William C. Hunter. Julapa Jagtiani

Transcription

1 MERGER ADVISORY FEES AND ADVISORS EFFORT Wllam C. Hunter Julapa Jagtan Emergng Issues Seres Supervson and Regulaton Department Federal Reserve Bank of Chcago December 2000 (S&R R)

2 Merger Advsory Fees and Advsors' Effort Wllam C. Hunter Senor Vce Presdent and Drector of Research Federal Reserve Bank of Chcago Julapa Jagtan Senor Economst, Supervson and Regulaton Federal Reserve Bank of Chcago December 29, 2000 The authors thank Carlos Guterrez and Loretta Kujawa for ther dedcated research assstance. The vews expressed n ths paper are those of the authors and do not necessarly reflect the vews of the Federal Reserve Bank of Chcago or the Federal Reserve System. Address any correspondence about ths paper to Julapa Jagtan, Supervson and Regulaton, Federal Reserve Bank of Chcago, 230 South LaSalle Street, Chcago, IL 60604, Tel , Fax , e-mal: Julapa.A.Jagtan@Ch.Frb.Org. Requests for addtonal copes should be drected to the Publc Informaton Center, Federal Reserve Bank of Chcago, P.O. Box 834, Chcago, Illnos , or telephone (312) The Emergng Issues Seres Workng papers are located on the Federal Reserve Bank of Chcago s Web ste at: 1

3 Merger Advsory Fees and Advsors' Effort The pace of corporate mergers and acqustons has dramatcally ncreased over the last decade. Accompanyng ths ncrease n merger actvty has been a concentrated effort by market analysts and academc researchers to dentfy the factors that determne the success of these mergers n achevng the stated goals of the mergng enttes. On a more focused level, there has been ncreased nterest n understandng the effects that the structure of the relatonshp between acqurng and target frms and ther varous merger advsors have on merger outcomes. Questons related to the mpact of the merger advsory relatonshp on the probablty that an announced merger wll actually be consummated, the speed wth whch an announced merger wll be effected, and the sze of the post-merger announcement gans are of partcular nterest. Despte the benefts that merger advsors can potentally provde 1, the seemngly excessve merger fees charged by merger advsors have been subject to crtcsm n recent years. One of the mportant questons s whether these merger fees can be justfed on the bass of the benefts that the merger advsors brng to the transacton. In ths paper, we address two related ssues -- 1) the determnants of the choce of merger advsors, and 2) whether merger fee contracts are desgned to nduce merger advsors to expend more effort n the advsory process leadng to better post merger performance of the combned entty. The rest of the paper s organzed as follows. Secton II presents the revew of related lterature. Secton III descrbes the data. The emprcal methodology and results are dscussed n Sectons IV and V, respectvely. The emprcal results are presented n sub-sectons as follows: 1 As dscussed n Hunter and Walker (1990), these benefts nclude the provson of an effectve mechansm by whch merger property rghts are assgned, the provson of nsurance aganst the samplng error ncurred by frms seekng merger partners wthout the assstance of an advsor, and the provson of nsurance aganst suts brought aganst merger prncpals under the judgement rule, among others. 2

4 a) probablty of completng the deal; b) speed of completon; c) post-merger performance of the combned entty; and d) mportant factors that determne fees pad by acqurng and target frms. II. Revew of Recent Lterature Most studes n merger and acquston (M&A) lterature examnes abnormal returns to the acqurng and target frms around the M&A announcement date, controllng for the varous factors such as characterstcs of the target, the acqurer, and the deal tself. A few studes have examned the role of merger advsors, and documented mportance roles of merger advsors n the mergers and acqustons market. Servaes and Zenner (1996) fnd that nvestment bank advsors are used (as opposed to n-house staff) n more complex transactons that are characterzed by sgnfcant asymmetrc nformaton. In addton, Bowers and Mller (1990) found that choce of merger advsor was mportant n determnng the wealth gans to targets and acqurng frms -- wealth gans are larger when ether the target or the bdder uses a frst-ter nvestment bank advsor. 2 Thus suggests that credblty of merger advsors s an mportant determnant of the gans generated by mergers. A recent study by Allen, Jagtan, and Saunders (2000) examned bank vs non-bank advsors, and found that banks have a comparatve advantage relatve to nvestment banks n servng as M&A advsors -- evdence of a "certfcaton role". The paper, however, does not deal wth the possblty that other factors assocated wth deal characterstcs (other than type of advsor) may have been the cause for the observed hgher abnormal returns when bank advsors are used. Besdes the role of M&A advsors, merger advsory fees have also been studes recently but the lterature on M&A fees s stll not extensve. Srnvasan (1999) found that swtchng 3

5 costs play an mportant role n the merger advsory market. Acqurng frms, as a result of hgh swtchng costs, are wllng to pay a hgher advsory fee when usng a merger advsor, wth whom t has had pror relatonshp. In addton, more credble nvestment bank advsors (proxed by ther ter) charged hgher fees than dd lower-ter advsors. However, ths analyss does not fully account of the noton that choce of advsor may depend on the nature and complexty of the deal, whch n turn, ultmately determnes the fees charged by advsors. We examne determnants of choce of advsor, the relatonshp between fees and advsor and deal characterstcs, and the economc gans created by the merger transacton. Hunter and Walker (1990) examned the varous merger fee contracts and found that the most commonly used contract nvolved a combnaton of a fxed fee and a fee based on the transacton prce, contngent upon the satsfactory completon of the merger. They also found that ths type of contract seemed to provde the proper ncentves for advsors to ncrease ther efforts to generate better outcomes,.e., mproved qualty of the merger matches as measured by the socal surplus generated by the merger. In addton, they found that merger fees are qute reasonable relatve to value created when compared to the typcal fees charged by fnancal ntermedares engaged n matchng buyers and sellers, e.g., real estate agents and brokers. We examne smlar ssues usng a dfferent methodology and more recent and more complete data. Rau (2000) examned the relatonshp between the market share held by merger advsors, ncentve fee structures, and the acqurers' performance as measured by post-acquston abnormal returns. He found that: 1) the ncentve fee structure (proporton of fees contngent on the completon of the deal) charged by dfferent merger advsors was related to ther market shares; 2) the market share was determned by the percentage of deals that the advsor had 2 These frst-ter (rather than second-ter or thrd-ter) nvestment advsors nclude Frst Boston, Goldman Sachs, Merrll Lynch, Salomon Brothers, and Morgan Stanley. 4

6 completed, not the acqurer's post-merger performance. The analyss was focused on the role of acqurer's advsors (gnorng target's advsors) and on short-term performance (as measured by post-merger abnormal stock returns). We examne the relatonshp between choce of advsor, fees, and performance focusng on long-term performance. 3 In addton to examnng the acqurer's advsors, we wll also take nto consderaton the targets frms' advsors as well as the role of multple advsors. III. The Sample and Data Our sample ncludes mergers that were announced durng the perod January 1995 to June Mergers nvolvng targets and acqurers whose shares are not traded n a lqud secondary market were excluded from our sample. We obtaned nformaton on merger deals, the targets, the acqurng frms, the advsors, and the fees charged by merger advsors from the Securtes Data Corporaton (SDC) database. There were 5,337 merger deals announced durng n the study tme perod where complete nformaton about advsors could be dentfed. We collected nformaton about whether or not any advsor(s) were used, credblty of the advsors, number of advsors, the responsblty of each of the advsors, the fees charged by advsors, etc. Of these 5,337 deals announced between January 1995 and June 2000, 4,845 deals were completed (by the end of June 2000), 160 deals were hostle takeovers, 1,430 deals were tender offers, and 790 deals were n-house deals (.e. used no advsors). Among the deals that were not n-house, 21 had the same fnancal advsors on both sdes of the transacton. Average market values of the target and the acqurng frms, based on share prce as of four weeks pror to announcement date, were approxmately $1.3 bllon and $8 bllon, respectvely. 3 For more dscusson on post-merger short-term performance vs long-term performance, see Cornett and 5

7 We classfy advsors nto three ters (ter 1, ter 2, and ter 3) based on two dfferent crtera: 1) total dollar value of transactons handled by the advsor durng the sample perod, and 2) the number of transactons handled by the advsor durng the sample perod. 4 Our ter-1, ter- 2, and ter-3 advsors are defned to be the top 15 advsors, the 16 th to 50 th advsors, and the rest (51 st to 665 th ), respectvely. The lsts of top 25 advsors based on the dollar value of transactons and the number of transactons are presented n Tables 1 and 2, respectvely. 5 Goldman Sachs, Morgan Stanley, Merrll Lynch, and Ctgroup/Salomon Smth Barney are among the top fve advsors under both classfcatons. Fees pad to advsors are reported n Table 3. Here fees are dvded nto the categores of advsory, deal management, farness opnons, bust-up, contngent, retaner, deal ntaton, and seller representaton. Under each fee category, the total fee and the fee pad by the target and the acqurng frms are reported. We also nclude the number of advsors that shared the fees (on each sde of the transacton) and ther ter rankng n the emprcal analyss. As ndcated n Table 3, on average, target frms pad $4.4 mllon (0.84 percent of transacton value) n advsory fees per deal. Acqurng frms pad $2.4 mllon (0.38 percent of transacton value) n advsory fees per deal. On average, total fees (pad by the targets and the acqurers combned) were 1.22 percent of the transacton value. Table 3 also presents a breakdown of average fees pad by targets (TFEE_XXX) and by acqurer (AFEE_XXX) per deal. Tehranan (1992) and Brewer, Jackson, Jagtan, and Nguyen (2000). 4 Another crtera -- usng average asset value of the clents beng advsed to durng the sample perod -- was also examned. However, the rankng was hghly drven by some small number of large clents. Thus ths crtera for rankng s not used n our analyss. The prmary ter classfcaton used n our analyss s based on transacton values, whch s smlar to the rankng based on number of clents (or transactons) beng advsed by an advsor durng the sample perod. 5 When the same advsor s used by both the target and the acqurng frms, value of transacton s accumulated for both of the merger partes. 6

8 IV. Emprcal Methodology A key goal of our study s to examne the factors that are mportant n determnng advsors' effort and the structure of the assocated advsory fees. Regardng advsor effort, we measure the effort put forth by fnancal advsors n three dfferent ways. Frst, advsor effort s measured by the ablty to complete deals. We expect that good effort should lead to a hgher probablty of the deals beng completed rather than wthdrawn. The bnary varable D_COMPLT s set equal to 1 for completed deals, and zero otherwse. Second, advsor effort s proxed by the tme t takes for a gven deal to be completed. The varable SPEED represents the number of days between the merger announcement and effectve dates. Ceters parbus, t s reasonable to expect that greater advsor effort should reduce the number of days t takes for an announced merger to become a completed transacton. Thrd, the amount of effort put n by advsors of the acqurng frms should (as a result of better negotaton strategy) lead to greater post-acquston gans for the acqurng frms. The varable ACQ_GAIN s used to proxy the gans accumulated by the acqurng frms around the effectve merger date. It s measured as the percentage dfference between the market value of transacton as of the effectve date (VEFF) and the value of transacton pad by the acqurng frm (VAL) dvded by VAL and multpled by 100 percent. Ths varable measures what the acqurer pad for the transacton relatve to the value of the transacton when the acquston become effectve. We test these predctons usng three the regressons models lsted below. We estmate equaton (1) usng a logt framework and OLS regresson for estmatng equatons (2) and (3). A host of control varables are ncluded n each regresson model. These control varables are defned n Table 4. 7

9 D _COMPLT = a ß D _TENDER 4 D _ HOSTILE ß TGT _TIER1 D _OLDADV ß ß ß ß FEECTG _TOT D1996 SPEED = a D FEECTG _ TOT ß 13 D D _ TWOTIER D _ HOSTILE ß 13 D FEECTG_ ACQ 17 D1998 ß D _ TENDER D _ TWOTIER ß TGT _ TIER1 D _OLDADV ACQ_ NOADV D _ INITIATE FTOTPCT 6 D FEECTG_ ACQ D1999 ACQ _ NOADV FEECTG_ TGT FTOTPCT D1999 TGT _ NOADV 7 D2000 D _ INITIATE ACQ_ TIER1 + 3 AFEE _ SHARE + TGT _ NOADV FEECTG _TGT 3 7 D ACQ_ TIER1 + AFEE _ SHARE + + (1) (2) ACQ_ GAIN ß ß = a ß D _ TENDER AFEE _ PCT TIER _ DOWN D _ HOSTILE ß TGT _ TIER1 D _ SAMEADV 5 9 ß D D _TWOTIER 6 TFEE _ PCT ACQ_ NOADV LOG(VAL) FTOTPCT TIER _ SAME D ACQ _TIER TGT _ NOADV 15 D1998 TIER _UP AFEE _ SHARE D D2000 (3) As noted above, we are also nterested n examnng those factors that are mportant n determnng the fee structure across merger deals. To examne ths queston, we estmate equatons (4) and (5) below usng OLS regresson analyss. See Table 4 for the descrpton of the varables. AFEE _ PCT = a ß D _ TENDER ß ß RELSIZE ß 13 TIER _ DOWN D _ HOSTILE ß TGT _ TIER1 D _ SAMEADV TFEE _ PCT = a PREM 4WK ß D _ TENDER ß ß RELSIZE ß 13 TIER _ DOWN D D _TWOTIER D _ HOSTILE LOG(VAL) 10 ACQ _ NOADV D _ MOE TIER _ SAME 18 D1997 D _TWOTIER ß TGT _ TIER1 D _ SAMEADV PREM 4WK D D1998 ACQ _ NOADV LOG(VAL) D _ MOE TIER _ SAME D TGT _ NOADV ACQ _TIER1 + TIER _UP D D _ SAMESIC + D1999 ACQ _TIER1 + TIER _UP TGT _ NOADV 3 D _ SAMESIC 20 D D D2000 (4) (5) 8

10 V. The Emprcal Results V.1. Probablty of Completng the Deal: The results of the logt estmaton of equaton (1) are presented n Table 5. Ths equaton examnes the factors mportant n determnng the probablty that a merger deal wll be completed, rather than wthdrawn. The varables D_HOSTILE and D_TENDER are sgnfcant wth a negatve and postve sgn, respectvely, ndcatng that the lkelhood of completng a deal s reduced when the offer s n the form of a hostle takeover bd versus a non-hostle one. Ths fndng s not surprsng. The varables ACQ_NOADV and TGT_NOADV are postve and sgnfcant, suggestng that the larger number of advsors used by ether the target or the acqurer the hgher s the lkelhood that the deal wll be completed. In addton, ACQ_TIER1 s sgnfcantly postve n most cases, ndcatng that when the acqurer uses at least one ter-1 advsor, the deal s also more lkely to completed. It s generally beleved that Ter-1 advsors are more capable of completng deals relatve to ter-2 or ter-3 advsors. Moreover, as dscuss below (and presented n Table 6), among all the completed deals, deals tend to be completed sooner when the acqurer uses at least one ter-1 advsor versus those deals that do not nvolve a top-ter advsor. Havng had a pror relatonshp wth the advsor (n a prevous merger deal) does not seem to have a sgnfcant mpact on the advsor's ablty to complete the deal, snce the varable D_OLDADV s not sgnfcant. In addton, pror relatonshps have no sgnfcant mpact on the speed of completng the deal (as presented n Table 6). It seems reasonable to expect that deals would have a hgher probablty of beng completed when ntated by advsors themselves. Ths s because the lkelhood of completng the deal may be one factor consdered by advsors when selectng merger counterpartes. However, the results show that the varable D_INITIATE s not 9

11 sgnfcant. In fact, whether or not the deal was ntated by advsors s not sgnfcant n determnng ether the lkelhood of completng the deal (Table 5) or the amount of tme t take to complete the deal (Table 6). In general, advsory fees do not seem to have a sgnfcant mpact on the lkelhood of completng the deal. The only fee varable that s sgnfcant s the contngent fee. The contngent fee varable for the target (FEECTG_TGT) and the acqurer (FEECTG_ACQ) are statstcally sgnfcant but wth unexpected negatve sgns. Ths s probably a reflecton of the fee structure negotated between the advsors and the merger partes where the porton of the total fee that s contngent s lkely to be smaller for those deals that are less lkely to be completed, ex ante. However, among all the completed deals, the hgher s the porton of the total fee pad that s contngent, the smaller s the amount of tme requred to complete the deal (see Table 6). Thus, contngent fees seem to play a sgnfcant role n provdng merger advsors wth an ncentve to complete deals sooner. V.2. Speed of Completon Ths secton examnes mportant factors that explan the varaton, across all completed deals, n the amount of tme t takes for a deal to be completed. The analyss s based on equaton (2) and the results are presented n Table 6. The dependent varable SPEED s the number of days between the merger announcement and the effectve dates. Unlke n the analyss of probablty of completon, where all the announced merger deals are ncluded n the analyss, the sample n ths secton ncludes only completed deals. As noted above and shown n Table 6, the varables D_HOSTILE and D_TENDER are sgnfcant wth postve and negatve sgns, respectvely. Ths ndcates that t generally takes longer to complete a hostle takeover bd relatve to a non-hostle one due to the complexty 10

12 assocated wth hostle takeovers. Non-hostle tender offers, n addton to beng more lkely to complete, also take sgnfcantly less tme to complete than other mergers. Interestngly, ncreasng the number of advsors used by ether the target (TGT_NOADV) or the acqurng frm (ACQ_NOADV) s lkely to add complexty -- thus, sgnfcantly ncreasng the tme requred to complete the deal. However, t should be noted that deals nvolvng greater numbers of advsors have a hgher probablty of beng completed (see Table 5). The sgnfcant negatve coeffcent on the varable ACQ_TIER1 ndcates that deals are generally completed faster when the acqurer uses at least one ter-1 advsor. Ter-1 advsors are more capable than lower-ter advsors n not only ther ablty to complete the deal (Table 5) but also ther ablty to complete t n shorter tme perod (Table 6). As was the case of the probablty of completon estmaton, the varables D_OLDADV and D_INITIATE are not sgnfcant n determnng the speed of completon of a merger. The exstence of a pror relatonshp between the acqurer and the advsor does not have a sgnfcant mpact on the advsor's ablty to complete the deal n less tme. Smlarly, the speed of completon of a gven merger does not seem to depend on whether or not the deal was actually ntated by a merger advsor. We fnd these results somewhat surprsng. Whle advsory fees seem to have no mpact on the probablty of completng a deal, fees do play an mportant role n determnng the speed of completng merger deals. The varous measures of fees (as percent of transacton value) that are ncluded n equaton (2): FTOTPCT, FEECTG_ACQ, and FEECTG_TGT are all sgnfcant and negatve. Larger total fees (as a percent of transacton value) sgnfcantly reduce the amount of tme advsors take to complete deals. In addton, the larger the porton of fees that are contngent upon completon of the deal (whether pad by the target or the acqurer), the faster are deals completed. Fnally, regardng the 11

13 mpact of the splt of total fees pad by the acqurer and target n a transacton on the speed of completon, t turns out that the larger the porton of total fees pad by the target the qucker s the transacton completed. Ths s evdenced by the postve and sgnfcant coeffcent on the varable AFEE_SHARE. V.3. Post Acquston Gans to the Acqurers In ths secton, we examne the varaton n the post-acquston gans accrung to the acqurng frms across the completed deals. The analyss s based on the estmaton of equaton (3) and the results are presented n Table 7. The dependent varable ACQ_GAIN s a measure of the value or return earned (loss) by the acqurer as of the effectve date of the transacton (amount pad for the target versus the value of the target as of the effectve date). Specfcally, the gan to acqurers s proxed by the dfference between the value of transacton at two ponts of tme -- what was pad for the target when the deal was announced and what the target was worth when the deal became effectve. If the acqurer pad too much for the transacton, the synergy realzed by the acqurer would be smaller or negatve. We expect that the advsors' effort could play an mportant role n the amount of gans to be realzed by the acqurer. As shown n Table 7, the varable ACQ_NOADV s sgnfcantly postve, suggestng that a greater number of advsors used by the acqurer tends to mprove the gans realzed by the acqurer. Although t was shown n Table 6 that use of more advsors tend slow down the completon speed, the combned efforts from several advsors used by the acqurer do seem to pay off n terms of larger post-acquston gans. Use of ter-1 advsors -- ether by the target or the acqurer -- as measured by the varables ACQ_TIER1 and TGT_TIER1, tends to reduce the gans to the acqurng frm. It seems reasonable to expect that the gans to the acqurer would declne when the target uses a ter-1 advsor. On the other hand, t s surprsng that the gans 12

14 realzed by the acqurer declne when the acqurer uses a ter-1 advsor. However, ths result s consstent wth Rau (2000), who fnds that top-ter advsors tend to advse ther clents to offer larger premums to targets, reducng the gans to the acqurng frms. As n the case of speed of completon, advsory fees play an mportant role n determnng post acquston gans. The varable FTOTPCT s sgnfcantly postve, ndcatng that the gans to acqurers are larger n deals where larger fees are pad (as a percentage of transacton value) regardless of the amount pad by ether the target or the acqurer. Ths fndng s consstent wth the postve and sgnfcance coeffcents on the varables AFEE_PCT and TFEE_PCT when ncluded separately n the analyss. An examnaton of the relatonshp between the decson to swtch advsors and the gans to the acqurer suggests that the gans are smaller when the acqurer swtches to a lower-ter advsor as evdenced by the sgnfcantly negatve coeffcent on the varable DUM_DOWN. Swtchng advsors wthn the same ter s assocated wth larger gans to the acqurng frm. Other control factors that are sgnfcant n explanng the varaton n the gans to the acqurer nclude D_HOSTILE (postve), D_TENDER (negatve), and LOG(VAL)(postve). The results ndcate that the gans realzed by acqurng frms declne n hostle takeovers but ncrease n a non-hostle tender offers. In addton, and as expected, the gans tend to be larger n larger transactons. V.4. Advsory Fees Pad by the Acqurer and the Target Ths secton examnes the factors mportant n determnng the advsory fees pad by ether the target or the acqurng frm. The analyss s based on the estmaton of equaton (4) for the acqurer and equaton (5) for the target. The results are presented n Table 8. 13

15 As expected, fees pad by the acqurng frm as a porton of transacton value, AFEE_PCT, ncrease wth number of advsors nvolved n the deal as measured by the varable ACQ_NOADV whch s postve and statstcally sgnfcant. In addton, the sgnfcance and postve coeffcents on the varables ACQ_TIER1 and TGT_TIER1 suggest that the acqurer also pays larger fees when t uses a ter-1 advsor or when the target uses a ter-1 advsor. Interestngly, the fees pad by the acqurer declne when t swtches advsors ether wthn the same ter (TIER_SAME) or to an upper ter (TIER_UP). In fact, lower fees charged by another advsor n the same ter as the prevous advsor may be the cause of swtchng wthn the same ter. However, t s surprsng that the fees also declne when the acqurer swtches to an advsor n a hgher ter. Other control factors that are sgnfcant n determnng advsory fees nclude: TENDER (postve), D_SAMESIC (postve), and LOG(VAL) (negatve). Hence, the fees pad by the acqurer are larger n tender offers than n a typcal non- tender merger or acquston. The fee s also larger when the target and the acqurer are n the same busness lne (.e., same SIC codes). The fees (as percent of transacton value) tend to become a smaller porton n larger merger transactons. As can be seen n columns 3 and 4 of Table 8, the fees pad by the target as percent of transacton value (TFEE_PCT) ncrease wth the number of advsors used by the target (TGT_NOADV) as the coeffcent s sgnfcantly postve. In addton, the postve and sgnfcant coeffcent on the varable TGT_TIER1 suggests that the fees are larger when the target uses a ter-1 advsor. Fnally, use of ter-1 advsors by acqurers (ACQ_TIER1) and the acqurer's decson to swtch advsors n any drecton (TIER_SAME, TIER_UP, or 14

16 TIER_DOWN) have no mpact on the fees pad by the target. As was the case for the acqurer, the target also pays larger fees n tender offers versus non-tendered frendly mergers. VI. The Conclusons Ths paper examnes the characterstcs of all merger deals announced durng the perod January 1995 to June The sample ncludes 5,337 merger deals nvolvng publcly traded acqurers and targets. We nvestgate the factors that determne the probablty that an announced merger wll be successfully completed, the speed wth whch announced mergers are actually completed, the fees pad to advsors by the acqurng and target frms, and the post merger gans earned by the acqurng frms. In dong so, we also attempt to assess the qualty of the relatonshp between merger advsors and ther clent. We fnd that advsor qualty and the number of advsors employed n a gven transacton are mportant n determnng the probablty of completng the deal. Ter-1 advsors were found to be more capable of completng deals relatve to ter-2 and ter-3 advsors. Interestngly, advsory fees do not seem to play an mportant role n determnng the lkelhood of completng the deal. In terms of speed of completng a deal, ter-1 advsors were found to be more effcent n terms of the amount of tme requred to complete deals, other thngs equal. However, unlke n the case of the probablty of completng the deal, ncreasng the number of advsors used by ether the target or the acqurer adds complexty to the transacton requrng sgnfcantly more tme for the deal to be completed. We also fnd that a greater porton of advsory fees that are contngent upon completon of the deal (whether pad by the target or the acqurer) further expedtes the speed of completon. The exstence of a pror relatonshp between the acqurer and the advsor does not seem to have a sgnfcant mpact on the advsor's ablty to complete 15

17 the deal n less tme. Fnally, merger deals that are ntated by the advsors are not lkely to be completed sooner than deals ntated by the merger counterpartes. Whle ter-1 advsors tend to complete the deals wth hgher probablty and complete them n less tme, we also found that the post merger gans realzed n these mergers actually declne when ter-1 advsors are employed. However, larger total advsory fees pad were found to be assocated wth larger post-merger gans. We found that that when acqurers swtch ther fnancal advsors wthn the same ter, the swtchng s assocated wth larger post-merger gans to acqurng frms. Fnally, our overall fndngs also suggest that hostle takeovers and nonhostle tender offers ntroduce sgnfcantly more complexty nto mergers and acqustons when compared to smple frendly mergers between frms. 16

18 References Allen, Lnda, Julapa Jagtan, and Anthony Saunders (2000) "The Role of Fnancal Advsors n Mergers and Acquston," Federal Reserve Bankng of Chcago Workng Paper, Emergng Issues Seres # S&R R. Bowers, H.M. and R. Mller (1990) "Choce of Investment Banker and Shareholders Wealth of Frms Involved n Acqustons," Fnancal Management 19, Brewer, Eljah, Wllam Jackson, Julapa Jagtan, and Thong Nguyen (2000) "The Prce of Bank Mergers n the 1990s," Federal Reserve Bank of Chcago Economc Perspectves, March, Cornett, Marca Mlon and Hassan Tehranan (1992) "Changes n Corporate Performance Assocated wth Bank Acqustons," Journal of Fnancal Economcs 31, Hunter, Wllam C. and Mary Beth Walker (1990) "An Emprcal Explanaton of Investment Bankng Merger Fee Contracts," Southern Economc Journal 56, McLaughln, Robyn (1990) "Investment-Bankng Contracts n Tender Offers," Journal of Fnancal Economcs 28, Rau, P. Raghavendra (2000) "Investment Bank Market Share, Contngent Fee payments, and the Performance of Acqurng Frms," Journal of Fnancal Economcs 56, Servaes, Henr and Marc Zenner (1996) "The Role of Investment Banks n Acquston," The Revew of Fnancal Studes 9 Number 3 (Autumn) Srnvasan, Anand (1999) "Investment Bankng Relatonshps: Theory and Evdence from Merger Fees," Ph.D. dssertaton, New York Unversty Stern School of Busness.

19 Table 1: Top 25 Advsors (based on total $ value of transactons advsed durng January 1985 and June 2000) Rankng Advsor's Name 1995 (Ml) 1996 (Ml) 1997 (Ml) 1998 (Ml) 1999 (Ml) 2000 (Ml) Total (Ml) 1 Goldman Sachs & Co $144,380 $133,062 $318,049 $826,686 $893,982 $380,804 $2,696,964 2 Morgan Stanley & Co 229, , , , , ,580 2,024,878 3 Merrll Lynch & Co Inc 101, , , , , ,183 1,999,925 4 CtGroup / Salomon Smth Barney 105, , , , , ,649 1,511,984 5 Credt Susse 118,015 91, , , , ,773 1,014,043 6 Lehman Brothers 80,209 82, , , ,590 34, ,021 7 Lazard 42, , ,698 86, ,413 32, ,077 8 Bear Stearns & Co Inc 63,258 50, , , ,073 29, ,455 9 Donaldson, Lufkn & Jenrette 26,143 45,621 93, , ,988 67, , JP Morgan 53,748 72, , , ,235 51, , Chase Manhattan / Chemcal 8,279 20,811 39, , ,602 44, , Dllon, Read & Co Inc 46,578 42,091 70,070 46, ,784 70, , Wassersten Perella Group Inc 41,406 39,485 26,665 38,937 67, , , Deutch Banc Alex Brown 18,483 28,116 54, ,188 93,214 28, , Banc of Amerca / Natons 2,169 2,170 36, ,517 23,219 32, , Gleacher Natwest 6,661 23,763 20,415 17,096 84,990 4, , Rothschld 234 4, , ,421 6, , Houlhan Dorton Jones 6,473 9,671 39,521 22,315 39,328 10, , Allen & Co Inc 30,378 12, ,712 67, , NM Rothschld & Sons (AU) 2,617 21,012 41,907 5,038 1, , BancBoston Robertson Stephens 4,796 6,977 4, ,957 16,238 65, Greenhll & Co, LLC 1,006 8,972 14,989 34,643 1,745 61, The Blackstone Group 5,991 8,356 8,794 13,825 15,655 5,426 58, CIBC Oppenhemer 1,065 3,398 2,844 7,647 33,798 5,774 54, Pane Webber 7,678 8,604 7,051 13,430 12,554 1,220 50,537 ***** In_House (No IB Retaned) 8,357 9,249 16, ,617 62,501 6, ,921

20 Table 2: Top 25 Advsors (based on total number of transactons advsed durng January 1985 and June 2000) Rankng Advser's Name Total 1 Goldman Sachs & Co Merrll Lynch & Co Inc Morgan Stanley & Co CtGroup / Salomon Smth Barney Donaldson, Lufkn & Jenrette Credt Susse Lehman Brothers Deutch Banc Alex Brown JP Morgan Bear Stearns & Co Inc Dllon, Read & Co Inc Lazard Banc of Amerca / Natons Houlhan Dorton Jones Chase Manhattan / Chemcal Broadvew Assocates Wassersten Perella Group Inc CIBC Oppenhemer Pane Webber KPMG Peat Marwck Hambrecht & Qust BancBoston Robertson Stephens Keefe Bruyette & Woods Inc Robnson-Humphrey / Amercan Exp Pper Jaffray & Hopwood Inc ***** In-House (No IB Retaned)

21 Table 3 Average Fees Per Deal (n $ Mllon) Pad by the Acqurng Frms and the Targets Varable Mean STD. Mn. Max. N Fees Pad By Acqurers ($mllon): AFEE_TOTAL AFEE_PCT (n % of transacton value) AFEE_ADVISORY AFEE_ADVISORY/OPINION AFEE_BUST-UP AFEE_CONTINGENT AFEE_DEAL MANAGEMENT AFEE_DEAL INITIATION AFEE_FAIRNESS OPINION AFEE_RETAINER AFEE_REPRESENTED SELLER Fees Pad By Targets ($mllon): TFEE_TOTAL TFEE_PCT (% of transacton value) TFEE_ADVISORY TFEE_ADVISORY/OPINION TFEE_BUST-UP TFEE_CONTINGENT TFEE_DEAL INITIATION TFEE_FAIRNESS OPINION TFEE_RETAINER TFEE_REPRESENTED SELLER

22 Table 4: Descrpton of the Varables Varables Descrpton HOSTILE ACQ_NOADV TGT_NOADV D_TENDER D_TWOTIER D_INITIATE ACQ_TIER1 TGT_TIER1 D_OLDADV D_SAMEADV FTOTPCT AFEE_SHARE AFEE_PCT TFEE_PCT FEECTG_TOT FEECTG_ACQ FEECTG_TGT LOG(VAL) TIER_SAME TIER_UP s equal to1 for hostle takeover, 0 otherwse s the number of advsors used by the acqurng frm s the number of advsors used by the target frm s equal to 1 for tender offer, and 0 otherwse s equal to 1 for a two-ter transacton, and 0 otherwse s equal to 1 f ether the target or the acqurng frm or both pay a deal- ntaton fee to ther advsor for ntatng the deal s equal to 1 f the acqurng frm uses ter-1 advsor, and 0 otherwse s equal to 1 f the target frm uses ter-1 advsor, and 0 otherwse s equal to 1 f the acqurng frm uses an advsor wth whom they have had pror relatonshp (advsed them prevously on another merger deal), and 0 otherwse s equal to 1 f at least one of the advsors was advsng both the target and the acqurng frms for the deal s dollar value (n $ mllon) of total fees pad to advsors by the target and the acqurng frm combned s percentage of advsory fees pad by the acqurng frm (AFEE_TOT) to total combned fees pad for the transacton (AFEE_TOT + TFEE_TOT) s percentage of fees pad by the acqurer relatve to transacton value s percentage of fees pad by the target relatve to transacton value s dollar amount (n $ mllon) of contngent fees pad by both the target and the acqurng frm combned s dollar amount (n $ mllon) of contngent fees pad by the acqurer s dollar amount (n $ mllon) of contngent fees pad by both the target s log of the dollar value of transacton s equal to 1 f the acqurng frm swtches ts advsor but stays wthn the same ter, and 0 otherwse s equal to 1 f the acqurer swtches ts advsor to a better ter (such as from ter-2 to ter-1 advsor or from ter-3 to ether ter-1 or ter-2 advsor), and 0 otherwse 2

23 TIER_DOWN s equal to 1 f the acqurer swtches ts advsor to a lower ter (such as from ter-1 to ether ter-2 or ter-3 advsor or from ter-2 to ter-3 advsor), and 0 otherwse D1996, D1997, D1998, D1999, D2000 s equal to 1 f the deal was announced n 1996, 1997, 1998, 1999, and 2000, respectvely, and 0 otherwse D_MOE D_SAMESIC RELSIZE s equal to 1 for a merger of equals, and 0 otherwse s equal to 1 f both the target and the acqurng frms are n the same busness lne (same SIC codes), and 0 otherwse s the rato (n percent) of the market value of the acqurng frm to market value of the target multpled by 100 percent 3

24 Table 5: Probablty of Completng the Deals Dependent varable s a bnary varable D_COMPLT, whch s equal to 1 for completed deals and zero otherwse. Explanatory varables are defned n Secton IV. ***, **, and * represent sgnfcance at the 1, 5, and 10 percent, respectvely. Independent Varable Intercept *** (1) (2) (3) (4) (5) D_HOSTILE *** ACQ_NOADV * (0.080) TGT_NOADV *** D_TENDER *** (0.005) D_TWOTIER *** D_INITIATE (0.263) ACQ_TIER ** (0.012) *** *** ** (0.027) *** ** (0.018) *** (0.216) *** (0.002) *** *** * (0.078) *** ** (0.016) *** (0.218) *** (0.003) *** (0.005) *** (0.143) *** (0.123) *** (0.496) (0.143) *** (0.007) *** (0.151) *** (0.116) *** (0.499) (0.293) TGT_TIER (0.471) D_OLDADV (0.526) FTOTPCT (0.667) AFEE_SHARE (0.683) (0.529) FEECTG_TOT *** (0.548) (0.591) (0.683) *** (0.803) (0.975) (0.695) FEECTG_ACQ ** (0.016) FEECTG_TGT ** D * (0.063) D *** D *** (0.102) *** (0.001) *** (0.102) *** (0.001) *** (0.044) (0.205) (0.408) (0.117) (0.781) (0.911) (0.661) ** (0.014) ** (0.039) (0.206) (0.418) (0.123) 4

25 D *** D *** *** *** *** *** ** (0.023) *** ** (0.025) *** Concordant 76.7% 77.2% 77.2% 82.6% 82.5% Dscordant 21.9% 21.8% 21.9% 16.5% 16.0% C-Value Model X 2 (P-Value) N

26 Table 6: Number of Days From Announcement to Effectve Date (SPEED) Explanatory varable s SPEED, as defned n Secton IV. ***, **, and * represent sgnfcance at the 1, 5, and 10 percent, respectvely. Independent Varable (1) (2) (3) (4) (5) Intercept *** *** *** *** *** D_HOSTILE *** *** *** *** (0.001) *** (0.001) ACQ_NOADV *** *** *** *** (0.001) *** (0.001) TGT_NOADV *** (0.001) *** *** *** *** D_TENDER *** *** *** *** *** D_TWOTIER *** *** *** *** *** D_INITIATE (0.901) (0.962) * (0.054) (0.382) (0.388) ACQ_TIER *** *** *** ** (0.020) ** (0.013) TGT_TIER (0.380) D_OLDADV (0.843) (0.965) (0.853) (0.955) (0.918) FTOTPCT *** *** *** AFEE_SHARE (0.050) ** (0.018) (0.502) (0.549) FEECTG_TOT *** *** FEECTG_ACQ *** (0.001) FEECTG_TGT *** (0.001) *** 6

27 D (0.348) (0.616) (0.505) * (0.085) * (0.091) D (0.252) (0.602) (0.445) (0.327) (0.335) D * (0.080) ** (0.024) ** (0.035) ** (0.020) ** (0.019) D *** (0.008) ** (0.040) ** (0.026) (0.974) (0.942) D *** *** *** *** (0.002) *** (0.002) R Adjusted R N

28 Table 7: Post-Acquston Gan to Acqurers (ACQ_GAIN) Explanatory varable s ACQ_GAIN, as defned n Secton IV. ***, **, and * represent sgnfcance at the 1, 5, and 10 percent, respectvely. Independent Varable (1) (2) (3) (4) Intercept *** ACQ_NOADV *** (0.002) *** *** *** *** (0.006) *** *** TGT_NOADV D_TENDER D_TWOTIER D_HOSTILE ACQ_TIER1 TGT_TIER (0.120) *** ** (0.024) *** *** *** (0.181) *** ** (0.024) *** *** *** (0.120) *** * (0.062) *** *** *** (0.233) *** * (0.061) *** *** *** D_SAMEADV LOG(VAL) TIER_SAME (0.390) *** (0.376) *** (0.445) *** *** (0.425) *** *** TIER_UP TIER_DOWN AFEE_PCT TFEE_PCT FTOTPCT *** * (0.065) *** (0.195) *** (0.187) *** ** (0.034) *** AFEE_SHARE (0.503) (0.327) D (0.235) (0.216) (0.209) (0.188) D (0.492) (0.451) (0.343) (0.304) 8

29 D1998 D1999 D (0.206) (0.628) (0.264) (0.233) (0.676) (0.256) (0.362) (0.967) (0.111) (0.409) (0.904) (0.105) R Adjusted R N

30 Table 8: Fees Pad by Acqurers (AFEE_PCT) and Targets (TFEE_PCT) as Percent of Transacton Value Explanatory varables AFEE_PCT and TFEE_PCT, as defned n Secton IV. ***, **, and * represent sgnfcance at the 1, 5, and 10 percent, respectvely. Independent Dependent Var=AFEE_PCT Dependent Var=TFEE_PCT Varable (1) (2) (3) (4) Intercept *** ACQ_NOADV TGT_NOADV D_TENDER *** *** (0.009) *** (0.005) *** *** ** (0.010) *** 0.006) *** (0.115) *** ** (0.027) *** (0.122) *** ** (0.024) D_TWOTIER (0.688) (0.661) (0.855) (0.820) D_MOE D_SAMESIC (0.834) ** (0.048) (0.833) * (0.058) (0.705) (0.707) (0.743) (0.773) RELSIZE (0.737) (0.746) (0.711) (0.717) D_HOSTILE (0.522) (0.415) (0.810) (0.811) PREM4WK ACQ_TIER1 TGT_TIER (0.516) ** (0.014) ** (0.016) (0.572) *** (0.002) ** (0.013) (0.962) (0.123) *** (0.001) (0.968) (0.189) *** (0.001) D_SAMEADV TIER_SAME TIER_UP (0.825) (0.931) ** (0.014) * (0.098) (0.938) (0.987) (0.787) (0.949) TIER_DOWN LOG(VAL) *** (0.473) *** *** (0.202) *** D (0.497) (0.560) (0.234) (0.236) 10

31 D1997 D1998 D1999 D (0.714) (0.489) ** (0.034) (0.127) (0.519) (0.694) ** (0.011) * (0.054) *** (0.003) *** (0.001) *** *** (0.001) *** (0.003) *** (0.001) *** *** (0.001) R Adj R N

32 Emergng Issues Seres A seres of studes on emergng ssues affectng the bankng ndustry. Topcs nclude bank supervsory and regulatory concerns, far lendng ssues, potental rsks to fnancal nsttutons and payment system rsk ssues. Requests for copes of papers can be drected to the Publc Informaton Center, Federal Reserve Bank of Chcago, P.O. Box 834, Chcago, Illnos , or telephone (312) These papers may also be obtaned from the Internet at: The Impact of New Bank Powers (Securtes and Insurance Actvtes) on Bank Holdng Companes Rsk Lnda Allen and Julapa Jagtan A Peek at the Examners Playbook Phase III Paul A. Decker and Paul E. Kellogg Do Markets Dscplne Banks and Bank Holdng Companes? Evdence From Debt Prcng Julapa Jagtan, George Kaufman and Catharne Lemeux A Regulatory Perspectve on Roll-Ups: Bg Busness For Small Formerly Prvate Companes Mchael Atz Conglomerates, Connected Lendng and Prudental Standards: Lessons Learned Catharne M. Lemeux Questons Every Banker Would Lke to Ask About Prvate Bankng And Ther Answers Mchael Atz Ponts to Consder when Fnancng REITs Catharne M. Lemeux and Paul A. Decker Stumblng Blocks to Increasng Market Dscplne n the Bankng Sector: A Note on Bond Prcng and Fundng Strategy Pror to Falure Julapa Jagtan and Catharne M. Lemeux Agrcultural Lendng: What Have We Learned? Catharne M. Lemeux S&R-99-1R S&R-99-2 S&R-99-3R S&R-99-4 S&R-99-5 S&R-99-6 S&R-99-7 S&R-99-8R S&R

33 Emergng Issues Seres Prce Rsk Management Creates Unque Credt Issues Jack Wozek The Role of Fnancal Advsors n Mergers and Acqustons Lnda Allen, Julapa Jagtan and Anthony Saunders Pooled Trust Preferred Stock A New Twst on an Older Product Paul Jordan Smple Forecasts of Bank Loan Qualty n the Busness Cycle Mchele Gambera The Changng Character of Lqudty and Lqudty Rsk Management: A Regulator s Perspectve Paul A. Decker Why Has Stored Value Not Caught On? Sujt Chakravort Hedgng the Rsk Mchael Atz Collateral Damage Detected Jon Frye Do Markets React to Bank Examnaton Ratngs? Evdence of Indrect Dsclosure of Management Qualty Through BHCs' Applcatons to Convert to FHCs Lnda Allen, Julapa Jagtan and James Moser Predctng Inadequate Captalzaton: Early Warnng System for Bank Supervson Julapa Jagtan, James Kolar, Catharne Lemeux, and G. Hwan Shn S&R S&R S&R S&R S&R S&R S&R S&R S&R R S&R R Merger Advsory Fees and Advsors Effort S&R R Wllam C. Hunter and Julapa Jagtan Impact of Independent Drectors and the Regulatory Envronment on Merger Prces and Motvaton: Evdence from Large Bank Mergers n the 1990s Eljah Brewer III, Wllam E. Jackson III and Julapa A. Jagtan S&R R 13

34 Emergng Issues Seres Market Dscplne Pror to Falure S&R R Julapa Jagtan and Catharne Lemeux 14