Advisor Lending to the Advised Acquirer in M&A

Project: Research

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Investment banks are important third parties for intermediating between corporate acquirers (orbidders) and potential sellers (targets) in mergers and acquisitions (M&A). As “bulge bracket”investment banks typically offer both financing and advisory services, sophisticated investmentbanking makes even mega deals possible. The bidders and targets are often asymmetric in firmsize. The bidders’ bigger size and more active role in M&A makes investment banking moreimportant for acquirers. Due to the concern on conflicts of interest, bidders and targets tend tohire their own advisors. But the same advisory investment banks are allowed to provide loanfinancing to their advised clients within the same deal.The acquirers, however, can have their own agency problems to start with. If the empire-buildingmotive, as recognized by the overinvestment literature, drives the acquirers forwardespecially in large acquisitions, it is natural to question whether investment banks abetacquisition-led overinvestment to benefit from rent sharing in corporate empire-building byproviding excessively expensive loans to the same bidders they advise to. But the high costs ofsuch loans may simply reflect high costs of last-resort financing. In effect, even negativeannouncement effects of the acquirers may not necessarily imply the bidders for empire-building.For example, issuing equity to finance investments often produces a negative announcementeffect without an implication for empire-building but for financing as a last resort underasymmetric information. The acquirers may obtain the advisor loans under duress similar to newequity from the market because the advisors can govern how M&A finance should be arranged.Thus the advisor lending may reveal hidden last-resort equity financing that would otherwisehave occurred.This project will examine the M&A announcement effect of the acquirers that use theloans from their advisors vs. other banks to finance the M&A deal. We will analyze the dealcharacteristics as well as the loan contracting terms. We will investigate post-M&A performanceto evaluate overinvestment acquisitions and will also gauge actual costs of last-resort financing ifoverinvestment is not obvious.The aim of the proposed project is to test the two competing hypotheses: rent sharing inempire-building vs. revealing of last-resort financing. Unlike last-resort financing largely due toasymmetric information, rent sharing implies an overinvestment-related agency problem. Theresults of this research will shed new light on the investment and relationship banking literatureand help researchers, practitioners and regulators to better understand sophisticated investmentand relationship banking.


Project number9042259
Grant typeGRF
Effective start/end date1/09/154/02/19

    Research areas

  • Investment banking,M&A,Loan financing,rent extraction,