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New research weighs the value of locking up “tier one” advisers in M&A
August 25, 2008
An oft-heard critique leveled at investment banking circles is that the advisory services provided by these institutions have become a commodity. The markets are efficient enough, the argument goes, that the value a banker can bring to a sale or acquisition differs little from one institution to the next.
While such a position can be difficult to defend, new research aims to answer the question: are good financial advisers really good? Ahmad Ismail, a business professor at the American University of Beirut, conducted a study examining control-stake deals from 1985 to 2004, with a goal of determining whether transactions advised by the “tier-one” banks (identified as the top 10 institutions in the league tables) were more profitable than deals that had “tier-two” advisers overseeing the process. Based on the institutions tabbed as “tier one,” such as Goldman Sachs, Morgan Stanley and Merrill Lynch, among others, the study essentially pitted the bulge bracket versus everyone else.
The results were mixed. “The existence of a prestigious adviser on at least one side of an M&A transaction results in higher wealth gains to the combined entity,” Ismail wrote in his research. “There is also evidence that target advisers are able to extract more wealth gains for their clients, which lead to higher gains at the expense of the acquirer.”
Regarding buy-side advisers, however, the research showed that tier-one institutions “were involved in most of the large-loss deals,” while the “less prestigious advisers occupied the highest positions in terms of the mean dollar gains earned by acquirers.”
It hardly provides a definitive answer to the question posited, whether or “good advisers” actually make a difference, but Ismail’s research seems to imply that there is some value to hiring tier-one institutions, at least on the buyside.
Some dealmakers agree. Steve Collins, a managing director at Advent International, notes that the larger, more reputable banks tend to take on mandates that are easier to sell. “There is more of a bias, as bigger banks usually represent stronger businesses, and that generally translates into higher valuations,” he says.
Collins also cites that larger banks tend to have more resources at their disposal that may lead to greater success on sell-side mandates. He specifically mentions deep industry knowledge, solid contacts throughout various sectors and regions, and an ability to be more discriminating with regards to the deals that they take on. “They certainly have a lot going for them,” Collins says.
At the same time, case can be made for the value boutiques bring. Tim Dailey, a former JPMorgan banker who founded ClearCreek Partners, says that bulge-bracket firms are “infamous” for interchanging senior executives for junior staffers throughout various stages of the transaction. “The managing director pitches the business, and then once the business is won, the vice presidents and even the analysts will work on the deal throughout the process,” Dailey says.
He concedes that “advising on M&A is not that hard or mentally taxing,” but Dailey adds that part of the art of the business is dealing with the egos, not necessarily working out the economics of a deal. That, he says, is where experience counts. “When a deal doesn’t close, it’s often because of a bruised ego… An associate can be an excellent process manager, but a lot of the advisory work is around people and ego management.”
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