When It Pays to Pay Your

Investment Banker:
New Evidence on the Role of
Financial Advisors in M&As
Presenter:
BISMA EJAZ

ABSTRACT
Researchers are giving evidence and proving that
top-tier advisors deliver high bidder returns
than non top-tier advisors
In PUBLIC acquisitions only!
Why?

Advisors' ability to identify synergistic

combinations (negotiating point between buyer
and seller) impacts price
Accumulate larger share of synergies for the
bidders

So they charge a high fee

Introduction
Mergers and Acquisitions- one of most
important activities in corporate finance
Bring about substantial reallocations of
resources within the economy
Investment banking industry dominated by
bulge bracket firms- top tier investment banks

Research Question
Top tier investment banks build up a reputation as
experts in capital market transactions which should
mean premium fees
However, prior empirical data fails to support this
reputation-quality relationship, reporting a negative
or insignificant relationship between bidder advisor
reputation and bidder returns.
Does the reputational capital mechanism fail?
If so, why do firms employ top tier advisors? Just to
ensure completion of deal? Why pay a high fee then?

 Researchers examine these questions and the

relation between reputation and quality and
price
Choosing a large and comprehensive sample of
US acquisitions in the period 1996 to 2009
Examine the different types of acquisitions to
check whether reputation is equally important in
all transaction of M&As (public and private)

 Investment banks act in the best interest of

client because their own reputation is at stake.
Public acquisition are followed closely by the
market so investment banks are careful
Public acquisitions require more skill and effort
because:
Difficult to capture gains as bargaining power of
public targets is greater
There is increased disclosure, increased
regulations and approvals, deal complexity
There is dispersed ownership so no party to stand
behind liabilities for investment banker to arrange
for indemnification from the seller

 Researchers found out that reputation more

important in public acquisitions (take less time
and create synergies),
Top tier advisors are associated with higher
bidder returns in public acquisition,
Top tier chargers higher fee
No effect of reputation on bidder returns in
acquisition of private firms!
Also find out about the in-house acquisitions
and why do firms choose this option

Literature: Theoretical framework

The relationship between reputation, quality,
and price was first modeled in the classical work
of Klein and Leffler (1981), Shapiro (1983), and
Allen (1984).

Literature: Financial Advisors

Bowers and Miller (1990) show that top-tier
advisors are able to identify deals with higher
total synergies, but not able to provide a larger
share of these synergies.
On the other hand, Michel, Shaked, and Lee
(1991) find that deals by a relatively less
prestigious advisor outperformed deals advised
by top tier advisor

Sample and Data

Collected sample of acquisitions announced
between 1996 and 2009
Both successful and unsuccessful deals
Transactions values and payment methods
included
Bidders are US public firms while targets are
both private and public
Original sample was 18865 which came down to
829 deals (full disclosure and data available)

Top-tier Firms
Goldman Sachs
Merrill Lynch (now Bank of America Merrill
Lynch)
Morgan Stanley
JP Morgan
Citi/Salomon Smith Barney
Credit Suisse First Boston
Lehman Brothers (now Barclays Capital)
Lazard

Correlation
Process of establishing a relationship between
two or more variables
CARs: Cumulative abnormal returns
Abnormal return= Actual Expected Return

size= bidder
market value of
equity
Deal value= value
of transaction

Why does reputation matter in public deals

only?
Firstly,
visibility and full disclosure leads to greater impact
on reputation of investment bank so the have to
provide superior services public takeover
situations.
Public acquisitions are widely observed by the
market, with most prominent deals extensively
covered by the business press and the media.
In contrast, acquisitions of private targets are
typically announced only when completed

Continued
Secondly,
Public acquisitions demand more skill and effort
(slide 6)
Superior services provided

Why Dont Top-Tier Banks Consume the

Entire Surplus They Create?
If banks leave no benefit for the client firms,
they will not employ them
There are a number of investment banks and
they compete on prices so taking a percentage of
surplus enables them to compete with the other
banks on the basis of fee they charge

In-House Acquisitions
Where the bidder does not employ an
investment bank
Why?
Control every part of the transaction

Conclusion
Contrary to prior findings, this paper provides
new evidence
top-tier advisors are associated with higher
bidder gains in public acquisitions
the improvement in bidder returns comes from
the ability of top-tier bankers to identify mergers
with higher synergies and to get a larger share of
synergies
Impact of reputation greater in public acquisitions

In response to the questions raised in the

introduction:
1. the reputational capital mechanism does
function in the market for merger advisory
services
2. the completion of an M&A deal is not the main
motivation of a top-tier investment banker;
3. Paying for a top-tier financial advisor in public
acquisitions is value enhancing.