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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | The importance of financial advisory in M&A transactions: Does the selection of the financial advisor influence the performance of the transaction? |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 54 |
| Date | 2016 |
| Abstract Text | Merger & Acquisition (M&A) transactions are among the most important and complex decisions a company faces. Most market participants agree that financial advisors play a key role for the success of a transaction. But as shown by Ismail (2010), just a few prestig-ious investment banks dominate the M&A market. This paper belongs to the growing literature exploring the role of investment banks in M&A transactions. Recent empirical studies provide mixed evidence of how the selection of financial advisors affects the performance of the associated transaction. Based on a sample of European M&A and consistent with Rau and Rodgers (2002), Schiereck et al. (2009) show that wealth effects are similar for transactions advised by different advisor tiers. Ismail (2010) contrasts earlier studies and states that, based on 6'379 US M&A deals, acquirers advised by tier-one advisors lost more than USD 42 billion, whereas those ad-vised by tier-two advisors gained USD 13.5 billion at the merger announcement date. While a more recent study of Golubov et al. (2012) contradicts that using a top-tier advisor is associated with an average 1.01% improvement in bidder abnormal returns, but in public acquisitions only. A voluminous amount of literature has emerged over the last few decades investigating the question of whether M&A creates or destroys value for the shareholders of the merging firms. Whereas the role of investment banks in M&A transactions is less understood and analyzed. Existing studies have focused on the US market, as a result little is known about the role of financial advisors in Europe. Moreover, recent research argues that the potential influence of investment banks on M&A performance should be investigated in markets, like Europe, with less M&A activity (Schiereck et al. (2009)). Motivated by the missing research in the field of European M&A transactions and the con-flicting empirical evidence on the subject, this study will attempt to examine evidence on two related questions: (1) under which acquirer- and deal-specific characteristics a top-tier advisor will get mandated in Europe? And (2) whether top-tier investment banks outper-form non-top-tier advisors in creating shareholder value in the short term? Design / Methodology / Approach First, in the spirit of Ismail (2010), the top-10 investment banks have been classified by the value of deals advised as top-tier. Secondly, to get a deeper understanding of the factors that influence the engagement of top-tier advisors, a maximum likelihood regression has been conducted. The final sample contains 3'706 European transactions by public acquirers announced between January 1st, 2001 and December 31st, 2015, from which 1'187 transactions were advised by top-tier advisors. Next, the event study methodology by Brown and Warner (1985) has been used to deter-mine the influence of different financial advisors on the success of the transaction. Abnor-mal returns have been estimated using the standard market model with a three day event window [-1/+1] around the date of announcement. Findings The resulting findings confirm that bigger acquirers and larger deals are more likely to be advised by top-tier advisors, consistently with the results of Golubov et al. (2012). Addi-tional empirical evidence show top-tier advisors are further associated with cross-border and focused (same 4-digit SIC Classification) transactions, bidder competitions and profit-able acquirers. Congruent with Golubov et al. (2012), the analysis shows that the reputation of top-tier advisors was not affected by their involvement in the subprime mortgage crisis, at least with respect to M&A advisory services. However, the study identifies a significant lower probability of a top-tier involvement in transactions during the Euro Crisis. As for the performance, the paper determines a mean (median) 3-day CAR of 1.17% (0.63%). Non-top-tier deals outperform top-tier transactions with mean (median) of 1.31% (0.71%) against 0.88% (0.40%), consistently with Golubov et al. (2012). The key findings from the abnormal returns model indeed show that high reputable advisers (top-10) are not able to generate higher positive abnormal returns. On the other hand, top-5 advisors destroy shareholder value in accordance with Ismail (2010). This result is not particularly surprising because the findings in this area have been inconsistent. Thus, market share based league tables can therefore be delusive. Further evidence shows that acquirer choice of advisors is not based on advisors track record or on their expertise in completing deals. One possible explanation is that companies may choose their advisor according to advisors prestige and popularity or as a self-protective measure. Other factors such as personal relationships may also influence the choice of financial advisors. In conclusion, this study added further contradictory evidence to the existing literature. Top-10 advisors do not outperform non-top-tier advisors, while top-5 advisors even destroy shareholder value. It seems that top-tier advisors are able to defend their market share and reputation despite of their performance and expertise in completing deals. |
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