Central Hub M&A Advisors
Alfred Yawson, Huizhong Zhang
Review of Finance, Volume 25, Issue 6, November 2021, Pages 1817–1857, https://doi.org/10.1093/rof/rfaa043
We examine how an M&A advisor’s horizontal relationships with other investment banks affects its ability to provide value-enhancing advice for acquiring firms. Like many other financial intermediaries, investment banks are connected vertically to various firms and horizontally to other banks, mostly through co-advisor appointments. These horizontal relationships can give rise to a communication network, allowing an M&A advisor to reach out to network contacts for target-related information and other resources at low cost. Hence, better networked advisors should have a superior ability to obtain information useful for a takeover bid from other investment banks, and use it to create value for acquiring firms.
Network banks could be prevented from sharing clients’ proprietary information with an acquirer advisor because of the fear of a loss of client trust and potential damage to their reputation. However, maintaining the reputation of being trustworthy is costly as banks are forced to restrict their actions to protect sensitive client information that could be otherwise used for their own benefits. Consequently, relationship rents in the form of future business are necessary to provide a continued incentive for a bank to remain loyal to a particular client. In the context of M&As, a bank’s incentive to keep the targets’ information secret is likely diminished as target firms normally cease to exist as standalone companies after successful acquisitions. This together with the verifiability issues makes it possible for private information of target firms to be transmitted between network banks.
Using a collection of centrality measures that describe an M&A advisor’s position in the network of investment banks, we show that acquirers enlisting the services of more centrally positioned advisors enjoy higher announcement abnormal returns. The effects are stronger among acquirers facing greater target information asymmetry such as “loner” acquirers and acquirers undertaking cross-industry deals, and among M&A advisors depending more heavily on networks for information such as small advisors and advisors with low expertise in the target industry.
Network banks may have obtained proprietary firm-, industry- or geographic-specific information about the target firm through either the provision of a wide range of investment banking services, or specialization in particular industries or geographical regions. We find that network contacts are most valuable to an acquirer advisor if they had previously assisted the target firm in equity issuance.
Finally, we show that more centrally positioned acquirer advisors are associated with lower takeover premiums and higher advisory fees. A potential inducement interbank networking can offer in return for the provision of insights is access to future co-advisor appointments: Banks with established ties to the appointed advisor(s) appear to enjoy a significant advantage of competing for future co-advisory mandates, having a higher probability of being chosen as co-advisor than their counterparts with no relationships.
Together, these findings suggest that the information advantage obtained from horizontal networking is an important channel through which central hub advisors create value for acquirers.