An analysis of advisor choice, fees, and effort in mergers and acquisitions

Abstract

This paper investigates the choice of financial advisors in mergers and acquisitions, the fees that the targets and the acquiring firms pay to these advisors, and the speed with which advisors complete transactions. Our sample includes 5337 merger deals announced during the period January 1995 to June 2000, that involved publicly traded targets and acquirers. We find that top-tier advisors are more likely to complete deals and to complete them in less time than lower tier advisors. However, the synergistic gains realized by the acquirers declined when top advisors were used. We also find that contingent fees play a significant role in expediting the deal completion. Surprisingly, we find that deals that are initiated by the advisors do not seem to take less time to complete. Our results suggest that the payment of larger advisory fees do not play an important role in determining the likelihood of completing the deal, but they are associated with greater acquisition gains realized by the acquirer. In addition, these synergistic gains are also associated with the switching by acquirers of their financial advisors within the same tier. D 1 As discussed in Hunter and Walker (1990), these benefits include the provision of an effective mechanism by which merger property rights are assigned, the provision of insurance against the sampling error incurred by firms seeking merger partners without the assistance of an advisor, and the provision of insurance against suits brought against merger principals under the judgement rule, among others.2 These first-tier (rather than second-tier or third-tier) investment advisors include First

What drives investment bank performance? The role of risk, liquidity and fees prior to and during the crisis

“…He suggests that the amount of investment banking fees is an accurate reflection of an investment bank's quality. Investors are willing to pay higher fees to more reputable investment banks than to less reputable ones (Beatty and Welch, 1996;Hunter and Jagtiani, 2003;Fang, 2005;Ismail, 2008).…”

How Accounting Firms Compete for Financial Advisory Roles in the M&A Market

“…Rau (2000) documents no association between the quality of investment bank and acquirer announcement returns. In line with these, McLaughlin (1992), Hunter and Jagtiani (2003) and Ismail (2010) report higher premia paid and lower announcement day returns for bidders using tier-one investment bank advisors, as opposed to the tier-two. For acquirers advised by tier-one advisors, the loss in the market value on the announcement day is more than $42 billion (Ismail 2010).…”

“…We control for the previous relation between the bidder and the advisor as acquirers are more likely to retain better performing advisors. We also control for the size of the advisory team as larger teams may benefit from the synergy of expertise between partners in the team and can ensure better risk sharing and monitoring, which can produce better outcomes (Hunter and Jagtiani 2003). Previous research documents higher price reaction for larger transactions (Golubov et al 2012) and for private targets (Fuller et al 2002), so we control for size of the deal and whether the target is a private firm.…”

Financial advisors, financial crisis, and shareholder wealth in bank mergers

“…In more complex transactions, investment banks offer valuable functions in reducing asymmetric information (Hunter and Jagtiani, 2003).…”

“…A growing body of literature has examined the effects of financial advisors in mergers and acquisitions (e.g., Servaes and Zenner, 1996;Hunter and Jagtiani, 2003;Ismail, 2009;Schiereck et al, 2009;Wang and Whyte, 2010;Golubov et al, 2011). For 2 Rau (2000) classifies the top five banks in any signal year as first-tier banks.…”