Expanded use of investment bankers by public company boards.

To maximize long-term shareholder value, public companies are constantly seeking growth--either organically or through acquisition. On the other hand, those companies not able to reach the holy grail of long-term growth may look to sell themselves to the highest bidder. In either case, public company boards that are actively seeking out deals have long sought the advice and guidance of investment bankers as they move through the process of identifying and executing strategic M&A transactions.

In contrast, smaller public companies faced with some unexpected, opportunistic deal--an unsolicited buyout offer, or the sudden chance to buy a competitor--have often treated the use of an investment banker as an afterthought. It happens time and time again. A CFO, board member, or legal counsel calls with, "We need a fairness opinion for the board to vote on our pending deal. The board meeting is in two weeks. Can you meet our deadline?"

Often the deadline can be met. But what if the banker concludes that the terms of the deal are not fair? No opinion. The deal stalls. It may die! A lot of time and money has been wasted. A lot of heartburn could have been avoided by bringing in the financial advisor much earlier in the process.

Fortunately, given the current environment of heightened regulatory and shareholder scrutiny, that is exactly what has been happening recently. There is an apparent trend towards much earlier engagement of investment bankers by smaller public companies. Rather than asking for a fairness opinion on a deal that is in its final stages, boards and special committees are looking for a broader scope of service, and asking their investment bankers to act in a much longer term, multi-phased, advisory capacity.

In one example the acquiring company may potentially issue a large number of shares to purchase the target company. While the board members initially set out looking for a fairness opinion on a transaction they had already been contemplating, that assignment was ultimately subdivided into multiple phases. First, the board wants some initial due diligence and preliminary analysis to determine whether, in a broad sense, a deal is likely to be feasible. Assuming the deal appears feasible, board members are looking for a more detailed analysis of relative values and deal structures. After that, the special committee wants assistance with the negotiation process. And finally, if the parties can arrive at an acceptable deal structure, a fairness opinion will be issued. So rather than rush through a two week analysis and opinion, the buyers are taking the time to ensure not just that the price is fair, but that they have been guided by an M&A expert throughout the entire process. And this is just one example of what appears to be a broader trend.

While this wider range of services has long been provided by investment bankers who are sourcing deals for their clients and collecting contingent fees upon success, it represents a recent development for smaller public companies that are looking for help in navigating a particular deal that they are already considering. Public company boards are under intense pressure and scrutiny to ensure that they are acting independently and in the best interest of their shareholders. Making full use of their financial advisors in M&A transactions can only serve to further that goal.

Todd A. Kaltman is a Managing Director with the Century City office of Duff& Phelps, LLC. With more than 600 employees serving clients worldwide through 15 offices in the United States and Europe, Duff & Phelps, LLC is a leading independent investment banking and financial advisory firm.