MFC-027 BeitelSchiereck.doc

Value creation of investment bank participation in the German

M&A-Business

Derick Beitela and Dirk Schiereckb

Working paper November, 9th 2003

Abstract

Although the recent downturn in M&A-activity, over the last 10 years, the M&A-market in

Germany showed a sharp increase in terms of transaction volume and number of deals. Along

with a growing market, investment banks play a more and more important role in the German

M&A-market. Investment bank participation in Germany has not been studied in much detail.

This study investigates the role investment banks play in creating value in M&A-transaction

of German acquirers. We find, that investment bank participation as well as reputation does

have a very limited impact on value creation.

Key words: Investment banks, investment banking, Mergers & Acquisitions,

German M&A-market

JEL classification: G24, G34

a Derick Beitel is research assistant at the Institute for Mergers & Acquisitions at the

University of Witten/Herdecke. E-mail address: [email protected] Dirk Schiereck is professor at the Endowned Chair of Banking and Finance at the European

Business School in Oestrich-Winkel. E-mail address: [email protected]

Value creation of investment bank participation in the German M&A-Business

1. Introduction

Over the last 15 years, the M&A-activity in Germany showed a sharp increase in terms of

transaction volume and number of deals.1 Although traditionally the vast majority of trans-

actions in Germany have been done without external M&A-advisors, investment banks are

becoming more and more important in the German M&A business.2 Advisory services of

investment banks can be viewed as capital investments. As an example, Saunders and

Srinivasan (2001) show (on the basis of 611 US M&A transactions between 1985 and 1998)

an average fee-payment of USD 4 m. Mandating an investment bank therefore only makes

sense if a company gains an advantage that the firm could not achieve without the advisory

services Empirical studies focusing on the role of investment banks in M&A transactions are

rare. Almost all existing studies focus on the US-market. The role of investment bank

participation in the German M&A-business has not been studied in much detail. Because of

the relatively immature M&A-market in Germany and structural differences between the US

and Germany (e.g. in corporate ownership and control) we take a deeper look at the German

M&A-market.

Value creation of investment bank participation can be measured in different ways. Referring

to the existing body of empirical studies in this field, this paper concentrates on the following

research questions:

1. Do shareholders of German buyers gain if their management uses an investment bank?

2. Are there a differences in the purchase prices if German buyers use external M&A-

advise?

3. Do shareholders benefit from investment bank participation in the mid-term?

Besides the shareholder wealth effects and purchase prices, this paper analyzes whether

transactions advised by investment banks are completed in a shorter period of time compared

to those without external M&A-advisors. The fourth research question is:

4. Does investment bank participation has an influence on the duration between the

announcement and the time a transaction is completed (time to completion)?

1 According to Thomson Financial SDC, the average CAGR of the transaction volume in Germany between 1990 and 2001 was 17%.

2 This goes along with the increased presence of investment banks in Germany over the last decade.

2

Besides investment bank participation, we also explore potential differences in the “quality”

of investment banks used, measured by reputation. The structure of this paper includes a short

review of the literature followed by a description of the data and methodology used. After

presenting the results of the study, the paper ends with a conclusion.

2. Review of the literature

There is mixed evidence on the shareholder wealth effects of investment banks acting as

M&A-advisors.3 For acquiring firms, Servaes and Zenner (1996) find no impact of investment

banks on the returns earned by the acquiring firms’ shareholders. Allen et al. (2001), who

compare transactions advised by commercial banks against those advised by investment banks

show, that returns are higher for acquirers that employ no advisor at all. Looking at the

reputation of investment banks, Bowers and Miller (1990), Servaes and Zenner (1996), Kale

et al. (1998), Rau (2000), Hunter and Jagtiani (2000) or Rau and Rodgers (2002) come to a

similar conclusion: First-tier investment banks are not better in providing superior shareholder

wealth effects compared to lower tier investment banks. Concentrating on target firm

shareholders, Kale et al. (1998) find, that cumulative abnormal returns are lower if only the

target firm chooses external M&A-advise. In contrast, target firm shareholders benefit, if

either the bidder or the target firm is advised by a first-tier compared to a lower-tier

investment bank. Bowers and Miller (1990) show similar results. Hunter and Walker (1990)

compare combined abnormal Dollar-returns against combined fee payments. They show an

average cumulated abnormal Dollar-return of USD 85m versus a combined average fee

payment of USD 5m. Bowers and Miller (1990) who concentrate on first- versus lower-tier

investment banks find, that combined wealth effects are higher, if the target, the bidder or

both are advised by a high quality investment bank. Kale et al. (1998) come to similar

conclusions.

Investigating the premiums paid by acquiring firms, Hunter and Walker (1990) find no impact

of investment bank participation. Instead, acquirers pay higher premiums, if the cash/asset-

ratio of target firms are high. Concentrating on the reputation of investment banks, Michel et

al. (1991), McLaughlin (1992) or Rau (2000) show, that acquiring firms pay a higher

premium if they are advised by a first-tier M&A-advisor. In the transaction sample of Rau

(2000), acquirers with first-tier investment banks pay an acquisition premium (median) of

3 For a detailed summary of the current empirical literature on the role of investment banks in mergers and acquisitions, see Beitel and Schiereck (2004a).

3

56,3%. The premium paid by acquirers with third-tier banks equals 38,1%. McLaughlin

(1990), McLaughlin (1992), Kesner et al. (1994), McLaughlin (1996), Rau (2000) or

Saunders and Srinivasan (2001) analyse fee payments. The results convey a positive

correlation between the absolute amount of fee payments and transaction volumes. On

average, dependent on the transaction type, up to 70% of fee payments are paid as contingent

fees. Saunders and Srinivasan (2001) show, that first-tier investment banks earn higher

(absolute) fee payments compared to lower-tier banks. However, the average transaction

volume advised by first-tier investment banks is also higher. Investigating the relationship

between fee payments and shareholder wealth effects, McLaughlin (1992) finds, that higher

fee payments are not related to higher acquisition returns of acquiring firms’ shareholders.

3. Value creation of investment bank participation in the German M&A-Business

3.1 The data

The transaction sample includes 398 M&A-transactions of German buyers between January

1995 until December 2001.4 The sample is drawn from the Securities Data Corporation (SDC)

database and has been completed by transaction published in the Computasoft M&A and the

Bloomberg databases. Capital market information (e.g. market capitalization of the trans-

action partners) is taken from Thomson Financial Datastream. Firm specific data is drawn

from the transaction databases used as well as from the Markus and Amadeus databases or

directly from annual reports.5 The criteria for choosing a transaction are:

• the announcement day is between January 1st, 1995 and December 31st,, 2001,

• the status of the transaction is completed,

• the transaction volume is at least 25 Mio. EUR,

• the home country of the acquirer is Germany,

• the transaction includes a change of control (i.e. before the announcement of the trans-

action the buyer owns less and after completion of the transaction more than 50% of the

shares/assets of the target),

• the business focus of the transaction partners is not mainly in the financial services

industry nor in the real estate business.

On the basis of these criteria we built two samples: 1) Transactions of German buyers with

investment banks („IB-sample“) and 2) Transactions of German buyers without investment 4 We analyze German acquirers only because for targets relevant data is often unknown. 5 Because of limitation in data (e.g. financials of non-quoted targets are often unknown) we always

indicate the number („N“) of parameters analyzed.

4

banks („Non-IB-sample“). The IB-sample comprises 172 transactions, the Non-IB-sample

226 transactions.

In order to reflect the minimum transaction volume demanded by most of the investment

banks analyzed, we only considered transactions with a minimum transaction value (rank

value) of EUR 25 m.6 Restrictions on the business focus were done to increase the

comparability of the transactions analyzed. Table 1 shows the time structure and the

transaction volume of the M&A transactions analyzed.

Table 1: Time structure and transaction volume of data sample

Source: Thomson Financial SDC, Computasoft M&A-Data and Bloomberg.

The average transaction size in the IB-sample is approximately 8.8 times higher than in the

Non-IB-sample. In 80% of the transactions, German buyers with investment banks, acquire

targets outside of Germany. The percentage of cross border transactions amounts to 65% in

the Non-IB-sample.7

To be able to analyze abnormal returns gained by the shareholders involved, only quoted

companies can be examined. Out of the 172 transactions in the IB-sample, there are 142

quoted buyers and 60 quoted targets. In the Non-IB-sample, 145 buyers and 28 targets are

publicly listed. To explore the impact of investment bank reputation, we further classify our

IB-sample into two different sub-samples.8 We classify an investment bank as one with “high

reputation”, if the advisor was among the top-five investment banks, in terms of advised

6 For more details on minimum transaction volumes, see Lüdke and Frien (2001). 7 Further analyses on the transaction parameters and its impact on the decision of German buyers to

use investment banks can be found in Beitel and Schiereck (2004b).8 Reputation of investment banks is often used as a proxy-variable for the quality of its advisory

services. Empirical (M&A-focused) studies, investigating investment banks by its reputation can be found in Bowers and Miller (1990), McLaughlin (1990), Michel et al. (1991), McLaughlin (1992), Servaes and Zenner (1996), Kale et al. (1998), Rau (2000), Hunter and Jagtiani (2000), Saunders and Srinivasan (2001), Schiereck and Unverhau (2002) or Rau and Rodgers (2002).

5

IB-sample Non-IB-sample

Year Number of transactions

in % Average transaction volume (in EURm)

2001 25 14,5% 1.330,982000 53 30,8% 1.843,441999 42 24,4% 2.388,571998 21 12,2% 2.168,641997 11 6,4% 1.222,041996 14 8,1% 601,761995 6 3,5% 1.070,34

Total 172 100% 1.777,57



2001 31 13,7% 111,762000 56 24,8% 225,951999 40 17,7% 206,381998 37 16,4% 289,061997 23 10,2% 162,911996 23 10,2% 186,221995 16 7,1% 163,56

Total 226 100% 202,28




2001 25 14,5% 1.330,982000 53 30,8% 1.843,441999 42 24,4% 2.388,571998 21 12,2% 2.168,641997 11 6,4% 1.222,041996 14 8,1% 601,761995 6 3,5% 1.070,34

Total 172 100% 1.777,57



2001 31 13,7% 111,762000 56 24,8% 225,951999 40 17,7% 206,381998 37 16,4% 289,061997 23 10,2% 162,911996 23 10,2% 186,221995 16 7,1% 163,56

Total 226 100% 202,28

(cumulative) transaction volume in the two years preceding the transaction analyzed.9 As we

analyze German buyers acquiring mainly European targets, we use European league tables to

classify our sample. Table 2 shows all investment banks who have been among the top-ten

M&A-advisors in Europe between 1993 and 2001.

No investment bank has been consistently among the top-5 M&A-advisors over the complete

period analyzed. Morgan Stanley (6-times), UBS Warburg (6-times), Lazard (4-times), JP

Morgan (3-times) and Goldman Sachs (3-times) were among the top-five banks the most

often. 47 German buyers (27%) have been advised by investment banks with high reputation.

Table 2: Top-10 investment banks in European M&A-transactions between 1993 and 2001

Investment bank Year / Ranking1993 1994 1995 1996 1997 1998 1999 2000 2001

Goldman Sachs 10 10 6 6 4 2 1 1 1JP Morgan 8 6 1 3 6 3 4 4 2Morgan Stanley 7 4 2 2 1 1 3 2 3Merrill Lynch >10 9 >10 >10 >10 7 2 9 4Dresdner Kleinwort Wasserstein 2 >10 >10 >10 7 >10 10 10 5Salomon Smith Barney 5 5 7 7 8 6 >10 3 6ING Barings >10 7 5 10 >10 >10 >10 >10 7Lazard 4 2 4 4 3 9 9 7 8UBS Warburg 1 1 3 1 2 5 5 6 9Credit Suisse First Boston >10 3 8 8 5 4 8 5 10Rothschild 9 >10 10 9 9 8 6 8 >10Societe General 6 >10 >10 >10 >10 >10 >10 >10 >10Deutsche Bank 3 8 9 >10 10 >10 7 >10 >10BNP Paribas >10 >10 >10 5 >10 10 >10 >10 >10

Source: Thomson Financial SDC.

3.2 Methodology

In order to address the four different research questions described above, we analyze the

(short-term) cumulative abnormal returns (CARs), the purchase prices and the mid-term

9 If a buyer has been advised by more than one investment bank, we use (in conjunction with McLaughlin (1992) and Rau (2000)) the reputation of the bank with the highest reputation. see McLaughlin (1992), p. 239 or Rau (2000), p. 303.

6

acquisition performance of German buyers. In addition we look at the duration between

transaction announcements and completions (time to completion). The methodology used for

measuring CARs builds on the event study methodology (OLS market model) as introduced

by Brown and Warner (1980), Dodd and Warner (1983) and Brown and Warner (1985).

Referring to the existing literature, we consider several event windows around the

announcement day in intervals of -20 to +20 trading days.10 To calculate the market model

regression parameters, we use a clean period of -301 to -21 trading days.11 For acquirers and

targets who were not publicly traded over the complete clean period, estimates for the

regression parameters are done with the corresponding period of time.12 For German buyers

and targets, we used the Morgan Stanley Dean Witter MSCI Standard Market Index for

Germany. For foreign targets, the corresponding MSCI country index was used. Actual

returns were calculated on the basis of the „total return index“ as computed by Thomson

Financial Datastream for each trading day.13

To compare the different transaction samples described above, univariate comparisons are

made between the IB- and the Non-IB-sample as well as between the samples with investment

banks of different reputation. Because the precondition of normal distributed data is not

always met, we use non-parametric (Mann-Whitney rang sum tests) as well as parametric

tests (t-tests). Similar methodology is used by Servaes and Zenner (1996) or Rau (2000).14 To

control for other variables influencing value creation in M&A-transactions, we also ran

multivariate OLS-regressions. As proxies for purchase prices, we looked at acquisition

premiums and transaction multiples, as described in table 3.

Table 3: Acquisition premiums and transaction multiples Acquisition premiums Description

iZCAR )( • CAR(Z)i = cumulative abnormal returns of the target i over the event window

10 If the announcement day falls on a weekend or holiday, we use the first trading day after the announcement day.

11 This period is consistent with the one used by Bowers and Miller (1990). Hunter and Walker (1990), Kale et al. (1998), Saunders and Srinivasan (2001) and Schiereck and Unverhau (2002) use a similar period. McLaughlin (1992), Servaes and Zenner (1996), Rau (2000), Allen et al. (2001) or Rau and Rodgers (2002) use a slightly shorter period of time.

12 17 acquirers in the IB- and 18 acquirers in the Non-IB-sample are not quoted over the complete clean period. The average clean period of these companies is 179 trading days in the IB- and 171 trading days in the Non-IB-sample.

13 The advantage of using the total return index is, that several adjustments (e.g. for dividend payments) are already included.

14 See Servaes and Zenner (1996), p. 798 respectively Rau (2000), p. 305.

7

i

i

TotAss

TAVol • TAVoli = transaction volume (100% of acquired shares)

• TotAssi = Total assets of target i, as shown in the last annual statement prior to the announcement of the transaction

Transaction multiples Description

iSales

TAVol • TAVol = transaction volume (for 100% of the acquired shares)

• Salesi = Sales of target i as shown in the last annual statement prior to the announcement of the transaction

iEBITDA

TAVol • EBITDAi = Earnings before interest, tax, depreciation and amortization of target i , referring to the last annual statement prior to the announcement of the transaction

The method for measuring mid-term acquisition performance builds on the adjusted abnormal

stock return of the acquiring company over a period of 125 trading day as well as 250 trading

days. To compute abnormal returns, we compare actual stock returns against the performance

of the corresponding market indices. The mid-term acquisition performance is then calculated

in analogy to the market model used to calculate (short-term) CARs.15

3.3 Results

Table 4 shows the CARs of German buyers in the IB- and Non-IB-sample over different

event windows. CARs of the acquirers in the IB-sample, as well as in the Non-IB-sample are

not significantly different from zero. The percentage of transactions with positive CARs is

similar in both samples and varies around 50%. CARs of German buyers with and without

investment banks are not significantly different. German acquirers do not earn higher or lower

CARs is they are advised by investment banks. The results in table 4 confirm the results

obtained in earlier (US-focused) studies: Investment bank participation in M&A-transactions

does neither have a significant positive nor negative effect on CARs earned by shareholders

of acquiring companies.

Table 4: CARs of German buyers with and without investment banksIB-sample Non-IB-sample

Event window CAR p-value TA w/ CAR>0

CAR p-value TA w/ CAR>0

Difference CAR

t-test p-value

15 Referring to Rau and Rodgers (2002) we only analyzed transactions, where the transaction volume is at least 10% of the market capitalization of the buyer (20 trading days before the announcement of the transaction).

8

(IB-sample: N=142, Non-IB-sample: N=145)

[-20;0] 1,61 0,441 53,5 0,92 0,468 52,4[-10;0] 1,37 0,431 49,3 0,89 0,457 49,7[-3;0] 0,57 0,452 51,4 1,47 0,384 55,9[0] 0,08 0,486 50,7 0,34 0,446 55,2[-1;+1] 0,93 0,410 57,7 0,83 0,423 55,9[-3;+3] 0,23 0,485 52,8 1,03 0,438 51,0[-10;+10] 0,71 0,474 52,8 -0,40 0,514 45,5

0,69 0,3520,48 0,352

-0,90 0,128-0,26 0,2870,10 0,352

-0,80 0,2131,11 0,248

[-20;+20] 0,23 0,494 52,8 -1,36 0,534 44,1 1,59 0,247

Besides CARs of German buyers, we also looked at the combined cumulative abnormal

returns. In six out of eight event windows analyzed, the combined CARs in the IB-sample are

lower as those in the Non-IB-sample. In no case, they are significantly lower. Table 5 shows

the results.

Table 5: Combined CARs with and without investment banks advising German buyersIB-sample Non-IB-sample

Event-window

CAR Median

TA w/ CAR>0

CAR Median TA w/ CAR>0

Difference medians

t-test p-value

MWU p-value

(IB-sample: N=47; Non-IB-sample: N=18)

[-20;0] 3,96 3,53 63,8 6,11 2,87 72,2 0,66 0,250 0,289[-10;0] 3,75 2,08 66,0 4,44 3,59 66,7 -0,41 0,403 0,391[-3;0] 2,32 1,10 55,3 4,10 2,24 66,7 -2,03 0,215 0,178[0] 1,66 0,51 59,6 2,10 0,68 66,7 -1,59 0,403 0,459[-1;+1] 2,95 1,92 66,0 2,06 2,42 72,2 -0,14 0,493 0,489[-3;+3] 1,90 0,62 53,2 3,13 3,28 72,2 -2,51 0,310 0,206[-10;+10] 2,41 2,80 61,7 2,49 3,76 72,2 0,31 0,491 0,294[-20;+20] 1,86 1,13 51,1 4,83 6,22 72,2 -3,70 0,257 0,219

Besides pure investment bank participation German buyers might benefit if they receive

advise by investment banks with high reputation. Table 6 summarizes the results.

Table 6: CARs of German buyers with investment banks with different reputation and combined CAR with investment banks with different reputation advising German buyers

IB with high reputation IB with low reputation

Event window

CAR Median

TA w/ CAR>0

CAR Median TA w/ CAR>0

Difference medians

t-test p-value

MWU p-value

9

A. CAR German buyers(IB w/ high reputation: N=41; IB w/ low reputation: N=101)

[-20;0] -0,30 -1,82 41,5 2,38 1,82 58,4 -3,64** 0,227 0,033[-10;0] 0,17 -1,77 41,5 1,86 0,41 52,5 -2,18* 0,233 0,089[-3;0] -0,23 -0,80 43,9 0,90 0,47 54,5 -1,27 0,204 0,147[0] 0,34 0,23 56,1 -0,02 0,00 48,5 0,23 0,340 0,494[-1;+1] 0,32 0,25 58,5 1,18 1,14 57,4 -0,89 0,419 0,371[-3;+3] -0,95 -0,76 46,3 0,71 0,53 55,4 -1,29* 0,154 0,088[-10;+10] -0,52 -0,35 46,3 1,20 1,33 55,4 -1,68 0,273 0,242[-20;+20] -1,11 -2,78 39,0 0,77 2,47 58,4 -5,25 0,320 0,182

B. Combined CAR (IB w/ high reputation: N=20; IB w/ low reputation: N=27)

[-20;0] 3,75 2,78 65,0 4,12 3,68 63,0 -0,90 0,470 0,366[-10;0] 5,97 4,13 70,0 2,11 1,05 63,0 3,08 0,099 0,253[-3;0] 4,03 0,73 50,0 1,06 1,10 59,3 -0,37 0,095 0,296[0] 2,50 0,39 55,0 1,04 0,51 63,0 -0,12 0,022 0,350[-1;+1] 4,54 3,51 80,0 1,78 0,67 55,6 2,84** 0,040 0,022[-3;+3] 3,78 1,96 65,0 0,52 -0,18 44,4 2,14 0,103 0,172[-10;+10] 6,92 6,34 65,0 -0,94 2,37 59,3 3,97** 0,015 0,041[-20;+20] 4,66 4,54 55,0 -0,22 -1,67 48,1 6,21 0,152 0,145

* = significant at the 10%-level, ** = significant at the 5%-level.

CARs of German buyers are in seven out of eight event windows smaller, if the acquirers are

advised by high reputation investment banks. In three event windows ([-20;0], [-10;0] and

[-3;+3]) the difference is significant according to the relevant Mann-Whitney-tests. Also we

find differences in combined CARs. The combined CARs in the sample with investment

banks with high reputation are significantly higher in the [-1;+1] and [-10;+10] event

windows compared to the sample with investment banks with low reputation. Similar to the

studies made by Kale et al. (1998), Bowers and Miller (1990) or Hunter and Walker (1990)

the results show, that transactions advised by investment banks with high reputation show

higher combined CARs. Although this result is interesting from a macro economic point of

view, German acquirers – as shown above – do not benefit from these advisory services.16

As described above we also looked at acquisition premiums and transaction muliples as

proxies for purchase prices. Table 7 summarizes the premiums and multiples paid by German

acquirers with and without investment banks.

Table 7: Acquisition premiums and transaction multiples paid by German buyers with and without investment banks


Average Median (N) Average Median (N) Difference medians

t-test p-value

MWU p-value

16 Comparing CARs of German buyers with high reputation investment banks with those obtained by German buyers without extern advise, we find that in six out of eight event periods, the CARs are lower in the high reputation investment bank sample (not shown). In contrast, CARs of German acquirers with investment banks with low reputation are almost always higher than in the Non-IB-sample. Looking at combined CARs we find no consistent results.

10

A. Acquisitions premiums

iZCAR )( (a) 29,24 27,08 60 10,99 8,55 28 18,53*** 0,007 0,006

i

i

TotAss

TAVol1,98 1,30 76 1,29 1,08 48 0,22*** 0,000 0,000

B. Transaction multiples

i

i

Sales

TAVol3,46 0,98 92 1,39 0,85 76 0,13 0,007 0,130

i

i

EBITDA

TAVol16,59 11,32 60 10,74 8,05 35 3,27*** 0,028 0,003

*** = significant at the 1%-level.

(a) CARi of targts in the [-20;+20] event window

Three out of four variables show significant results. German buyers advised by investment

banks pay significantly higher acquisition premiums and transaction multiples compared to

those without investment banks. No similar results can be shown for German acquirers with

investment banks of different reputation (not shown).17

Value creation in M&A-transactions is not only influenced by investment bank participation.

To control for other variables, we ran multivariate OLS-regressions (table 8,9 and 10). The

control variables analyzed mainly build on the existing literature. The results in table 8

confirm the previous results. Investment bank participation or reputation does not influence

CARs received by shareholders of German acquirers. The regression analyzes – considering

only investment bank participation (model 1) or reputation (model 3) – does not explain

CARs (p-value = 0,705 respectively p-value = 0,839). Also while taking into consideration

other variables (model 2 and model 4), investment bank participation or reputation does not

have any significant explanatory power (model 2: German buyers with investment banks p-

value = 0,239, model 4: German buyers with high reputation investment banks p-value =

0,295).

In contrast to investment bank participation or reputation we find a significant positive impact

with the relative transaction size (relative transaction volume: p-value = 0,000 (model 2)

respectively p-value = 0,014 (model 4)) as well as with the business area of the target

(business area of target in new economy: p-value = 0,016 (model 2)). Negative explanatory

power we find regarding the absolute size of transaction volume and the dummy variable

describing business related transactions (model 2: p-value = 0,046 respectively p-value =

17 Comparing transactions with investment banks with high or low reputation with those advised by no external financial advisor, we find a similar result (not shown). German acquirers with investment banks pay, independent from the reputation of their advisor, higher acquisition premiums and transaction multiples compared to those buyers without investment banks.

11

0,096). Similar results we obtain while looking at acquisition premiums and transaction

multiples (table 9 and 10). In contrast to our previous finding investment bank participation,

and reputation, does not have a significant impact on premiums and multiples if other

variables are taken into consideration. Significant explanatory power we find regarding the

absolute transaction size (table 9, model 3 and 4 and table 10, model 1,2,3 and 4), the cash-

asset-ratio of the targets (table 9, model 3 and 4), the country focus (cross-border transactions:

table 10, model 4), the existence of a major shareholder (table 10, model 3) and the business

focus of the target. In almost every regression analysis, the “new economy-dummy“ is

significantly positive. Negative impact on premiums and multiples we find with public targets

and (to our surprise) regarding the transaction experience of German buyers (both in table 10,

model 3 and 4).

In contrast to investment bank participation or reputation, the results of the regression analysis

show that the number of investment banks involved has a positive impact on CARs received

by the shareholders of German buyers. Table 8 model 4 shows, that CARs of German buyers

are higher, if the acquirers use more than one investment bank. The beta-coefficient of the

variable “number of investment banks of German acquirer“ is positive and significant (p-

value = 0,027). No impact can be shown regarding acquisition premiums or transaction

multiples.

Table 8: OLS-regression analysis for CARs of German buyers

Parameters CARs of German acquirer

model 1 model 2 model 3 model 4

German acquirer with investment bank -0,019(0,705)

-0,100(0,239)

German acquirer with high reputation investment bank

-0,017(0,839)

0,112(0,295)

12

Number of investment banks of German acquirers

0,261**(0,027)

Acquisition of single assets -0,027(0,738)

-0,032(0,777)

Transaction volume -0,138(0,110)

-0,246**(0,046)

Relative transaction volume 0,279***(0,000)

0,267***(0,014)

Cross-border transactions -0,119(0,122)

-0,055(0,587)

Payment not only cash 0,102(0,215)

0,140(0,216)

Market capitalization German acquirer -0,106(0,219)

-0,134(0,281)

Same (3-digit) industry code of transaction partners

-0,106(0,162)

-0,177*(0,096)

Number of industry codes target 0,030(0,699)

0,070(0,518)

Business area of target in New Economy 0,197**(0,016)

-0,005(0,965)

Prior stake of German acquirer in target (> 5%) 0,004(0,961)

-0,065(0,527)

Target with investment bank -0,058(0,561)

-0,116(0,339)

Target with high reputation investment bank -0,026(0,748)

0,014(0,901)

Transaction experience German acquirer 0,116(0,147)

0,077(0,468)

German acquirer with major shareholder (>25% of the shares)

-0,003(0,973)

-0,117(0,259)

(N) 287 177 142 100

Intercept 0,014**(0,014)

0,023(0,195)

0,012(0,102)

-0,022(0,493)

R2 (Adj.) -0,003 0,115 -0,007 0,111

F-value 0,144(0,705)

2,432***(0,003)

0,042(0,839)

1,775**(0,049)

Durbin-Watson-value 1,864 1,877Table 8 shows the coefficients of the OLS-regressions measuring the impact of various parameters on the CARs of German buyers in the event window [-1;+1]. The corresponding p-values are shown in brackets. * = significant at the 10%-level, ** = significant at the 5%-level, *** = significant at the 1%-level.

Table 9: OLS-regression analysis for acquisition premiums paid by German buyers

Parameters CAR target TAVol / TotAss


German acquirer with investment bank -0,504(0,236)

0,079(0,648)

German acquirer with high reputation 0,166 -0,144

13

investment bank (0,447) (0,424)


0,029(0,931)

0,016(0,920)

Transaction volume -0,232(0,309)

-0,243(0,374)

0,395***(0,005)

0,433**(0,026)

Relative transaction volume -0,168(0,391)

-0,194(0,483)

0,052(0,683)

0,135(0,438)

Cross-border transactions 0,048(0,837)

0,105(0,705)

0,158(0,278)

0,217(0,201)

Payment not only cash -0,414*(0,065)

-0,405(0,118)

Market capitalization German acquirer -0,150(0,588)

-0,243(0,374)

-0,064(0,693)

0,085(0,659)


0,261(0,215)

0,230(0,339)

0,110(0,398)

0,130(0,438)

Number of industry codes target -0,121(0,533)

-0,165(0,468)

-0,150(0,215)

-0,107(0,509)

Business area of target in New Economy 0,226(0,286)

0,230(0,333)

0,273**(0,037)

0,266*(0,091)

Prior stake of German acquirer in target (> 5%) -0,012(0,962)

-0,067(0,818)

0,159(0,213)

0,141(0,395)

Target with investment bank 0,729*(0,096)

0,329(0,191)

0,012(0,938)

-0,085(0,672)


-0,067(0,818)

-0,022(0,883)

-0,028(0,880)

Cash/asset ratio target -0,194(0,334)

-0,245(0,297)

0,318**(0,010)

0,334**(0,043)

Publicly listed target -0,178(0,160)

-0,235(0,183)

Transaction experience German acquirer -0,004(0,984)

-0,033(0,880)

-0,016(0,901)

-0,057(0,726)


-0,189(0,342)

-0,169(0,445)

-0,029(0,807)

-0,103(0,525)

(N) 39 35 64 45

Intercept 0,047**(0,044)

-0,006(0,925)

0,059(0,589)

0,198(0,389)

R2 (Adj.) 0,031 -0,078 0,284 0,207

F-value 1,081(0,422)

0,847(0,628)

2,666***(0,005)

1,716(0,102)

Durbin-Watson-value 1,872 1,861 2,245 2,165Table 9 shows the coefficients of the OLS-regressions measuring the impact of various parameters on the acquisition premiums. The corresponding p-values are shown in brackets. * = significant at the 10%-level, ** = significant at the 5%-level, *** = significant at the 1%-level.

Table 10: OLS-regression analysis for transaction multiples paid by German buyers

Parameter TAVol / Sales TAVol / EBITDA


German acquirer with investment bank 0,061(0,696)

0,161(0,349)

German acquirer with high reputation 0,053 0,035

14

investment bank (0,688) (0,804)


0,022(0,885)

0,182(0,217)

Transaction volume 0,567***(0,000)

0,483***(0,005)

0,365**(0,010)

0,344**(0,044)

Relative transaction volume -0,077(0,499)

-0,003(0,981)

0,041(0,752)

0,007(0,960)

Cross-border transactions 0,066(0,614)

0,137(0,356)

0,159(0,274)

0,360**(0,035)

Market capitalization German acquirer 0,006(0,969)

0,120(0,467)

0,187(0,209)

0,411**(0,011)


0,172(0,140)

0,186(0,196)

0,094(0,478)

0,106(0,482)


-0,155(0,270)

-0,154(0,240)

-0,079(0,593)

Business area of target in New Economy 0,265**(0,027)

0,326**(0,021)

0,246*(0,081)

0,371**(0,042)


0,056(0,697)

0,143(0,254)

0,040(0,775)

Target with investment bank 0,058(0,665)

0,057(0,747)

0,120(0,425)

-0,054(0,804)


-0,039(0,800)

0,167(0,261)

0,145(0,395)

Cash/asset ration target 0,115(0,285)

0,048(0,722)

-0,065(0,609)

-0,179(0,288)

Publicly listed target -0,154(0,175)

-0,214(0,161)

-0,411***(0,002)

-0,299*(0,092)

Transaction experience German acquirer -0,052(0,654)

-0,079(0,574)

-0,263*(0,069)

-0,280*(0,055)


0,005(0,964)

-0,021(0,883)

0,229*(0,086)

0,258(0,141)

(N) 63 44 51 35

Intercept 0,107(0,763)

-0,073(0,919)

1,161*(0,055)

0,457(0,654)

R2 (Adj.) 0,436 0,439 0,437 0,583

F-value 4,196***(0,000)

3,100***(0,005)

3,588***(0,001)

3,972***(0,003)

Durbin-Watson-value 2,033 2,216 1,894 2,329Table 10 shows the coefficients of the OLS-regressions measuring the impact of various parameters on the transaction multiples. The corsponding p-values are shown in brackets. * = significant at the 10%-level, ** = significant at the 5%-level, *** = significant at the 1%-level.

Besides CARs and purchase prices, investment bank participation might be advantageous to

German acquirers if the M&A-advisors are able to influence the time to completion of a

transaction.18 A shorter time to completion reduces confusion surrounding a transaction (e.g.

uncertainty of staff, clients or suppliers) and therefore transaction costs (e.g. in the form of

18 It would be also interesting to investigate whether investment bank participation or reputation has an impact on the total duration of transaction execution. As public information on this period of time is not available, we cannot analyze this period.

15

lost customers or key staff). Table 11 shows the time to completion of the transactions in our

samples. The average time to completion in the IB-sample is 102 days, whereas it is 42 days

in the Non-IB-sample. The period between transaction announcement and completion for

German buyers with investment banks is more than twice as long as the corresponding period

in the Non-IB-sample.

Table 11: Time to completion

One important factor influencing time to completion is the transaction size: The average time

to completion increases with higher transaction volumes. Looking at different transaction size

sub-samples, we still find, that time to completion is significantly higher in the IB-sample.19

To control for other variables influencing time to completion, we ran multivariate OLS-

regressions. The results shown in table 12 do not support our previous findings.

Table 12: OLS-Regression analysis for the time to completion

Parameters Time to completion

model 1 model 2

German acquirer with investment bank 0,081(0,290)

German acquirer with high reputation investment bank 0,040(0,662)

19 Transaction volume between 25 and 99 Mio. EUR: MWU p-value < 0,000, transaction volume between 100 and 499 Mio. EUR: MWU p-value < 0,000, transaction volume greater than 500 Mio. EUR: MWU p-value = 0,088.

16

IB-Sample Non-IB-Sample

66 68

151

0

20

40

60

80

100

120

140

25-99 101-499 >500

Transaktionsvolumen in Mio. EUR

Tag

e

–

31

44

102

0

20

40

60

80

100

120

140

25-99 101-499 >500


Tag

e

IB-Sample Non-IB-Sample

66 68

151

0

20

40

60

80

100

120

140

25-99 101-499 >500


Tag

e

–

31

44

102

0

20

40

60

80

100

120

140

25-99 101-499 >500


Tag

e

Number of investment banks of German acquirers 0,329***(0,002)

Acquisition of single assets 0,080(0,294)

0,057(0,582)

Transaction volume 0,159**(0,042)

0,109(0,313)

Relative transaction volume 0,097(0,157)

0,041(0,654)

Cross-border transactions -0,098(0,156)

-0,049(0,586)

Payment nor only in cash 0,142*(0,062)

0,119(0,229)

Market capitalization German acquirer 0,063(0,419)

-0,035(0,747)

Publicly listed target 0,074(0,361)

-0,115(0,308)

Same (3-digit) industry code of transaction partners 0,048(0,484)

0,017(0,852)


0,027(0,775)

Business area of target in New Economy -0,116(0,121)

-0,111(0,274)


0,187**(0,043)

Target with investment bank 0,110(0,182)

0,125(0,208)


-0,010(0,921)

Transaction experience German acquirer 0,126*(0,080)

0,148(0,114)

(N) 212 124

Intercept 4,109*(0,071)

-3,298(0,466)

R2 (Adj.) 0,117 0,161

F-value 2,856***(0,000)

2,480***(0,003)

Durbin-Watson-value 2,014 2,130Table 10 shows the coefficients of the OLS-regressions measuring the impact of various parameters on the time to completion. The corresponding p-values are shown in brackets. * = significant at the 10%-level, ** = significant at the 5%-level, *** = significant at the 1%-level.

After controlling for other variables, investment bank participation does not have a significant

impact on time to completion (table 12, model 1: German acquirer with investment bank: p-

value = 0,290, model 2: German acquirer with high reputation investment bank: p-value =

0,662). Positive impact we find regarding the transaction volume (model 1: p-value = 0,042),

the method of payment (payment not only cash, model 1: p-value = 0,062), prior stake of

German acquirer in target (model 2: p-value = 0,043) and regarding transaction experience of

German buyers (model 1: p-value = 0,080).

17

In contrast to investment banks participation or reputation, again the number of investment

banks involved does have a significant impact on the duration between transaction

announcement and completion. The corresponding beta-coefficient in table 12, model 2

(“number of investment banks of German acquirer“) equals 0,329 (p-value = 0,002).

We already showed that investment bank participation nor reputation does have an impact on

CARs, purchase prices or time to completion. But do German buyers benefit from investment

bank participation or reputation in the mid-term? Table 13 summarizes the results: The mid-

term acquisition performance of the analyzed buyers with and without investment banks do

not differ significantly. Also investment bank reputation has no impact (table 14).

Table 13: Mid-term acquisition performance of German buyers with and without investment

banks

IB-sample Non-IB-sampleSub-samples Aver-

ageMedian (N) Aver-

ageMedian (N) difference

medianst-test

p-val.MWU

p-value

125 trading days 4,62 -1,52 61 1,14 -9,41 53 7,89 0,371 0,328250 trading days 2,81 -8,04 61 -1,54 -11,58 53 3,54 0,367 0,472

Table 14: Mid-term acquisition performance of German buyers with investment banks with different reputation

IB with highreputation

IB with low Reputation

Sub-samples Aver-age

Median (N) Aver-age

Median (N) difference medians

t-test p-val.

MWU p-value

125 trading days -3,19 -11,88 15 7,56 0,00 46 -11,88 0,231 0,319250 trading days -10,36 -7,11 15 7,47 -7,53 46 0,42 0,135 0,433

4. Summary and conclusion

In this paper, we analyzed four research questions. We investigated whether investment bank

participation and/or reputation has an impact on (short-term) CARs of German buyers, on

purchase prices and on time to completion. Further we looked at the mid-term acquisition

performance of German acquirers. The results confirm the existing (US-focused) empirical

literature. Investment bank participation and/or reputation does not have a significant impact

18

on abnormal cumulative returns received by shareholders of German acquirers. The mid-term

acquisition performance of German acquirers is also not influenced by investment bank

participation nor reputation. Also transactions with (short-term) CARs do not show positive

mid-term acquisition performances more often if investment banks are involved. Similar

results we find regarding acquisition premiums and transaction multiples. While looking at

investment bank participation alone, we find that German acquirers pay higher acquisition

premiums and transaction multiples in transactions advised by investment banks. However

this results can not be confirmed taking into consideration other variables in the regression

analyzes. In contrast to investment bank participation we find, that other deal-characteristics,

like the transaction volume or the business focus of the target do have significant explanatory

power in explaining CARs and purchase prices. German buyers do not pay higher premiums

and multiples if they use investment banks, but if they proceed in bigger transactions or if

they acquire targets in business areas with (potentially) greater revenue potentials. In this

aspect, this study confirms the results obtained by Hunter and Walker (1990) or Servaes and

Zenner (1996) who can not find a significant relations-ship between investment bank

participation and acquisition premiums. In contrast to Michel et al. (1991), McLaughlin

(1992) or Rau (2000) we can not show, that German buyers advised by investment banks with

higher reputation pay higher acquisition premiums. German acquirers pay similar acquistion

premiums and transaction multiples independent from the reputation of the respective M&A-

advisors.

A different result we find regarding the number of investment banks involved. Shareholders

of German acquirers do benefit if its management mandates more than one investment bank.

This results confirms the results of Hunter and Jagtiani (2000). The number of investment

banks does not only influence CARs, but also the duration between transaction announcement

and completion. The shareholders of German acquirers benefit if its management uses more

than one M&A-advisor. At the same time they „suffer“ from longer time to completions.

A possible explanation for the positive impact of more than one investment banks could be

the combination of different product- and transaction-expertise of the various investment

banks involved that leads to better results. Also competition among the advisors for potential

add-on mandates could play an important factor. A reason for the increased time to

completion might be that the investment banks need more time to coordinate their advisory

services.

19

As the main results of this study we find that investment bank participation and reputation

does have a very limited impact on value creation in M&A-transactions of German acquirers.

In this aspect, the management of German acquirers can not rely on the investment banks

involved. Instead the ultimate responsibility for value creation in M&A-transactions rests with

the management.

Bibliography

20

Allen, L., Jagtiani, J., Peristiani, S. and Saunders, A. (2001): The role of bank advisors in mergers and acquisitions. NYU Stern Department of Finance, Working Paper.

Beitel, D. and Schiereck, D. (2004a): Investmentbanken in M&A-Transaktionen. Stand der empirischen Forschung. Forthcoming.

Beitel, D. and Schiereck, D. (2004b): Warum beauftragen Deutsche Käuferunternehmen Investmentbanken bei der Durchführung ihrer M&A-Transaktionen? Forthcoming.

Bowers, H. M. and Miller, R. E. (1990): Choice of investment banker and shareholders' wealth of firms Involved in acquisitions. Financial Management, Vol (19), S. 34-44.

Brown, S. and Warner, J. (1980): Measuring security price performance. Journal of Financial Economics, Vol (7), S. 205-258.

Brown, S. and Warner, J. (1985): Using daily stock returns: The case of event studies. Journal of Financial Economics, Vol (14), S. 3-31.

Dodd, P. and Warner, J. (1983): On corporate governance: A study of proxy contests. Journal of Financial Economics, Vol (11), S. 401-438.

Hunter, W. C. and Jagtiani, J. (2000): Merger advisory fees and advisors' effort. Emerging Issues Series, Federal Reserve Bank of Atlanta S&R-2000-11R.

Hunter, W. C. and Walker, M. B. (1990): An empirical examination of investment banking merger fee contracts. Southern Economic Journal, Vol (56), S. 1117-1130.

Kale, J., Kini, O. and Ryan, H. (1998): On the participation and reputation of financial advisors in corporate acquisitions. Georgia State University, Working Paper.

Kesner, I. F., Shapiro, D. L. and Sharma, A. (1994): Brokering mergers: An agency theory perspective on the role of representatives. Academy of Management Journal, Vol (37), S. 703-721.

Lüdke, U. and Frien, B. (2001): Der beste Freund des Übernahmekandidaten. M&A-Berater: Was sie können - und was nicht. FINANCE, Vol (Juni), S. 10-30.

McLaughlin, R. (1990): Investment-banking contract in tender offers: an empirical analysis. Journal of Financial Economics, Vol (28), S. 209-232.

McLaughlin, R. (1992): Does the form of compensation matter? Investment banker fee contracts in tender offers. Journal of Financial Economics, Vol (32), S. 223-260.

McLaughlin, R. (1996): Adverse contract incentives and investment banker reputation: Target firm tender offer fees. Journal of Financial Research, Vol (19), S. 135-156.

Michel, A., Shaked, I. and Lee, Y.-T. (1991): An evaluation of investment banker acquisition advise: the shareholders' perspective. Financial Management, Vol (20), S. 40-49.

Rau, P. R. (2000): Investment bank market share, contingent fee payment, and the performance of acquiring firms. Journal of Financial Economics, Vol (56), S. 293-324.

Rau, P. R. and Rodgers, K. J. (2002): Do bidders hire top-tier investment banks to certify value? Purdue University, Working Paper.

Saunders, A. and Srinivasan, A. (2001): Investment banking relationships and merger fees. University of Georgia Department of Banking and Finance, Working Paper.

Schiereck, D. and Unverhau, J. (2002): Investment bank reputation and shareholder wealth. Effects in mergers & acquisitions. Universität Witten/Herdecke, Working Paper.

Servaes, H. and Zenner, M. (1996): The role of investment banks in acquisitions. The Review of Financial Studies, Vol (9), S. 787-815.

21

Documents

MFC-027 BeitelSchiereck.doc