On the Participation and Reputation of Financial Advisors in Corporate Acquisitions

In this article, we study the role of financial advisors in successful corporate acquisitions through tender offers. Our analysis distinguishes the advisor's role on the basis of whether the advisor's client is the target or the bidder. We document systematic patterns in takeover deal characteristics and wealth effects vis-a-vis advisor participation as well as advisor reputation. Differences in deal characteristics suggest that the main reason that an advisor is utilized is to overcome some disadvantage relative to the other party in the takeover contest. Whenever a target, either because of its relatively smaller size or because of a larger bidder toehold, or a bidder, because of the presence of multiple bidders, perceives itself as being in a position of weakness, it employs the services of an advisor. Additionally, we document that the weaker the position, the higher the reputation of the chosen advisor. We do not find a significant relation between bidder wealth effects and either bidder advisor participation or reputation, although we do observe higher combined (bidder and target) wealth gains when the bidder employs a higher reputation advisor. On the other hand, we find significant relations between target wealth gains and both advisor participation and reputation. Targets employ advisors primarily when the wealth gains to them are quot;lowquot;. This finding, while seemingly counterintuitive, is consistent with the conjecture that if advisors possess special bargaining expertise, the demand for their services would be higher in low wealth gain deals. Conditional upon employing an advisor, however, we find a significantly positive relation between target wealth gains and advisor reputation. Furthermore, we find that at least a part of the additional target gains from employing a more highly reputed advisor are at the cost of the bidder's wealth. Our results suggest that reputable target advisors have superior abilities in creating value for their clients as well as bargaining on behalf of their clients, and that reputable bidder advisors exhibit superior ability to identify synergistic value