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The Rise of Online M&A Deal Sourcing

What the growing adoption of online dealmaking means for the M&A industry

Tony Hill, Intralinks DealNexus
Tony Hill, Intralinks DealNexus

Readers over the age of 30 can recall a time in the 90’s when fledgling online dating websites were looked at with skepticism. After all, what self-respecting single lad or lass needed help from “The Internet” to find a suitable date? Fast forward 20 years, and one-third of married couples report having met online and, to state the obvious, the stigmas associated with finding Mr. or Ms. Right in the cloud – instead of the local pub – have fallen by the wayside.

Parallels can be drawn between online dating sites and emerging online deal sourcing technologies for M&A professionals. Online deal sourcing – the process of utilizing highly-secure, exclusive online networks to intelligently and, most importantly, discretely – find and engage the “right” buyers and/or actionable M&A opportunities – has been around since roughly 2007 and, with millions of connections already made on thousands of deals worldwide (with transactional value in the hundreds of billions), online deal sourcing is itself emerging from a similar “awkward” phase.

When the first online deal sourcing platforms started about six years ago, the majority struggled to get off the ground. Many investment bankers dismissed them as ineffective and not for suited for real dealmakers. Others decried them as thinly-veiled attempts at “dis-intermediating” them out of the business. On the buy-side, the reception was less harsh but not flattering either. Even though strategic and financial acquirers are always on the lookout for an edge in seeing more deal flow, they lamented the lack of participation and deal flow volume on these primitive networks.

Unsurprisingly, the early consensus was that online deal sourcing was not ready for prime time, and perhaps never would be.

Online Deal Sourcing Grows Up

But a survey commissioned by Intralinks in September 2013, titled “How Deals Get Done,” indicates that times have changed. The survey polled over 2,400 buy and sell-side M&A professionals around the world on attitudes toward, and usage of, online deal sourcing, and revealed that 40 percent of dealmakers have adopted online deal sourcing to supplement their already-existing deal processes. Of those, a startling 50 percent have closed a deal as a result of leveraging deal sourcing platforms. The survey also revealed that 70 percent believe online deal sourcing is already making the M&A industry more efficient.

Like online dating sites before it, the process of finding the right M&A opportunity online is maturing. And with tens of thousands of M&A professionals already signed up, many believe a key inflection point may have already been achieved. What is driving the rapid uptake? What does this mean for the industry? A good place to start is by examining some old stigmas associated with online deal sourcing which, slowly but surely, have begun dissipating.

The Fallacy of Disintermediation and Other Misconceptions

Whenever the topic of online deal sourcing comes up in articles, panels, conferences, etc., the subject of advisor disintermediation often follows, and for good reason. After all, countless empires have been built by cutting out the middle man. But most M&A practitioners – even those staunchly against online deal sourcing – acknowledge that the role of the dealmaker cannot be rubbed out by technology. Over the years, several technologies may have improved the quantitative aspects of the role, but the art of the deal will always be human in nature. Still, disintermediation always makes for a good conversation starter.

While disintermediation is a widely-acknowledged myth, a couple of other misperceptions about online deal sourcing regrettably are not, and persist to this day. Chief among them is that deal sourcing is not secure or discrete enough to meet bankers’ standards, and that bankers already “know all the buyers.” These arguments may have been valid in the early years of online deal sourcing but, today, they could not be further from the truth.

To begin with, online deal sourcing is just as secure and discrete, if not more, than existing practices for taking a deal to market. In a conventional deal process, all it takes is one errant email for a deal’s cover to be blown. Online deal sourcing platforms, meanwhile, do not even require confidential deal information to run their algorithms. In fact, they discourage it. With some basic, anonymous data points on revenue, profitability, industry and geography, the algorithm has everything it needs to generate an intelligent suitor list, instantly. From there, the M&A advisor can discretely share the deal with as few or as many recipients as they choose, if any at all.

Even less defensible is the argument that a banker can know all the buyers for a given deal. Barring a couple of unique situations – for example, an extremely massive deal that only has a handful of buyers globally, or a deal in an extremely niche, insular industry – it simply is not possible in today’s fast-paced, constantly-fluctuating global M&A landscape. That is not to say that an experienced advisor cannot successfully consummate deals with his or her already-existing network of buyers. However, such limited processes could easily miss out on other excellent buyers that were literally only a click away; such as buyers that could help accelerate an auction and drive up purchase terms.

Fortunately, with the online deal sourcing industry now fully consolidated, and as junior M&A professionals (Millenials, in particular) ascend up the organizational chart, the historical propensity to disavow online deal sourcing is quickly being replaced with a natural tendency to embrace it.

The Bottom Line: Higher Close Rates, Sea Level Rise in Deal Volume

Online deal sourcing is here to stay. The intelligent matching algorithms that fuel online deal sourcing platforms are based on user-submitted deals and investment criteria, not scraped from the public domain. As these networks continue growing, so too will their effectiveness and connective power. Better matching means shorter marketing timeframes to finding and engaging the right buyer – or set of buyers for an auction – which means shorter overall deal processes, freeing up precious analyst/associate hours to take on new deals or even scout for new ones.

Not only will online deal sourcing improve close rates but, because it can shave a few weeks (if not more) from the average middle market deal process, it will free up advisory firms – large and small – to take on clients they might not have otherwise have had the bandwidth to represent. Combine higher client counts with higher close rates and the logical outcome for the advisory community is clear: more tombstones and more fees.

For acquisitive corporations and private equity funds, the math is much easier. Online deal sourcing offers the benefits of a passive safety net – to make sure they never miss a perfect deal in their backyard – plus a suite of active tools to more effectively canvas micro-industries and geographies which, previously, may have been cost-ineffective to cover. If one is in the business of uncovering, evaluating, and acquiring companies, it may as well be free money.

Online deal sourcing may not be able to match the millions of dates and marriages created from online dating sites, but the way things are moving, it is poised to connect hundreds of billions of dollars on M&A deals.

Tony Hill is Director of Intralinks DealNexus, the largest, global online deal sourcing platform for mergers & acquisitions professionals. Prior to joining Intralinks, Tony was CEO and cofounder of PE-Nexus, a pioneer and leader in the online deal sourcing space. In 2013, PE-Nexus was acquired by Intralinks and re-launched as Intralinks DealNexus. Today, DealNexus makes millions of connections between M&A professionals around the world on thousands of live, actionable M&A opportunities. Before founding PE-Nexus, Tony was a Vice President at Cross Keys Capital, a boutique middle-market investment bank, and worked for Siemens AG Power Generation in Germany.

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IvySchmerken
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IvySchmerken,
User Rank: Author
1/2/2014 | 4:53:56 PM
re: The Rise of Online M&A Deal Sourcing
As your survey shows, online deal sourcing is gaining traction among M&A professionals. Despite fears of "disintermediation" from traditional deal makers, the millenials are embracing networks and trusting them with personal data, so why not M&A? Also, in a global economy it's impossible to know all the suitors and target companies that exist, so a database could be more efficient. Though an online match could occur, cutting out the intermediary, there is still the need for negotiation.
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