Investment Bankers’ Impact on Acquisition Premiums

Investment Bankers’ Impact on Acquisition Premiums

By Robert St. Germain

November 09, 2020

In previous blogs, my colleagues and I have discussed the many “qualitative” benefits of business owners using investment bankers (IB) to facilitate the sale of their companies. Among those cited sellers’ benefits are:

1.) Realistic valuations;

2.) Experience and expertise in the competitive and protocol driven M&A process;

3.) Access to the universe of potential buyers;

4.) Insulation during negotiations; and

5.) Reduced distractions from continuing to manage their enterprises during the process.

Importantly, implicit in the above is the expectation that using IBs also results in positive impacts on the selling prices i.e. the associated “quantitative” benefit. Proof of the reasonableness of that expectation can be derived from the study titled “Does Hiring M&A Advisers Matter for Private Sellers?” by Anup Agrawal, Tommy Cooper, Qin Lian, and Qiming Wang with the current draft dated November 2018.

The study is statistically rigorous and I recommend readers explore it on their own. However, the findings, which are based on 1,554 acquisitions of private companies during the period 1993-2010, are very enlightening as highlighted below:

1.) Private sellers that hire advisers receive significantly higher acquisition premiums (i.e. from 6% to 25%);

2.) The presence of sell-side advisers in deals involving private sellers has a negative effect (i.e. -7%) on announcement returns to (public) acquirers, consistent with the idea that advisers increase the bargaining power of private sellers; and

3.) M&A advisers, especially top investment banks, can find and negotiate better deals for private sellers.

In combination, the qualitative and quantitative benefits make for a compelling case to hire IBs to assist in the selling of private companies.

If participating in a professionally run sale process to maximize the return on your life’s work is of interest, contact your local CFA office, which is staffed with senior, securities licensed investment bankers operating in the context of a worldwide organization with over six decades experience assisting business owners sell their companies.