How Often Do 'Conflicts of Interests' in the Investment Banking Industry Arise During Hostile Takeovers?

We analyze all hostile takeovers in the past ten years where the market capitalization of the target firm exceeded $1 billion and the identity of the financial advisor of the acquirer is known. Our analysis reveals that, in the majority of cases, at least one of the advisors for the acquirer previously represented the takeover target in some way. The existence of overlapping relationships provides incentives for clients and investment banks to limit flows of private information about clients. If a firm believes that material secret information about its business that is to be revealed to an investment bank would be of interest to a competitor or potential acquirer, then that firm may obtain assurances or a written agreement about disclosure from the investment bank to ensure the confidentiality of the information. Similarly, if a bank believes that there is potential for a conflict to arise among clients relating to private information, it will often decide that it is appropriate to restrict access to that information within the investment bank by constructing a Chinese wall. Next, we test whether acquisition premia are significantly different for the acquisitions where there is a potential conflict. We find no significant differences in the means. However, we find somewhat significant differences in the variances of the two samples, which suggests that buyers with inside information may be more discriminating, both in choosing their acquisition targets and in determining the premia offered. Finally, we propose an economic test for determining whether private information has been transmitted to an acquirer, and the materiality of that private information, when an investment bank faces a potential conflict of interest, and we apply that test to a specific case involving a hostile takeover