Investment Banks Advising Takeover Targets

By Ma, Qingzhong | Journal of Economics and Finance, July 2013 | Go to article overview

Investment Banks Advising Takeover Targets


Ma, Qingzhong, Journal of Economics and Finance


Abstract Should takeover target firms hire top-tier investment bank advisors? For a sample of mergers and acquisitions between publicly traded U.S. acquirers and targets, in deals in which targets hire top-tier banks, targets earn higher premiums and abnormal returns; the probability of stock payment is lower, especially when bidder stock is potentially overvalued; acquirers, however, do not necessarily earn lower abnormal returns, and combined returns are higher. Controlling for selfselection does not erode, but, in some cases even strengthens the results. The evidence suggests that top-tier investment banks advising targets benefit shareholders of client firms by making better deals, instead of simply bargaining against the acquirers. The findings shed light on the role of advisor incentives when linking advisor quality and shareholder wealth.

Keywords Merger · Acquisition · Investment Banking · Incentive

JEL Classification G34 · G24

(ProQuest: ... denotes formulae omitted.)

1 Introduction

Billions of dollars are paid to investment banks for advising firms engaged in mergers and acquisitions-$10.7 billion by targets and $4 billion by acquirers in 1997-2003 according to the Securities Data Corporation (SDC). Of these fees, more than half went to a small group of "top-tier ' banks, led by Goldman Sachs with $3.3 billion. However, whether they add value to client firm shareholders in exchange for the fees remains an open question. This paper studies the effect of hiring top-tier investment banks in mergers and acquisitions from the perspective of target firms. Specifically, the following questions are addressed. Do target firm shareholders gain more from hiring top-tier banks, compared to hiring other banks? Do acquiring firms lose when targets hire top-tier banks? How do top-tier banks advising targets affect acquisition terms?

The literature of investment banks as merger advisors has been focusing on the acquirer side (Servaes and Zenner 1996; Rau 2000), with few studies examining the effect of banks advising targets (Kale et al. 2003). Moreover, one of the main findings in the literature is somewhat puzzling: Acquiring firms do not seem to benefit from hiring bank advisors, even those in the top-tier (Servaes and Zenner 1996; Rau 2000; Stoiuaitis 2003). One reason for such a finding might reside in the potential conflict of interest between acquiring firms and their bank advisors. McLaughlin (1990) examines investment bank fee contracts in tender offers and finds that a large portion of the fees involved is contingent on deal completion, and that this portion increases with deal value. Bao and Edmans (2011) find that acquirer returns are positively related to advisors' past returns but negatively related to market share; when choosing their advisors, however, acquirers focus on market share but ignore past performance. Both fee contract terms and market share concerns directly create conflicts of interest between acquirers and their banks- acquirers hope to pay lower prices for acquisition, while their bank advisors are better off with higher prices. In contrast, target firms and their bank advisors both look for higher prices, suggesting that interests are better aligned between shareholders and bank advisors. As a result, the target side provides a cleaner environment for examining the roles of investment banks as merger advisors.1 Moreover, McLaughlin (1990, p221) reports that targets pay higher fees than acquirers, suggesting the importance of studying the role of investment banks advising targets.

In a sample of 2,156 takeover deals involving publicly traded U.S. acquirers and targets from 1980 to 2003, over 89% of targets, representing 98% of transaction value, hired investment banks.2 Therefore, I focus on the question of which investment banks to hire rather than whether to hire or not. Because the investment banking industry is rigidly hierarchical in nature, and several top-ranked banks persistently dominate the business, including providing merger advisory services, I classify investment banks into two groups, top-tier and non-top banks, according to their market shares in the advisory business. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Investment Banks Advising Takeover Targets
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.