In an effort to answer this question professors Anup Agrawal from the University of Alabama, Tommy Cooper from the University of Mississippi, Qin Lian and Qiming Wang both from Louisiana Tech University analyzed a sample of 4,468 acquisitions of private sellers during the period of 1980 – 2012 to examine the decision and the consequences of hiring sell-side M&A advisors.
The Results Bode Well for Intermediaries
In their study entitled Does Hiring M&A Advisors Matter for Private Sellers?, it was discovered that “private sellers receive significantly higher acquisition premiums when they retain M&A advisors.” Although “top-tier” intermediaries offered the highest acquisition premium, the benefit of the M&A advisor held true across all deal sizes. Professor Agrawal stated, “Our findings suggest that the hiring and reputation of M&A advisers improve private sellers’ bargaining power and deal valuations”.
M&A Advisors Create Competition
The higher acquisition price derives from an M&A advisor’s ability to run smoother processes with better buyer lists. Business intermediaries have greater economies of specialization and information acquisition, and have lower search costs than their clients. A smooth process means that the M&A advisor is particularly adept at keeping multiple, relevant bidders engaged simultaneously. This concurrent interest from several interested parties is critical to obtaining the best sale price.
“Previous studies find that bargaining power is a significant determinant of the magnitude of private company valuations,” wrote the professors. “A key determinant of the seller’s bargaining power is the number of competing bids it receives.” Like supply and demand, “a seller has more negotiating leverage when a prospective buyer believes that it is competing with other bidders.” An M&A advisor helps drive acquisition premium by driving competition.
Best of all, the competition doesn’t even need to be real. According to Professor Agrawal, the mere presence of an M&A advisor can induce a sense of competition. “An M&A advisor can influence the attitudes and assumptions of bidders. If a seller only has one strategic buyer interested in purchasing the company, using an M&A advisor can give the prospective buyer the impression that there are competing strategic buyers against which it must compete to acquire the seller.”
Overall, Professor Agrawal explained, “A sell-side advisor can identify strategic buyers, evaluate the reasonableness of a bidder’s offer, manage and pace concurrent negotiations with multiple bidders, reduce the information advantage that a seasoned acquirer has over a private seller regarding the M&A process, and represent a private seller in negotiations with potential buyers.”
Additionally, advisors help keep you focused on running your business — a vital part of any sales process. They do not let the transaction become a distraction that negatively impacts business performance during such a critical period.