The Cost of Advice in Merger & Acquisition Transactions

Abstract:     
In this study, we estimate the cost of advice associated with pre-merger or pre-acquisition due diligence. Mergers and acquisitions (hereafter 'mergers') are significant resource-consuming activities for businesses. The benefits of synergism, efficiency and market power associated with a merger may be realized at some point in the future, but real spending commitments (e.g., the cost of merger advice) are made by a potential acquirer even before any announcement of a proposed transaction. Using the actual amounts paid to accounting firms as the 'cost of advice,' we find that these short-term costs are nontrivial. Consequently, we hypothesize that the cost of pre-merger advice explains a large share of the decline in acquiring-firm shareholder wealth that is frequently observed in such transactions. We also find that the primary determinants of these costs are the financial size of a deal and the complexity of a deal as proxied by whether the transaction involved a domestic or international target. We do not find that the method of payment utilized to facilitate a transaction affects the cost of the merger advice.

Number of Pages in PDF File: 23

Keywords: advice, cost of advice, M&A, mergers and acquisitions

JEL Classification: D40, G34

working papers series