The Cost of Advice In Mergers and Acquisitions.pptVIP

The Cost of Advice In Mergers and Acquisitions Rebel A. Cole Kenneth Ferris Arie L. Melnik Presented at the 4th ICAF conference, Corfu Island, August 2012 Introduction 1 - Mergers represent large investments by acquiring firms. - Firms that initiate mergers use external advice. - Three types of advice are involved: 1. Accounting and legal advice (ref due diligence) 2. Financial advice (usually by investment bankers) 3. Strategic advice (about post merger integration) Our focus is on the early stages (even before the announcement). Introduction 2 - Finance literature focuses on stock price changes. - Planned mergers are not always executed. The prices of terminated mergers do not revert to pre-announcement levels (existing puzzle). One possible reason is out-of-pocket expense. Cost of advice is financially important to providers of services. It is important to estimate actual direct cost of proposed merger. We focus here on MA in the financial sector (SIC-6000). objectives - The purpose of the study is to examine the market for advice services. We examine if accounting and legal costs of advice increase with the financial size of expected deals We ask if advice on international mergers is more costly than domestic mergers. We inquire if accounting advice on cash deals is cheaper than advice on share-per-share transaction. Contributions First, we provide the first credible evidence on the direct costs of merger offers Second, we provide new evidence on the determinants of these costs. Literature review Auditors have economic power vis-à-vis clients (Fields et al, 2004, Lyon and Maher, 2005). In our case, clients are large banks. Pricing research of accounting services is about audit related tax advice. We consider a different market. This particular market produces transitory but significant income for accounting and legal firms. Considerable legal research deals with the value of fairness opinion (Davidoff, 2006, Kisgen et al,