goes through, major thrust from investors is towards the business development of the invested company. Almost always there is an imminent need of finding out and reaching out to the customers. It is usually achieved through lead generation and meetings’ set up in B2B set-up and effective digital marketing in B2C set up. Business Development support services ensure the revenue and growth forecasts are met

Deal Documentation

There are a host of documents that are prepared for fund-raising. Requirements are even more in the case of public companies. Following are the documents that are usually prepared for fund-raising

PPM/CIM: Private Placement Memorandum or Confidential Information Memorandum is a detailed document covering all aspects of the proposed investment

-1 Pager: It’s a teaser document that is sent out for information of other investors

-Financial Model: As discussed earlier in the document, it analyzes the investment in all scenarios and the respective outcomes.

-Pitch Deck: A short version of CIM which is more of a marketing document

Several other forms are filled and prepared depending on the geography of the investor and investee.

Magistral Consulting has helped multiple investors like Private Equity, Venture Capital, and Family Offices in making the right investments through all the services mentioned above. To drop an inquiry please visit www.magistralconsulting.com/contact

About Magistral

Magistral Consulting has helped multiple funds and companies in outsourcing CIO related activities. It has service offerings for Private Equity, Venture Capital, Family OfficesInvestment BanksAsset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE fundsCorporates and Portfolio companies. Its functional expertise is around Deal originationDeal Execution, Due Diligence, Financial ModelingPortfolio Management and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.