Premium, merger fees and the choice of investment banks: A simultaneous analysis

We analyze 635 US M&A transactions from 1985 to 2004. In contrast with prior research, we distinguish between the target and acquirer fees, and examine their independent effects on the level of the merger premium. The study provides evidence of a positive (negative) association between target (acquirer) fees and the level of the premium. It indicates that the reputation of investment banks affects the level of merger fees, but does not affect the level of the premium. The findings confirm the conflict of interests between target and acquirer firms where the investment banks’ efforts are positively related to shareholders’ interest. The study also finds that when acquirers pay higher fees than target firms, they pay lower premiums. The findings also imply that for the small proportion of mergers (13%) resulting in relatively large value gains for buying firms, an acquirer might be willing to pay large advisory fees even though this may result in a higher premium.