The Black Box Labeled Research
While mingling at a colleague’s company barbecue the other day, a new acquaintance asked the simple question, “So, Bob, what do you do in investment banking?”
“Research,” I answered, soon realizing from all the blank stares I was getting that nobody had any idea what I really do on a day-to-day basis.
If most people don’t have any idea what type of research goes into investment banking, then I realized our client, the middle-market business owner, probably doesn’t either. Our clients generally only see the final product, whether it be a pitchbook, financial model or CIM (confidential information memorandum), and they rarely think about where that information comes from or how it was analyzed. But in the complex process of selling a company, it is essential that behind-the-scenes research is accurate.
Middle-market research is a difficult task. We do not have the luxury of public company reporting where every detail about a company is published for everyone to see in SEC filings. Most of the raw data regarding companies, private equity, and M&A transactions comes directly from online databases (Capital IQ, Mergermarket, Pitchbook, GF Data, Prequin… the list goes on). However, we also get a significant amount of information from magazines, tradeshows and newspapers that are invaluable.
This information is almost always incomplete, if not downright contradictory, and must be pieced together from a variety of sources and verified, due to old data or simply incorrect data. Becoming efficient at sifting through all the junk to find that one gem takes a significant amount of practice and experience, as well as knowledge about the industry you are working in. My role is to take this information and condense it all into an easy to understand, simple, yet useful nugget of data.
The perfect example of this occurred about a month ago. I was researching a private company, a strategic acquirer that we were considering as a potential buyer for one of our clients, a family-owned niche manufacturer. I found the buyer in multiple databases, but there was a glaring difference between the reports I was getting. The owner and his son had the same name with the father being Senior and the son being Junior. In one report, Junior was listed as President, with Senior as CEO; however in another report someone else was listed as president and Junior was not listed at all. With further research, I found that Junior had been the President at one point, but his current position was with a competitor as VP of operations. Seems pretty odd that Junior, who had an executive position in the company owned by his father, would just leave for a competitor!
I dug deeper, and discovered a lawsuit against the potential buyer dated a year ago. Junior had been accused of sexual harassment by an employee, and had settled outside of court. Three months later, he was working for a different company. Imagine what a disaster it would be if we had arranged a meeting between our client and the prospective buyer, with no clue about this situation beforehand. That’s why a solid research team is essential in middle-market banking.
And while using an outsourced research team can look inviting, those firms are not always competent. I recently received a call from a firm in India offering outsourced research for investment banks at a discount compared to having analysts and associates on staff. I told them we’re a middle market investment bank that advised private and family-owned businesses. As a sample of their work, he sent me a PowerPoint with detailed information on a large PUBLIC company. Safe to say, we are not using their product!
I believe that having an understanding of where information is coming from is just as important as the information itself. If you are looking to sell your business, take a second to see what type of research capabilities each investment bank you are considering can offer, and make sure they care about finding the most accurate and up-to-date information.