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

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.     

The certification role of financial advisors in cross-border M&As

This paper examines the determinants of the choice of financial advisors and their impact on the announcement effects of US acquirers in cross-border M&As. Two hypotheses are tested: one pertains to the certification role of financial advisors, and the other relates to advisors' experience in target countries. Evidence supports the certification hypothesis in the selection of advisors, particularly in all-cash paid transactions where acquirers assume the entire risk of not realizing the expected synergy value. We also observe significantly more favorable shareholder reactions to the choice of US-domiciled advisors and foreign-domiciled advisors actively doing business in US markets. The fact that this positive reaction exists when the chosen US advisors do not have significant experience in the target country suggests how much US acquirers and shareholders value the certification role of financial advisors in cross-border M&As.     

Do boutique investment banks have the Midas touch? Evidence from M&As

We study whether the meteoric rise of boutique advisors in mergers and acquisitions (M&As) is justified by their buy-side performance. We find that acquiring firms represented by boutique advisors generate superior short- and long-run abnormal returns over those employing full-service advisors. This effect is mainly prominent in private deals, interindustry mergers, and deals involving inexperienced acquirers, where valuation uncertainty tends to be higher. Overall, our results reflect that acquirer shareholders benefit from boutique investment banks' high level of industry expertise and independent advice, supporting the rising demand for their financial advisory services.     

Are good financial advisors really good? The performance of investment banks in the M&;A market

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 $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.     

Top-tier financial advisors,expropriation and Chinese mergers & acquisitions

The empirical literature contains mixed evidence regarding the relationship between advisor reputation and returns in mergers and acquisitions (M&As). However, very few studies consider the detrimental effect of expropriation by controlling shareholders and value creation role of top-tier financial advisors. We revisit the role of financial advisors in M&As by examining whether and why top-tier advisors affect acquisition quality in the Chinese market, finding that they generate substantial value for acquiring shareholders, though value creation is lower for high expropriation-possibility acquirers. We also show that top-tier financial advisors help improve operating performance and reduce bid premiums. The results contribute to the takeover literature by shedding new light on the role of financial advisor in acquisitions.     

M&A Operations and Performance in Banking

This paper investigates whether M&A operations influence the performance of banks. Using a sample of 714 deals involving EU acquirers and targets located throughout the world over the period 1991–2005, we investigate whether M&A operations are associated with improved performance (using both standard accounting ratios and cost and alternative profit X-efficiency measures). Despite the extensive and ongoing consolidation process in the banking industry, we find that M&A operations are associated with a slight deterioration in return on equity, cash flow return and profit efficiency and with a marked improvement in cost efficiency. Hence, the improvements in cost efficiency appear to be transferred to bank clients. These changes in performance are directly attributable to the M&A operations, and would not have occurred in their absence. Moreover, these changes exhibit a particularly negative trend for cross-border deals to testify the importance of geographical relatedness in order to achieve better post-M&A performance. The environmental and bank-characteristics that make a deal successful or unsuccessful are finally identified.     

Cross-border acquisitions and employment policies

Using novel firm-level data on employment quality in an international sample of M&A deals, this paper investigates the cost-benefit trade-off faced by acquirers when providing generous employment policies. We find that shareholders react more positively to deal announcements by acquirers providing generous employee incentives when the deal is domestic, but negatively when the deal is cross-border. These effects are primarily driven by the provision of monetary incentives and are strongest for firms in skilled industries. We argue that generous employment policies increase synergy gains and reduce labor adjustment costs in a domestic takeover. In cross-border deals, however, costs associated with managing employee policies across borders and lack of opportunities for eliminating work duplication negatively affect acquirer returns. Nevertheless, we find that country-specific acquisition experience can mitigate these negative effects. Our results cannot be explained by country-level labor regulations or by target-level employment policies.     

The role of investment banks in M&A transactions: Fees and services

We examine the pricing and performance of advisers in M&A transactions. We determine adviser quality on the basis of a contemporaneous market share measure and show that high quality advisers receive higher M&A advisory fees. High quality advisers also complete deals faster, but their superiority is not reflected in increasing the likelihood of deal completion or delivering greater abnormal equity returns to their clients. It is well known that stock bids are received more negatively than cash bids, so we further partition the sample of acquirers by consideration type and examine the abnormal returns of each partition. We find that high quality investment banks are able to differentiate themselves by delivering greater abnormal returns to their acquirer clients in deals involving stock.     

Industry Expertise,Information Leakage and the Choice of M&A Advisors

This paper examines the impacts of M&A advisors’ industry expertise on firms’ choice of advisors in mergers and acquisitions. We show that an investment bank's expertise in merger parties’ industries increases its likelihood of being chosen as an advisor, especially when the acquisition is more complex, and when a firm in M&A has less information about the merger counterparty. However, due to the concerns about information leakage to industry rivals through M&A advisors, acquirers are reluctant to share advisors with rival firms in the same industry, and they are more likely to switch to new advisors if their former advisors have advisory relationship with their industry rivals. In addition, we document that advisors with more industry expertise earn higher advisory fees and increase the likelihood of deal completion.     

The impact of institutional investors on mergers and acquisitions in the United Kingdom

In this paper we investigate the impact of institutional ownership on UK mergers and acquisitions. We employ a comprehensive sample of M&As conducted by UK acquirers from 2000 to 2010, thus including a full cycle of peak and trough in M&A waves. We find that institutional investors increase the likelihood of an M&A to be a large, cross-border deal, opting for full control. Moreover, institutional ownership concentration and foreign institutional ownership increase the likelihood of cross-border M&As. In addition, we assess the influence of institutional shareholders’ investment horizon and find that while investment horizon have a negative influence in encouraging cross-border M&As, the presence of long-term investors encourages larger M&As. Finally, even after controlling for the 2007–08 financial crisis the market reacts negatively to the announcement of cross-border M&As.     

Revisiting acquirer returns: Evidence from unanticipated deals

This paper examines the implications of market anticipation of impending merger and acquisition (M&A) deals on the assessment of acquirer wealth effects through event study methods. We find evidence suggesting that prior studies have understated the gains to acquirers. The documented negative or near-zero abnormal returns to acquirers appears to be confined to sub-samples of highly-anticipated deals. By contrast, unanticipated acquirers gain significantly from M&As, achieving average cumulative abnormal returns of 5.4% to 7.5% in the seven days around the bid announcement. Empirically, we show that market anticipation partly explains (1) the documented low returns to acquirers, (2) the positive abnormal return spillover to close rivals of acquirers, and (3) the declining returns to serial acquirers across successive deals. Overall, our study provides evidence against several stylised facts and sheds light on the puzzle that M&A activity persists despite recurrent research findings that they do not create value for acquirers.     

Indexing mergers and acquisitions

We measure the efficiency of mergers and acquisitions by putting forward an index (the ‘M&A Index’) based on stochastic frontier analysis. The M&A Index is calculated for each takeover deal and is standardized between 0 and 1. An acquisition with a higher index encompasses higher efficiency. We find that takeover bids with higher M&A Indices are more likely to succeed. Moreover, the M&A Index shows a strong and positive relation with the acquirers’ post-acquisition stock performance in the short run and operating performance in the long run. After constructing three portfolios under a buy-and-hold strategy, we find that efficient portfolios with the highest indices earn higher equity returns and monthly alphas than inefficient portfolios with the lowest indices. Overall, our findings indicate that the M&A Index is positively associated with merger outcomes for acquirers.     

Earnings management of target firms and deal premiums: The role of industry relatedness

This paper contributes to the merger and acquisitions (M&A) literature by providing evidence for the role of industry relatedness in the association between target firms' earnings management (EM) before the deal and the premium offered by the acquirer. We argue that familiarity with the industry's policies and practices is a crucial factor that helps acquirers to see through targets' EM. Our evidence supports this prediction in relation to accounting manipulation as we observe that the income increasing accrual manipulation of the target results in significantly higher premiums offered by acquirers in interindustry deals, which is not the case when targets and acquirers belong to the same industry.     

The effect of cultural and institutional factors on initiation,completion, and duration of cross-border acquisitions

We study the effect of cultural and institutional distances on the probability that a firm from an acquiring country announces an acquisition of a firm in a target country (initiation), the probability that an announced deal is completed (completion), and the average time it takes to complete an acquisition (duration). We find that culture plays a decisive role in deal initiation. Completion and duration of a deal is largely unaffected by the cross country cultural and institutional differences and depends on deal level characteristics. We find a higher probability for acquirers to hire Top-tier advisors when they initiate deals in countries with higher cultural differences. We also find that use of Top-tier advisors by acquirers increases the probability of completion of the deal.     

The informational consequences of good and bad mergers

We study the information production dynamics in financial markets in response to Mergers and Acquisitions (M&As) announcements. We find that acquirers with low levels of pre-announcement stock price informativeness experience a substantial increase in their corresponding post-announcement stock price informativeness in response to positive Cumulative Abnormal Returns (CAR). We show that this increase is due to the enhanced prospect of deal completion. By contrast, high levels of acquirer pre-announcement stock price informativeness limit traders' incentives to search for, and acquire, new information. We also find that similar dynamics apply to the changes in acquirers' analyst coverage. Emphasizing the important role of information acquisition costs in influencing informed trading, a positive acquirer CAR increases the acquiring firm's post-announcement stock price informativeness in M&As involving public rather than private and subsidiary targets. Overall, we show that M&As have important informational consequences beyond their immediate effects on stock prices.     

Determinants of M&A success in the European insurance industry

This research analyzes the success of mergers and acquisitions (M&A) for European acquiring insurers using a stock market perspective. In contrast to previous papers that use an event study approach, our analysis is based on the stochastic dominance methodology, in which we analyze short and long term capital market reactions following an M&A announcement. In addition, we examine firm- and transaction-specific determinants associated with superior M&A success. Using a sample of 102 European insurance M&A transactions over the period 1993–2009, our results indicate that acquiring insurers are second-order dominated by their benchmark portfolio in the short term. In the long run, we find no evidence of stochastic dominance compared to their non-acquiring counterparts. Moreover, we find that geographically diversifying acquirers are rewarded by the market, and that transactions in which the acquirer and target have a business relationship before the M&A announcement outperform transactions without pre-M&A participation in the short-term. Finally, we detect a positive relationship between cash payment and acquirers’ M&A success.     

Acquisitions and the cost of debt: Evidence from China

A large body of literature has examined the effect of mergers and acquisitions (M&As) on firm valuation, and generally find that M&As reduce acquirers' shareholder value. However, relatively little is known about the effect of M&As on the pricing of corporate debt by debtholders, especially for firms in less developed countries. Using a sample of Chinese listed firms with outstanding bonds from 2007 to 2020, we find that the cost of debt is lower for acquirers than for non-acquirers, and that the effect of acquisitions in reducing cost of debt is more pronounced for firms from provinces with less developed markets, for private firms, and for firms undertaking cross-province acquisitions. Our results are robust to a series of robustness checks that address various endogeneity concerns, including the use of a matched-sample approach, the use of the Heckman two-stage model and a change analysis, the control for acquirers' pre-acquisition bond yield spread, and the exclusion of acquisitions of publicly listed targets. Our analyses of provincial institutional factors show that the relationship between M&As and cost of debt is moderated by government relations to market, private economy development, and the development of market intermediaries and legal environment. We further document that acquirers have lower default risk during the post-acquisition period because of a coinsurance effect, and that acquirers attract more analyst following and investors after acquisitions. Overall, our results indicate that acquisitions can reduce cost of debt through reducing firms' default risk and information risk, and that institutional factors matter for the effect of M&As on the cost of debt.     

Liquidity and information asymmetry considerations in corporate takeovers

ABSTRACT

We examine how stock market liquidity and information asymmetry considerations influence the wealth effects of Mergers and Acquisitions (M&As). We present a simple model predicting that M&As of listed targets that have relatively illiquid stocks are profitable for acquirers due to (a) the weak bargaining power of the targets’ shareholders, and (b) the limited information asymmetry concerns when evaluating takeover synergies. Our results show that cash-financed M&As of listed targets that have relatively illiquid stocks are associated with an increase in acquirer risk-adjusted returns. These gains are equivalent to those realized from comparable private target M&As. When engaging in stock-financed listed-target M&As, acquirers with liquid stocks enjoy significant gains when the targets have relatively illiquid stocks. This result holds especially when the deal is announced during periods of deterioration in the overall stock market liquidity. Lastly, we find that liquidity considerations affect the acquirer’s choice of the target firm’s listing status, as well as the M&A method of payment.     

Economic policy uncertainty and cross-border mergers and acquisitions

We examine the impact of policy uncertainty on cross-border mergers and acquisitions (M&As). Using a sample of 23 countries worldwide over the period from 2003 to 2016, we provide evidence that when a country has high policy uncertainty, the volume of inbound acquisition decreases whereas the total number of outbound deals increase significantly. Policy uncertainty also encourages acquirers to use stock as a method of payment and offer lower premium to targets. We also find that the percentage of full control cross-border M&A deals is negatively correlated to the level of policy uncertainty. Further evidence suggests that policy uncertainty complicates the takeover process by increasing the probability of withdrawn and pending deals as well as requiring longer time periods to complete deals.     

Can Stock Markets Predict M&A Failure? A Study of European Transactions in the Fifth Takeover Wave

In this paper we develop various measures of M&A failure for an intra‐European sample during the fifth takeover wave: inferior long‐term stock performance, inferior operating performance, and target divestment. After documenting the extent of M&A failure, we test the relation between short‐term abnormal returns at deal announcement and M&A failure. We examine a sample where listed bidders acquire listed targets (267 deals) as well as privately‐held targets (336 deals). Our results indicate M&A failure rates up to 50% in both samples. When acquirers and targets are listed, lower M&A announcement returns are consistently and significantly associated with higher M&A failure probabilities and long‐term losses. In contrast, when targets are privately held, we find no evidence of such an association.