Sell Side and Buy Side in M&A Markets

Sell side M&A typically involves a company or individual looking to divest themselves of a business or asset, while buy side M&A involves a company or individual looking to acquire a business or asset. Understanding the nuances of each approach can help you make informed decisions when it comes to M&A transactions. The “buy-side” refers to the firms that invest in securities (e.g. stocks, bonds, etc.), like private equity funds, pension funds, and investment managers. To illustrate the differences between buy-side and sell-side analysts, imagine sell-side vs buy-side the interactions between two hypothetical firms.

How Do Buy-Side and Sell-Side Analysts Collaborate With Other Professionals in the Financial Industry?

The accurate reading and acknowledging of their synergetic powers is the essence of coping https://www.xcritical.com/ with complicated financial circumstances. Considering such differences and helping them to come together with a common purpose, players can better manage challenges and make faster use of emerging trends in the investment banking industry which is constantly changing. Because private equity funds make money by buying and selling securities, they are considered to be buy-side.

Key differences between buy side and sell side analysts

Money from Growth Equity Investors will help the business grow (i.e., scale) as rapidly as possible. In my experience, most people who work in finance can’t really explain what they do to their families. For outsiders, it’s even harder to figure out all of the different roles and moving pieces in this world. As a founder, navigating an M&A transaction is less intimidating if you understand the dynamics of the parties involved. Learn about the interests and strategies of the parties operating on the buy-side vs. the sell-side of a transaction. Another example of a successful buy side M&A deal is the acquisition of Instagram by Facebook in 2012.

Advantages and Disadvantages of Buy Side M&A

They make investment decisions and manage their clients’ money, and do their best to grow the firm’s portfolio. Sell-side analysts are those who issue the often-heard recommendations of “strong buy,” “outperform,” “neutral,” or “sell.” These recommendations help clients make decisions to buy or sell certain stocks. This is beneficial for the brokerage because every time a client makes a decision to trade stock, the brokerage gets a commission on the transactions. You see this especially with the large, multi-manager hedge funds and private equity mega-funds, but it happens even at smaller/newer places. This happens due to the performance fees and carried interest in private equity and hedge funds; in other areas, it’s a closer call because of low/no performance fees. They are correct that the most senior, top-performing buy-side professionals earn far more than Managing Directors in areas like investment banking and sales & trading.

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As the job descriptions suggest, there are significant differences in what these analysts are paid to do. Sell-side analysts are mainly paid for information flow and to access management and other high-quality information sources. Compensation for buy-side analysts is much more dependent upon the quality of recommendations that the analyst makes and the fund’s overall success.

Buy-side vs. Sell-side in M&A Investment Banking

Their primary responsibility is to assess companies and conduct equity research, evaluating factors like future earnings potential and other investment metrics. These analysts frequently issue recommendations on stocks and other securities, typically in the form of buy, sell, or hold ratings, which they communicate to their clients. The term on the buy side in the realm of investment banking refers to the side that is dedicated to the acquisition of securities for purposes of investment. It contains a wide spectrum of participants as a group of institutional investors ranging from pension funds, mutual funds, hedge funds, and private equity funds that are involved. On the other hand, sell-side research is produced by investment banks, brokerage firms, and other financial institutions that sell investment products. Sell-side analysts generate reports, recommendations, and market analyses intended for a broad audience, including institutional and individual investors.

Sell Side vs Buy Side: What’s the Difference?

One of the most high-profile activities of the sell-side in the stock market is in initial public offerings (IPOs) of stocks. Underwriters are typically brokers, who act as a buffer between companies and the investing public, and who market and sell those initial shares. The market makers are a compelling force on the sell side of the financial market. On the Sell Side of the capital markets, we have professionals who represent corporations that need to raise money by SELLING securities (hence the name “Sell Side”). The Sell-Side mostly consists of banks, advisory firms, or other firms that facilitate the selling of securities on behalf of their clients.

• Conversely, “sell-side” firms sell securities and investment opportunities to the buy-side.
• On the other hand, sell-side research is produced by investment banks, brokerage firms, and other financial institutions that sell investment products.
• Buy-side strategic acquirers and investors want to improve the value of their company and fill gaps in operations, product offerings, or geographical locations to complement their existing offerings.
• Private equity firms seek to invest in and grow a company to either operate it for profit or sell it in the future for a return on investment.
• Meanwhile, investment banks often pitch to buy side clients, which doesn’t always materialize into deals.
• Investment banks dominate the sell-side, with the largest being Goldman Sachs and Morgan Stanley.

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The big difference here is that these investors buy units of ownership (either Shares of Stock or Units of Debt) with a goal of selling them later for a higher price (and possibly collecting some cash flow along the way). Similarly, this conflict arises for banks who advise exclusively on the sell-side, but who offer their services to private equity firms on the sell-side. When advising founders on the sell-side, such a bank has an incentive to favor private equity buyers whom they could run a larger secondary transaction for a few years down the road. In many cases, investment banks offer advisory services for either side of a transaction, meaning in one transaction they represent a seller and in another a buyer. Something less obvious is that a given party can operate on the buy-side or the sell-side of a transaction, depending on the circumstances and timeline. For example, a private equity firm who acquires shares in a company on the buy-side will eventually move to the sell-side when the time comes to liquidate their investment.

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Companies can borrow as much as 90% of the equity needed for the deal, putting up as little as 10% of the deal price. It is common for an organization to initially implement a contract lifecycle management software solution for one high-priority use case. Once the return on investment is realized, or the enterprise-wide value of contract management becomes apparent, broader usage is considered. Whatever your implementation approach, leverage the benefits of contract lifecycle management software not limited to a buy-side or sell-side focus, so you are prepared for future requirements. Buy-side contracts arrange to obtain goods or services from the seller in exchange for some consideration, such as money. The staff responsible for managing buy-side contracts at your organization most likely work in procurement, outsourcing, vendor management, facilities management, or some related department.

However, Goldman Sachs also has some buy-side arms, such as Goldman Sachs Asset Management. In order to prevent conflicts of interest between the buy-side and sell-side, the two bodies are separated by a Chinese wall policy. These regulations require a clear separation between research and investment banking activities, leading to more objective, unbiased research that buy-side firms can safely rely on. For example, MiFID II requires buy-side firms to pay for sell-side reports, which ultimately pushes sell-side analysts to produce more valuable and impactful research.

In a typical deal, a VC takes a small (or ‘Minority‘) ownership stake which typically ranges from 10-25% of the company. Within a bank, the Investment Banking division typically offers advisory services for Mergers & Acquisitions and Restructuring; and with the support of Capital Market teams, helps companies raise Debt and Equity capital. Investment Banks, on the other hand, provide a variety of services that enable Buyside (and Company) transactions to occur. In the World of Finance #4 article in this series, we explore the services they provide in more detail.

This process completes the cycle of capital flow in financial markets, where the sell-side facilitates the issuance and distribution of securities to meet corporate financing needs. Consider an asset management firm managing a fund that finances alternative energy companies for its high-net-worth clients. The portfolio manager of the buy-side firm would actively evaluate opportunities to invest these funds into the most promising businesses within the industry. One day, the vice president of equity sales at a leading investment bank or private equity firm contacts the portfolio manager, informing them about an upcoming IPO by a prominent alternative energy company.

Buy-side firms and specialists work with the acquiring company to ensure it gets the most beneficial conditions during the transaction. One notable gray area is “traders,” who are considered sell-side but they do actively participate in the market’s asset buying and selling. However, it makes sense when you consider that most sell-side traders are doing “market making,” which is ultimately a service for their buy-side clients who are often on the other side of trades. The sell-side of the financial market is responsible for creating, promoting, and selling traded securities to the general public.

The buy-side is said to be better when it comes to making money, as it gives you the opportunity to earn more, especially when the investments generate high returns. This appears to be more lucrative compared to earning a commission on sales on sell-side M&A. Sell-Side Quants create tailor-made securities and hedge complex portfolios for their clients. The math required for these types of positions usually is the one to be found in the curriculum of a Masters’s in Financial Engineering. These programs cover Ordinary Differential Equations, Partial Differential Equations, Stochastic Calculus, and continuous-time modeling.

However, Bond investors can also wait until the bond comes due (Matures), and then the borrower of the Bond is required to pay back the full value (Principal or Face Value) of the bond that was originally borrowed. So, if someone tells you they work in ‘Private Equity’, they are likely assuming that you know that this means LBO (aka Buyout) fund. For more on the distinctions between Venture Capital, Growth Equity, and Private Equity, check out the World of Finance #3 article. Private Market Investors (broadly called ‘Private Equity’) buy and sell ‘Private’ interests in companies ranging from small stakes to full company ownership.

In short, buy-side analysts have “skin in the game” because their investment thesis is not merely a recommendation, but rather, a decision with real monetary consequences. For those who are still deciding whether they should be on the buy-side or the sell-side, you may want to know how you can earn money should you choose to be on either one of these sides. You either earn money as an investor yourself or as the agent of an investor/corporation, and therefore, through salary and commission. In the long run, you have a higher earning potential as an investor, rather than as an agent. These quants tend to have a general knowledge of data science, econometrics, time-series modeling, and machine learning.

While M&A practitioners are looking for a relative rebound of deal activity in 2024, let’s recall the roles and responsibilities of each side of M&A investment banking. The buy-side vs. sell-side distinction in M&A refers to firms that sell or purchase products like stocks and bonds. For those on the sell-side, an analyst’s job is to entice investors to purchase these products, while those on the buy-side utilize capital to procure these assets for sale. Sell-side analysts require strong communication skills to present their research and recommendations to clients effectively.

The sell-side firms are considered ‘market-makers’, and they provide liquidity for the capital market. The sell side is an indispensable ingredient in all financial systems, being a provider of unique services to the last but not the least envisaged market participant. Sell-side entities including investment banks and brokerage firms do an extraordinary job in promoting new financial products, presenting analytical research reports, and executing trades for clients. These operations benefit not only buy-side institutions but also facilitate smooth functioning and competitive pricing for private investors. A sell-side analyst works for a brokerage or firm that manages individual accounts and makes recommendations to the clients of the firm. A buy-side analyst usually works for institutional investors such as hedge funds, pension funds, or mutual funds.

As part of the IPO service, the banker will find buy-side investors (e.g. pension funds, hedge funds, etc.) to purchase the securities in the IPO transaction. Brokerage firms, investment banks, or research firms generally employ sell-side analysts. Therefore, their compensation is usually more stable and less performance-based than that of buy-side analysts.