Wednesday, June 29, 2011
The recent In re Del Monte brought to the fore the problem of investment bankers and the conflicts they often carry with them in arranging sales. In the words of Goldman Sachs banker, "Life is full of conflicts, some real, some imagined." Now, there is a paper from Agrawal, et al, The Impact of Common Advisors on M&A that exmaines the effect of having common advisers for the buyer and seller in sales. In short, deals where the investment bank is on both sides of the deal take longer to complete and tend to favor shifting transaction surplus to acquirers.
Abstract: 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. We compare M&As with common advisors to deals in which targets and acquirers use different advisors and account for the endogenous nature of this choice. We find that (1) deals with common advisors are less likely to be completed and take longer to resolve, and (2) sharing advisors does not affect the wealth gains of shareholders of targets, acquirers or the combined firm and the post-acquisition performance of acquirers. We find some evidence that valuation multiples paid for targets and deal premiums for public targets are significantly lower in transactions with common advisors, suggesting that common advisors tend to favor acquirers over targets, 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.