Abstract
The study examines whether prestigious investment banks deliver quality gains to their clients in a sample of 6,379 US M&A deals. It finds that acquirers advised by tier-one advisors lost more than $42 billion, whereas those advised by tier-two advisors gained $13.5 billion at the merger announcement. The results were mainly driven by the large loss deals advised by tier-one advisors. The evidence indicates that investment banks might have different incentives when they advise on large deals vs. small deals. The results imply that market share based reputation league tables, could be misleading and therefore, the selection of investment banks should be based on their track record in generating gains to their clients. The findings were consistent with the superior deal hypothesis as tier-one target advisors outperformed tier-two advisors and the existence of a prestigious advisor on at least one side of an M&A transaction resulted in higher wealth gains to the combined entity. Target advisors were able to extract more wealth gains for their clients, which led to higher combined gains at the expense of the acquirer.
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Notes
Investment banks and financial advisors are used interchangeably in the paper.
Source: Thomson Financial SDC database, M&A and Advisors Summary Report, Fourth Quarter 2006.
This is based on the assumption that managers seek shareholders value maximization as their main goal.
Other explanations for the lower premiums paid in small deals could be related to the possibility that smaller firms are more likely in distress, or their managers might accept lower premiums as part of an agreement with the acquirer management to keep their jobs etc…
April 22 represented the last date on which the data was available when I collected the sample.
Carter, Dark, and Singh (1998) show that continuous market share, three-tier market share rankings, and tombstone rankings are highly correlated for the IPO market.
Fuller et al. (2002) justifies the use of the 5-day window by the fact that after checking the accuracy of the SDC announcement date they find that for about 92.6% of a random sample of 500 acquisitions the date was accurate. However, for the remaining deals it was off by two days at most. I use the 5-day CAR for my analysis similar to Fuller et al. (2002); however, I also run the tests using other windows and found that my results are robust. Results and tables are available upon request.
I closely investigated the losses of In-House deals and found that they are mainly driven by deals completed by very large acquirers, those were Lucent Technologies, Cisco Systems, Intel Corp. and AOL. The abnormal dollar losses of those four acquirers reached nearly $145 billion during the sample period.
The ranking tables are available upon request.
For tier-one advisors’ clients, the mean premium paid in large deals was 100.8% while that paid in small deals was 42.42%. The difference was not significant as there were only 11 small deals advised by tier-one banks.
Similar to Moeller et al. (2005), over the 20-year period of the study, most of the losses (87%) were found to have taken place between 1998 and 2001. The aggregate losses accumulating from large loss deals between 1998 and 2001 reached nearly $757 billion created from 127 deals.
The remaining losses were created in In-House deals and Undisclosed advisor deals ($173 billion and $398 billion respectively).
Kale et al. (2003) followed another procedure that is: they ranked bidder’ wealth gains in ascending order and used each deal’s rank as their dependent variable. I used the same method and found that the results were robust.
The ranking tables are available upon request.
The number of observations in Model 2 is smaller than in Model 1 because the sample in Model 1 is a trimmed sample where 5% from both sides of the distribution of acquirer abnormal dollar gains are excluded; whereas in Model 2 only large loss deals are excluded.
The negative coefficient on the cash payment dummy may look contradictory to the standard M&A literature. However, it is worthwhile noting that such literature uses the CAR as a dependent variable, while this study uses the dollar gains which are a function of both the CAR and the deal size. Moreover, a univariate analysis of target mean dollar gains controlling for the method of payment shows that those gains are larger for mixed offers, than for equity offer which are also larger than for cash deals ($102.07 million, $68.94 million and 65.81 million, respectively).
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Appendix A
Appendix A
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Ismail, A. Are good financial advisors really good? The performance of investment banks in the M&A market. Rev Quant Finan Acc 35, 411–429 (2010). https://doi.org/10.1007/s11156-009-0155-6
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DOI: https://doi.org/10.1007/s11156-009-0155-6