The implication is that they typically can't add $200,000 of value to a 10MM deal. One possible reason is that the 8-figure deals are pretty specialized and obscure, and it's hard for a banker to know the right valuation for the company.
I have never done or participated in an acquisition that large, but my intuition was also that 1-2% on an 8-figure deal is cheap. Because, I reasoned, that might be a 6-figure deal with a different group of people. I think the problem is that you state "$200,000 of value to a 10MM deal". But "10MM deal" isn't what an acquisition starts out as. It could be a $2M acquihire or $10M deal or $100M package by a competitor who is scared s$%#less of your disruption paying in stock that they fear will lose 60% of its value (along with the rest of their company, worth billions) if they don't turn the tides soon on this disruption, by buying an innovative upstart. They could fear they're facing a very binary scenario and don't see any other way forward.
These deals are not "$2M deals", "$10M deals", and "$100M deals" deals respectively, until they happen, and 5-10% either way probably matters a lot less than which of these scenarios you end up living in.
This is similar to why it's not expensive to pay a CTO 50% equity of your "$2M business". Because it's not really a "$2M business" it's a "$2M business" or "$0 business" or "$5M business" or "12M business" (or the sky is the limit) and the CTO will be quite crucial in determining which one happens.
This is counterintuitive. Put another way, Sergey Brin and Larry Page didn't each pay the other guy $30 billion to do what the other guy did in 1998. (Based on their respective net worth today, and the fact that they had to give up half their company to the other guy in 1998 instead of keeping it all.)
Because if they hadn't had the other guy, each of them who is now worth $30B wouldn't be worth $60B, but rather most probably $0.
So saying "2% of a 10MM deal" is like saying "50% of a $374B company."
It doesn't work that way. I certainly wouldn't mind giving 15% to someone who had closed a few $100M deals and wanted to help me close mine. And it would be a steal.
"The implication is that they typically can't add $200,000 of value to a 10MM deal. One possible reason is that the 8-figure deals are pretty specialized and obscure, and it's hard for a banker to know the right valuation for the company."
What makes you think that all investment bankers and all negotiators are equal and it only has to do with "knowing the right valuation"? And that there is generally no situation where they can provide value for what they charge?
This sounds similar to consumers who assume that a real estate agent getting paid 5% isn't providing any value at all vs. simply showing a property and putting it in a MLS. Definitely true in some cases but definitely not true across the board. Or even close.
Having spent a couple of years in M&A and capital markets, I can attest that this is absolutely true.
In most cases, most top M&A buldge bracket firms and even top M&A boutiques, will look to work on sell-side deals that are $500mm+. Probability of a successful close is so low and opportunity cost is high (process is long and it's a ton of work), it rarely makes sense to look at something unless the fee opportunity is in millions.
Simply put, $10mm deal doesn't move the needle for top firms. There are exceptions, of course, primarily for relationships and future business potential, for example when spinning off a smaller division of a larger business or when dealing with financial sponsors.
"I just believe Kan when he says that the ones who are actually worth their fee won't work on a 10MM deal."
That really sounds a bit like "anyone good works for XYZ" (pick some of the usual suspects) or "all top lawyers work for big NYC law firms and have made partner" (or similar .... you get the point). Or the local business man in a no name town, that nobody has ever heard of, couldn't possibly be as sharp as a guy operating where all the action is. Why would anyone be in Bentonville if they can be in NYC or Chicago?
You are making an association between what a top firm does and how they evaluate opportunities and what an individual who happens to work somewhere else (for some particular reason perhaps he or she can't move on to "bigger and better things") and what their actual skill level is which are two different things.
As a generality of course it can be true and a shortcut. But making an assumption that someone couldn't possibly provide value (assuming they don't harm a deal of course) I don't agree with.
