Co-Head of Mergers & Acquisitions in Europe at Barclays Capital, Matthew Ponsonby, talks about the strategic decisions that lie behind big deals.
Why would a company contemplate a merger or an acquisition?
It's important to remember that there are two sides to every deal. For every acquisition there is someone selling a business. It begins with company strategy. M&A is a major tool in a CEO's armoury. On the seller's side, it might be part of a strategy to re-allocate resources. Perhaps the company has an asset, which is not integral to the rest of the business - they may wish to sell it and redeploy the capital. On the buyer's side, a merger or an acquisition could be part of a strategy for growth. For example, it may provide a means of expanding an existing product line into a new market - something which might be difficult to achieve through organic growth. Or it could be a question of acquiring a related product. For example, a utility company might look to acquire gas production assets (what's called "going upstream") in order to secure the energy it supplies to customers. So the reasons why a company may consider an M&A transaction are extremely varied and will depend on the nature of their business and the strategy they have chosen to pursue.
Do deals typically start with the bank presenting an idea or do you normally react to a strategy that the client already wants to pursue?
It's a bit of both. There are two key parts to any strategy: development and execution (or what to do and how to do it). Most companies will have a clear idea of what they want to achieve. However, during the development stage you hope to become a trusted part of the decision making process. You can sometimes offer a different perspective that a client may not have considered because of the broad range of contacts and experience you have within the industry.
The executionary stage is often where you can bring real insight. How are you going to get this deal done? How are you going to finance it? What sort of consideration should you use - cash or shares? What will the shareholders think? How should you value your own shares (or those of the other company) - how far should you push your own rating?
To provide the right answers to these questions, you need to have a deep understanding of the commercial drivers of the client's business. The advantage an integrated bank like Barclays Capital has is that we are able to offer the full range of solutions.
What makes the work interesting?
It's a fascinating job because you are central to the critical decisions that companies make about their future. On a typical deal, we might have four or five people advising the company. The team could potentially include a director, a managing director, a vice president, an associate and an analyst. So even when you are just starting your career as an analyst, you will be involved in very significant deals which may have a huge impact on the client's business. In other words, you become central to something important quickly - that can be exhilarating. It's also exciting to be able to see the results of your advice put into practice. I've worked in the industry for 20 years and I've never been bored by anything we do.
Do macroeconomic factors, such as the weakness of the UK economy, have a bearing on M&A activity?
Any period of macroeconomic uncertainty will have an impact on the M&A market. One way to understand this is to think about the predictability of companies' earnings. In a period of uncertainty it becomes very hard to value companies because you don't know how their future earnings may be affected. In this situation a gap tends to emerge between the valuations of buyers and sellers. The seller will obviously take an optimistic view on future earnings, whilst the buyer will be more conservative. When the gap becomes unbridgeable the M&A market will slow down.
That would suggest that you expect there to be limited activity for the foreseeable future?
We've seen a slow start to the M&A market this year but that's largely as a result of the economic uncertainty we were facing last year. Now we've entered 2010, there is more of a consensus that we will see an economic recovery. Market activity depends on increased confidence about the future. I expect a recovery in the M&A market but not to the levels we saw in 2007.
What separates an excellent analyst from an average one?
It's a good question because the intellectual bar is very high in investment banking. There are an awful lot of very clever people who join the industry but clearly not everyone succeeds, so how do you distinguish between them? It's not just about pure brains although that is a helpful starting point. Having spent time talking to graduates, I've thought about this a lot. I suspect that the key differentiator is nothing more complicated than common sense. When I'm interviewing graduates, I look for someone who is smart but also someone who can apply that intelligence in a practical way.
It's important for graduates to understand what they're getting themselves into. This is a very rewarding career but it's also one in which people work extremely hard. You have to really want to do it to succeed. I look for candidates who are clearly interested in the industry and are determined to do well. That's why the internship system works so well for both sides. It gives students a chance to get under the skin of a role and see what it actually involves on a day-to-day basis. They can learn from those a year or two ahead of them about what they're letting themselves in for. From our side, it gives us an extended period in which to get to know somebody and judge whether this is something that they really want to do.
What else should students know?
They should realise that it's not necessarily about what degree you do. You need to be able to learn on the job. It's important to be comfortable working with numbers but I know a lot of successful bankers who have degrees in disparate disciplines, from music to history and science. You don't have to be an economist but you must have an enquiring mind, a degree of common sense and a genuine interest. That last quality is the most important because it would be difficult to turn up to work and do the hours that we do if it wasn't something that really interested you.
But you're not expecting people to be experts when they turn up for interview?
Absolutely not. It always helps to distinguish yourself if you've read a bit about relevant topics - particularly about the institution you're applying for! You may be applying for seven institutions but it's always good if you can sound convincing when you say that the one you really want to join is the one you're meeting with that day.