How Accounting Firms compete for Financial Advisory Roles in the M&A market

Accounting firms provide a variety of non-audit services, including advisory roles for mergers and acquisitions (M&A). In recent years, accounting firms have regularly been ranked among the top M&A financial advisors by Thomson Reuter's quarterly rankings for the mid- and low-end market, outperforming some investment banks.

This research seeks to identify how they are able to compete so effectively in an area where established investment banks would be expected to dominate, and what incremental benefits they offer to their clients.

The research looked at a sample of global M&A transactions over the period 1990-2014 involving a public bidder domiciled in either the US, Canada or one of 15 European markets.

The study examines whether accounting firms' competitive advantages explain why bidders choose them to advise on their M&A deal. It finds that acquirers are more likely to choose accounting firms when there is a likelihood of overpaying for the target. The research proposes that accounting firms lever their audit expertise to identify fairer valuations of target companies. We see that they are particularly effective at reaching a fairer valuation when they specialise in the target firm's industry, and when the target has low reporting quality. It is also notable that, where large investment banks cross sell financing of a merger transaction along with advisory services in order to maximise profit, there is no pressure for accounting firms to do this, contributing to their ability to achieve a fair valuation for the target.

The paper then examines if the advantages accounting firms offer actually translate into better deals for the bidders. Firstly, figures show positive price reactions for deals where accounting firms advised were nearly double those seen in deals advised by investment banks.

Secondly, the study documents that the offer premium for deals advised by accounting firms is on average 24.7% smaller than for deals advised by investment banks. When there is such concern from shareholders, investors and press that companies do not overpay for an acquisition, this is a compelling advantage. Add to this the finding that deals advised by accounting firms are less likely to fail and we see that accounting firm services can lessen the risk of reputational cost to management and of negative returns that can emerge during and following a poorly managed acquisition.

Existing literature on the topic of advisory roles to M&A practices has focused on investment banks, and to our knowledge this is the first research to document the growing visibility of accounting firms in the global market. With advisory revenue now growing faster than any other at accounting firms, this paper's findings are timely.

A working paper version of the research is available for download at the link below.