Value for money: M&A fee income related to business intelligence

Posted on Tuesday, 3 July 2007. Filed under: Business Intelligence, Commentary, Mergers |

It was difficult to miss the headlines last week about fee income for M&A deals.  The Financial Times reported that the advisory fees paid to investment bankers was $10.7 billion for the first six months of the year.  This is 20% higher than last year’s first six months.  Not surprising, either, given the deal volumes also running.  For comparison, note that the low point in this millenium was in 2003 when the first half of the year yielded ‘only’ $3.0 billion in M&A fees. 

 There’s been talk of pressure on the amount that dealmakers can bill for deals, especially as the deals get larger.  This appears to be true, as the value of deals has increased by 50% this year (first half 2007 vs first half 2006:  $2.8 trillion vs $1.4 trillion).  But this is as much as case of their being more mega-deals, where the fee level is smaller as a percentage of the deal.  Note that the total fees earned by investment banks in the first half of the year is just under 0.4% of the announced deals.

The value for money comes in what is provided by the investment banks in this advisory work.  We’ve been addressing ‘business intelligence’ in this weblog, and would suggest that this could be something that companies seek more from their advisors, often from consultants other than the investment banks:

Despite their expense,studies conducted at Cass Business School have shown that the inclusion of a financial advisor is good for buyers because the advisors increase shareholder wealth by finding bidders or targets with greater value, providing advice on premiums, identifying liability concerns (including demonstrating to shareholders that they did the most they could to achieve the best deal for the shareholders), providing local knowledge in the increasingly complex cross-border deals and because of their competence demonstrate a higher probability of deal successful completion.

Each of the advisors can play an important intelligence role, although often each advisor’s actual role is limited to their traditional functions.  Accountants check and produce the numbers, but if asked, can provide important information about the industry and other companies in the market.  Investment banks may drive the overall process and be responsible for the valuation, pricing, and negotiation, but are also important reservoirs of information about the market, and competitors.  They have Chinese walls that operate to keep information from one deal being used on another, but the general experience of the senior investment bankers themselves is often enough to provide a client with information that otherwise could not be obtained.

Both large, global consultants and small boutique advisors are renowned for their ability to seek out non-public information about client and customers.  There is a demonstrated willingness of employees, suppliers, and clients to provide information for no other reason than having been asked.  Often it is difficult for a company to ask this information directly, because they would need to identify who is asking.  Consultants, on the other hand, do not need to disclose their clients unless asked – and frequently are just not asked!  Why people are so willing to divulge confidential information to experts is not always clear, but what is clear is that many will do so for no other reason than that someone has asked them.

Some specialist consultants focus specificially on due diligence work and intelligence gathering.  One or several steps up from the detectives made popular by Hollywood, these consultants can be masters at finding information that is otherwise difficult to obtain.  Although there are those that operate on the wrong side of generally acceptable ethical and moral principals (granting that these may differ by culture, country, and individual), there is also much that can be done for targets or bidders by these investigative firms on the totally right side of the law.  Selection of such consultants is therefore a key factor in successfully obtaining the information required.

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One Response to “Value for money: M&A fee income related to business intelligence”

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