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.