The investment banking community is involved with mergers in a number of ways:
1. They help arrange mergers
The bankers will identify firms with excess cash that might want to buy other firms, companies that might be willing to be bought and companies which might be attractive to others.
2. They help target companies develop and implement defensive techniques
Target firms that do not want to be acquired generally enlist the help of an investment banking firm, along with a law firm that specializes in helping to block mergers. Defensive techniques include:
(a) Changing the by-laws e.g require special resolution (75%) to approve mergers.
(b) Trying to convince the target firm's shareholders that the price being offered is too low.
(c) Raising antitrust issues between shareholders of the two firms.
(d) Repurchasing shares in an open market in an effort to push the prices above that being offered by the potential acquirer.
(e) Being acquired by a more friendly firm.
(f) Taking a poison pill (commiting economic suicide) e.g. borrowing on terms that require immediate repayment of all loans if the firm is acquired, selling off at a bargain the assets that originally made the firm a desirable target, heavy cash overflows in dividends, executive benefits etc.
3. Establishing a fair value
Investment bankers are experts that can help the firms determine a fair ratio of exchange that is beneficial (if possible) to both shareholders.
4. They help finance mergers
If the acquiring company has cashflow problems, then investment bankers will provide required finance for the merger.
They speculate in the shares of potential merger candidates and thereby make arbitrage gains.