In our paper, The Impact of Common Advisors on Mergers and Acquisitions, which was recently made publicly available on SSRN, we examine the conflict of interest that an investment bank faces when advising both the target and acquirer in a merger or acquisition (M&A) by investigating how common advisors affect deal outcomes.
When the New York Stock Exchange merged with Archipelago Holdings, Inc. in 2004, Goldman Sachs served as the lead M&A advisor to both sides of the deal. Goldman’s dual role was fraught with obvious conflicts of interest. The rationale given was that the bank, as the former underwriter of Archipelago’s IPO, had valuable insights about the potential synergies from the merger.
Whether a common M&A advisor has an adverse effect on one or both sides of a deal is unclear a priori, for two reasons. First, the advisor may be deterred from exploiting its clients by potential litigation costs, damage to its reputation, and the repeat nature of the business. Second, as considerable empirical evidence suggests, market participants may consider financial intermediaries’ conflicts of interest when making their own decisions.
While a common advisor is well-positioned to serve its own interests, it can also improve deal outcomes. Compared to separate advisors, a common advisor likely has greater access to information about the counter-party and greater control over when information is exchanged between the two parties. The common advisor can use its information advantage to improve deal outcomes by reducing information asymmetry between acquirers and targets. Which of the two effects, conflict of interest or deal improvement, dominates in practice is an empirical issue that we examine in this paper using a large sample of takeover attempts on U.S. targets during 1981-2005.
We first offer some insights on the determinants of the decision to share an M&A advisor. We find that targets and acquirers are more likely to share an advisor in deals that are less complex, and involve private targets. A common advisor is also more likely to be used when the target or acquirer hires multiple advisors and has (does not have) a prior relationship with the counterparty’s (its own) advisor. We then examine a range of deal outcomes for takeover bids with common and separate advisors. In doing this, we account for the endogenous nature of the choice of common vs. separate advisors, and control for other determinants of deal outcomes.
We find that (1) deals with common advisors are less likely to be completed and take longer to resolve, and (2) sharing advisors affects neither the wealth gains of shareholders of targets, acquirers or the combined firms nor the post-acquisition performance of acquirers. We find some evidence that valuation multiples paid for all targets, and deal premiums paid for public targets, are significantly lower in transactions with common advisors. This finding suggests that common advisors tend to favor the acquirer over the target, with an eye on future investment banking business from the larger, surviving firm. But most of our results suggest that common M&A advisors lead to neither better deal outcomes by facilitating information flow between targets and acquirers, nor worse deal outcomes by influencing both sides to hasten deal completion.
Our findings have at least two implications. First, common M&A advisors are used more often in deals involving less conflict, such as when one or both sides of a deal have a prior relationship with the counter-party’s advisor or plan to use multiple advisors. Second, unlike in the residential real estate market, the impact of the conflict of interest from dual agency may be mitigated in corporate mergers because the clients tend to be sophisticated parties that consider the incentives of common advisors.
The full paper is available for download here.