Investment Banking Relationships and Merger Fees

Abstract

This paper is among the first to investigate the effect of a prior investment banking relationship on merger advisory fees paid by acquiring firms. We find that acquiring firms pay a higher fee to advisors when they have had a continuing relationship and a lower fee when they switch to an advisor with whom they have had no prior relationship. We develop a measure of relationship strength between an acquiring firm and its merger advisor based on previous debt, equity and merger transactions completed by the acquiring firm. We also examine the relationship between a merger advisor's reputation and its ability to retain clients.We find that firms are more likely to switch if their M and A advisor is not a top tier investment bank. To test if higher fees are compensation for better performance, we examine differences between the average announcement returns of acquiring firms that switch advisors and those that do not. We find no significant difference between these two return samples.Overall, our findings indicate that acquiring firms perceive benefits of retaining merger advisors with whom they have had a prior relationship (even at the cost of higher fees) and/or they face some other (higher) costs of switching to new bank advisors.3

The Role of Bank Advisors in Mergers and Acquisitions

“…Building on the theoretical model in James (1992), Saunders and Srinivasan (2001) finds that merger advisory fees include a relationship premium that is consistent with the existence of switching costs borne by acquirers when they hire new advisors with whom they had no prior relationship. If merger fees are set competitively, an explanation for this relationship premium is a certification effect, whereby rents are paid to banks with superior information obtained in the course of a prior relationship.…”

“…If merger fees are set competitively, an explanation for this relationship premium is a certification effect, whereby rents are paid to banks with superior information obtained in the course of a prior relationship. Saunders and Srinivasan (2001) also find that top tier advisors charge higher fees than lower tier investment banks, and that acquirers pay a relationship premium in merger fees that is highest for top tier advisors. Although Rau (2000) finds no impact of advisors on acquirer abnormal returns, he shows a positive relationship between investment bank market share and fees and deal completion rates.…”

“…We included a dummy variable, MERGER, for completed target acquisitions (denoted by a value of 1) in contrast to partial acquisitions, spin-offs, or split-offs (all denoted as 0). Following Saunders and Srinivasan (2001), a variable FEES controlled for total fees paid by both target and acquirer as a percent of transaction value. None of these variables turned out to be statistically significant and we do not present them in our regression results presented in Section 5.2.…”

How Accounting Firms Compete for Financial Advisory Roles in the M&A Market

“…On average 10-20% of proposed M&A deals fail leading to significant costs related to managerial time and credibility of the bidder that often lead to forced departures for the acquirer's managers (The Economist 2014). 3 Saunders and Srinivasan (2001) document that revenues from underwriting public security issues to finance M&A transactions are on average 55% higher than merger advisory fees for bulge bracket investment banks.…”

Financial advisors, financial crisis, and shareholder wealth in bank mergers

“…In addition, prior studies usually classify financial advisors into two or three tiers on the basis of their market share in the takeover market (McLaughlin, 1992;Rau, 2000;Saunders and Srinivasan, 2001;Chahine and Ismail, 2009;Ismail, 2009). Chahine and Ismail (2009) …”