Difference Between Buy Side vs. Sell Side M&A

Industry
Last updated:
August 3, 2022

The global financial markets have witnessed an uptick in merger & acquisition (M&A) transactions in recent years, with projections indicating this activity will continue to increase for the foreseeable future.

  • Between 2005 – 2009, the average number of M&A transactions per year was 13,500.
  • From 2014 – 2018, that average increased to about 21,500.

Understanding the varying roles of buy side versus sell side M&A is crucial in achieving a nuanced perspective on how these strategic transactions fit into the global financial market. Still, many people fail to grasp a complete comprehension of the function of each side. Here's a full overview of buy-side vs. sell-side M&A and the particulars of origination strategy.

Difference Between Buy-Side vs. Sell-Side in M&A

Before going into the specifics of buy-side versus sell-side within the M&A sector, it's important to understand these two roles within finance.

Generally, the sell side is made up of investment banks or advisory firms that assist companies to sell securities to the buy side. The buy side is made up of institutional investors. At times, investment banks also conduct activities on the buy side, but this is generally the exception, not the rule. There are also various other firms that participate in the buy side but are less relevant when discussing the market as a whole.

While we are focusing on the difference between buy-side and sell-side in M&A, it is important to note these two sectors within the financial services industry are not exclusive to M&A transactions. Sell-side firms provide various services to companies interested in selling securities (debt and equity), most notably raising awareness and then facilitating these strategic transactions.

6 Key Institutional Investors Types

Institutional investors make up the buy side of securities transactions and include several key actors with which you are probably familiar:

  • Mutual Funds: Mutual funds are a way for investors to pool their money together to invest in various securities. These funds are operated by money managers, whose goal is to create capital gains on the pooled money according to the fund’s prospectus.
  • Hedge Funds: While similar to a mutual fund where investors pool together money, hedge funds are far more aggressive and risky with their strategies and aren’t nearly as regulated. Hedge funds also typically have a much higher minimum investment requirement than mutual funds.
  • Pension Funds: Aptly named, pension funds are funds through which retirement income is gained for pension plans set up by employers, unions, or other organizations. Much like mutual and hedge funds, assets are pooled among the investors, and the fund is usually managed by a professional third-party.
  • Sovereign Funds: State- or government-owned investment funds are known as sovereign funds. Most are funded by revenues from exports or foreign-exchange reserves, and funds may be kept in a central bank, though they are usually invested in the global market.
  • Private Equity Firms: These firms are generally a collection of investors — both institutional and individual — who create portfolios of private companies they have invested in or, in some cases, outright own. Private equity firms are also known to buyout or take-private public companies.
  • Private and Public Companies: While both private and public companies can purchase securities — sometimes in the form of an acquisition — most often they are representing the sell side of the market here. After all, the shares being bought by the rest of the actors in this list are being sold by the private and public companies in question.

When looking at M&A transactions specifically, there are several key features worth noting.

7 Common Types of M&A Transactions

Mergers and acquisitions refer specifically to the transfer or consolidation of company assets. There are several key types of transactions that make up the M&A sector:

  1. Merger: When two companies combine
  2. Acquisition: When one company purchases a majority stake in another
  3. Consolidation: When two or more companies combine to create a new firm
  4. Tender Offer: When a company or investor purchases all the outstanding stock of a company
  5. Acquisition of Assets: When a firm purchases a company’s assets
  6. Management Acquisition: When the company’s management leadership purchases the company from the shareholders
  7. Acqui-hiring: When a company or firm acquires a company largely to hire its employees rather than acquire its product

Sell-Side Role in M&A Transactions

For the sell side, there will always be an investment bank or advisory firm facilitating the transaction. This role would also apply to a merger or consolidation, where the facilitator would represent the sell side outright.

The 4 major roles of the sell side in an M&A transaction include:

  • Creating awareness about the deal from the outset and attracting specific financial buyers (usually private equity firms)
  • Providing advice on how to proceed with the M&A transaction to both the sellers and buyers
  • Modeling and evaluating the company
  • Facilitating and mediating any potential deal

The Buy-Side Role in M&A Transactions

Buy-side roles vary depending on the transaction in question. Generally, a private equity firm is the most active player on the buy side of the M&A market.

When investing on the buy side, there are several key activities at play:

  1. Searching for potential M&A transactions through deal origination
  2. Modeling and evaluating the company to determine whether to go through with a transaction
  3. Researching and conducting due diligence on potential transactions
  4. Continued management of the portfolio

Private equity firms play such a prominent role in the buy-side M&A market because these companies are continuously making acquisitions. Most of their activities include determining whether to buy, hold, or sell their various assets to continuously generate profit through their portfolio.

Deal origination represents a critical part of buy-side activities for both sell-side and buy-side firms.

The Importance of M&A Deal Origination

In simple terms, deal origination is the process of uncovering potential M&A transactions.

Firms are continuously monitoring the market for potential acquisitions through research, lead generation, and communication with clients. However, origination strategy has witnessed a shift in recent years, as various FinTech companies have streamlined deal sourcing through technology.

Online deal origination refers to the virtual integration of deal opportunities into online platforms, which buy-side and sell-side companies access to uncover new opportunities in the M&A market. This innovation in technology has hugely impacted the investment banking industry.

The enhanced accessibility of deal management software is a major reason for increased activity in the M&A sector, with companies like SourceScrub streamlining the investment banking deal sourcing process for both sell-side and buy-side firms.  

Sources:

  1. Corporate Finance Institute. Buy Side vs Sell Side M&A. https://corporatefinanceinstitute.com/resources/careers/jobs/ma-buy-side-sell-side/
  2. Corporate Finance Institute. Deal Origination. https://corporatefinanceinstitute.com/resources/knowledge/deals/deal-origination/
  3. Deal Room. Sell-side vs Buy-side M&A: What is the Difference?.
  4. https://dealroom.net/faq/sell-side-vs-buy-side
  5. Deloitte. The state of the deal: M&A trends 2019. https://www2.deloitte.com/tw/en/pages/mergers-and-acquisitions/articles/2019-ma-trend.html
  6. Investopedia. Mergers and Acquisitions – M&A. https://www.investopedia.com/terms/m/mergersandacquisitions.asp
  7. Wall Street Prep. Sell Side vs. Buy Side.

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