Do boutique investment banks have the Midas touch? Evidence from M&As

• Published date: 01 January 2024
• Author: George Alexandridis,Nikolaos Antypas,Vicky Y. Lee
• Date: 01 January 2024
• DOI: http://doi.org/10.1111/eufm.12425

DOI: 10.1111/eufm.12425

ORIGINAL ARTICLE

Do boutique investment banks have the Midas

touch? Evidence from M&As

George Alexandridis

1

|Nikolaos Antypas

1

|Vicky Y. Lee

2

1

Henley Business School, ICMA Centre,

University of Reading, Reading, UK

2

School of Accounting, Finance &

Economics, University of Greenwich,

London, UK

Correspondence

Vicky Y. Lee, School of Accounting,

Finance & Economics, University of

Greenwich, Old Royal Naval College,

Park Row, London SE10 9LS, UK.

Email: yl1629d@gre.ac.uk

Abstract

We study whether the meteoric rise of boutique

advisors in mergers and acquisitions (M&As) is

justified by their buy‐side performance. We find that

acquiring firms represented by boutique advisors

generate superior short‐and long‐run abnormal

returns over those employing full‐service advisors.

This effect is mainly prominent in private

deals, interindustry mergers, and deals involving

inexperienced acquirers, where valuation uncertainty

tends to be higher. Overall, our results reflect that

acquirer shareholders benefit from boutique invest-

ment banks' high level of industry expertise and

independent advice, supporting the rising demand for

their financial advisory services.

KEYWORDS

boutique advisors, mergers and acquisitions, value creation

JEL CLASSIFICATION

G24, G34

Eur Financ Manag. 2024;30:634–672.634

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This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and

reproduction in any medium, provided the original work is properly cited.

© 2023 The Authors. European Financial Management published by John Wiley & Sons Ltd.

We are grateful to the editor, John A. Doukas, and two anonymous referees for their constructive and valuable

comments. This paper has also benefited from comments and advice from Dimitris Petmezas, Nickolaos Travlos,

Simone Varotto, Leonidas Barbopoulos, and discussants and participants at the ICMA Centre Research Seminar from

the University of Reading, the 2019 Australian Finance and Banking Conference, the 2021 International Conference of

the French Finance Association, the 2021 European Financial Management Association Conference, and the 2022

Financial Management Association Global Conference. All errors are our own.

1|INTRODUCTION

By serving mid‐size to large cap corporations, boutique investment banks have become a

major driver of the financial advisory market in recent decades. Refinitiv (2019) reports that

the merger and acquisition (M&A) fees earned by boutique investment banks surpassed

those earned by top five banks in 2012.

1

In some cases, boutique advisor reputations, as

manifested in various league tables, have climbed above those of bulge bracket banks, with

boutique advisors now leading some of the largest M&A transactions and commanding an

ever‐growing share of the total deal value and revenue pie.

2

The success of boutique

advisors can be attributed to a number of factors. Among them is the sector‐specific

knowledge and expertise that we tend to observe with boutique advisors. Further, most of

the top‐tier boutiques are typically founded by former bulge bracket dealmakers with access

to established client and investor pipelines that are instrumental in handling large‐scale

transactions.

3

The very nature and structure of boutique financial advisors also tend to be

associated with more independent advice and fewer conflicts of interest relative to full‐

service banks, which often arrange deal financing and cross‐sell multiple financial services

for profit (Allen et al., 2004;Songetal.,2013). Finally, negative investor perception and

stricter regulatory scrutiny inflicted on large banks following the 2008 financial crisis

catapulted demand for boutique M&A advisors.

4

Despite the continuous growth of boutique advisors' market share, limited insights have

been offered on the drivers of their success or whether this trend can be justified by their M&A

dealmaking skills and ability to deliver synergistic value. The literature on financial advisors

mainly focuses on examining the role of top‐tier banks in driving M&A performance (Bao &

Edmans, 2011; Golubov et al., 2012; Hunter & Jagtiani, 2003; Ismail, 2010; Rau, 2000; Servaes &

Zenner, 1996). This is because, before the mid‐2000s, the M&A advisory space was dominated

by bulge bracket and other full‐service financiers.

Furthermore, the only previous study on boutique advisors by Song et al. (2013) is limited to

examining advisor quality through deal premia in public M&As. First, the majority of boutique

deals involve private acquisitions, which comprise more than 60% of all deals in the M&A

market. Much of the recent growth in boutique advisory, therefore, can be attributed to private

deals. Hence, the question of whether boutiques are able to deliver value in a segment they

specialize most remains largely unaddressed.

5

Second, while Song et al. show that acquiring

firms hiring boutique advisors pay lower premia in public deals, prior studies report lower

(higher) premia are associated with lower (higher) returns (Antoniou et al., 2008; Kisgen &

Song, 2009). Thus, it cannot be surmised that boutique advisors also deliver superior returns for

acquirers, and their economic contribution to shareholder value still needs to be examined. To

address these significant gaps, our study aims to shed light on the overarching question of

whether employing a boutique advisor comes with financial gains for acquiring firms and their

shareholders.

We study a sample of US M&As with buy‐side advisor data over the period 2000–2016. Our

sample includes the post‐2008 period to encapsulate the significant growth of boutiques in the

1

See Refinitiv, 31 July 2018, ‘Mega deals keep the M&A boom afloat’.

2

League table rankings can be downloaded from the Refinitiv Mergers & Acquisitions database.

3

See The Financial Times, 16 March 2014, ‘Small proves beautiful at boutique banks’.

4

See The Financial Times, 18 April 2019, ‘Rise of the boutique banks’.

5

Advising private deals requires different skill sets from advising public deals, largely because of information scarcity. Thus, boutique

advisors' operation in specific regions and industries can be more useful in private acquisitions.

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aftermath of the financial crisis.

6

Given the lack of advisor classification data, we manually

identify and group financial advisors into boutiques and full‐service banks. Overall, our sample

comprises 1848 deals linked to boutique advisors and 3162 deals advised by full‐service banks.

In comparing advisory quality, we consider the actual value creation mechanism of boutique

advisors by gauging their impact on short‐and long‐term abnormal returns. This approach

allows us to capture a broader spectrum of potential gains that can be attributed to the

dealmaking skills of boutique advisors. More importantly, it enables us to include private deals

which have not been considered before.

Consistent with the rise in reputation and market share of boutique advisors, we find that

the market reacts more favourably to deal announcements when the acquirer advisor is a

boutique rather than a full‐service bank. In particular, hiring a boutique advisor is associated

with a 0.6% improvement in acquirer returns, which corresponds to a $72 million increase in

shareholder value for the average‐sized acquirer in our sample. In addition, boutique advisors

appear to be more effective at creating value in private deals, where the difference in

announcement returns reaches 1%. We also document that the effect of boutique advisors is

persistent in the long run, as acquirers in boutique‐led deals yield greater returns, ranging from

3.0% to 14.4% based on buy‐and‐hold and calendar‐time strategies, than those in deals led by

full‐service advisors. In contrast, documented performance differentials are not observed in

public deals.

These results from the ordinary least squares (OLS) estimates, however, should be

interpreted with caution due to endogeneity concerns. First, since financial advisors are not

randomly chosen by their clients, selection bias, whereby certain advisor selection criteria that

are unaccounted for in our model, can be driving our results. This type of endogeneity can be

corrected using Heckman's (1979) two‐step procedure. Second, observable differences in

acquirer and deal characteristics associated with both the advisor selection and deal outcome

(confounders) can distort the causal relation and produce biased estimates. Observed

confounding is particularly important to control for, given the presence of strong confounders

in our sample, especially bidder size, and should be treated using a matching technique. Thus,

we use propensity score matching (PSM) and compare advisor skills based on similar

transaction portfolios. Overall, PSM results are more pronounced than the original OLS

estimates: hiring a boutique advisor leads to an average 0.8% (1.2%) improvement in acquirer

returns in all (private) deals, which translates into a $96 million ($104 million) increase in

shareholder wealth.

To corroborate our findings, we investigate the sources of boutique advisors' value creation.

Primarily, we focus on information scarcity or asymmetry associated with nonlisted firms

(Capron & Shen, 2007; Officer et al., 2009). Similar to private deals, we find that boutique

advisors outperform in deals characterized by greater information uncertainty, such as cross‐

industry mergers and deals involving acquirers without prior acquisition experience in the

target industry. We also discover that most boutique advisors are industry specialists retaining

more sector expertise than full‐service banks. This explains why they are better at capitalizing

on information asymmetry. To the contrary, full‐service banks tend to be preferred for deal

financing and for acquisitions financed entirely by cash. Finally, boutique advisors are less

6

This period contains richer observations than the sample period (1995–2006) of Song et al. (2013) due to higher growth in boutiques'

market share and revenue over the postcrisis period. For instance, Refinitiv, 7 May 2019, ‘Boutique M&A Fees’highlights that boutique

fees increased by 80% in 2018 compared with the precrisis peak in 2007. Moreover, several top‐tier boutique investment banks in league

tables—Centerview Partners, Moelis & Company, and PJT Partners—were only founded after 2006.

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