2016 05 05 acquirers

Hiring ex-advisors of target firms pays off for acquirers

12 May 2016

The article at a glance

Acquiring firms that hire targets’ former advisors pay lower takeover premiums and reduce the likelihood of competing bids, says study co-authored by …

Acquiring firms that hire targets’ former advisors pay lower takeover premiums and reduce the likelihood of competing bids, says study co-authored by Cambridge Judge Business School academic.


Acquiring firms that hire the former advisors of their targets “take advantage of value-relevant information” in order to pay lower takeover premiums and lower the likelihood of competing bids, according to a study of more than 3,000 US takeover bids over a 24-year period.

Dr Xin (Simba) Chang
Dr Xin (Simba) Chang

The study by academics from the UK, China and Australia shows that hiring targets’ ex-advisors has a “significant impact on merger outcomes” – reducing competition from other bidders by one-third, lowering the average bid premium by about 20 per cent, and securing a larger share of merger synergies for the acquiring firm.

“Acquirers take advantage of value-relevant information about targets through targets’ ex-advisors, and achieve bargaining advantages in deal negotiations,” says the study. “A prior bank-firm relationship can be exploited by potential bidders, putting target firms in a disadvantageous position on the bargaining table.”

The study, recently accepted for publication in the Journal of Banking and Finance, looked at 3,251 takeover bids (both completed and withdrawn) of listed US companies between 1985 and 2008. Of 760 targets which had ex-advisors from past merger and acquisition (M&A) transactions, acquirers in 73 deals hired those ex-advisors including investment bankers from many leading investment banks involved in M&A activity.

“We found that hiring targets’ ex-advisors provided a clear bargaining advantage and allows them to do the acquisition at a better price with fewer competing bids,” said study co-author Dr Xin Chang, University Senior Lecturer in Finance at University of Cambridge Judge Business School. “It creates a meaningful information advantage, and reduces the risk of overpayment.”

For example, hiring targets’ ex-advisors reduced multiple bids by three per cent, what the study termed an “economically meaningful effect” given a 9.2 per cent unconditional probability for any deal in the study’s sample to involve multiple bidders.

The study – entitled “The information role of advisors in mergers and acquisitions: evidence from acquirers hiring targets’ ex-advisors” – is co-authored by Dr Xin Chang of Cambridge Judge Business School, Dr Chander Shekhar of the University of Melbourne, Dr Lewis H.K. Tam of the University of Macau, and Dr Jiaquan Yao of Xiamen University.

In contrast to the positive findings regarding acquiring companies, target companies that hire the former advisors of their bidders enjoy “no discernible value” – so the advantages of hiring ex-advisors is “asymmetrical” owing to the fact that targets will cease to exist as standalone entities following a successful takeover.

“While acquirers can use the promise (or lure) of future business to motivate targets’ ex-advisors to work hard on their behalf, target firms cannot offer the same incentives to acquirers’ ex-advisors,” said the study, whose sample found that 58 per cent of targets’ ex-advisors hired by acquirers were also used by these acquirers in future transactions.

A separate study by the same four authors, published earlier this year in the Journal of Business Finance & Accounting, made similar asymmetrical findings when it came to concerns about information leakage to industry rivals through M&A advisors: while acquirers are more likely to switch to new advisors if their former advisors have relationships by industry rivals, soon-to-be-absorbed targets are far less concerned.

The study indicates that there is no explicit law barring ex-advisors of a merging firm from providing advisory services to a merger counter-party, and the current US Securities and Exchange Commission rules normally require disclosure of material relationships only in the past two years between financial advisors and parties to the underlying transaction.