Every year, companies pursuing M&A deals spend nearly $40 billion on advisors. These investment bankers, lawyers, and other professionals are hired to provide domain-specific expertise to the acquirer or acquiree, an independent “second opinion” for the board, or other services to help close a deal. But do they actually add value to the mergers and acquisitions they’re meant to support?
We analyzed market reactions to more than 10,000 U.S.-based acquisitions and found that indeed, companies that announced the involvement of one advisor, on average, outperformed those that did not announce any. However, we also found that companies with two advisors performed worse than those with none, and every additional advisor after that led to even worse stock market reactions. So what drove this surprising effect?
Too Many Cooks Can Spoil the Broth…
To explore this question, we conducted a series of in-depth interviews with both seasoned acquirers from large multinational firms such as ABN Amro, Avery Dennison, DSM, and Philips, and advisors from leading consultancies such as Allen & Overy, Atos, EY, and Deloitte. These experts confirmed that when deals are highly complex or include multiple stakeholders who all need support and representation, retaining multiple advisors can be necessary and helpful — but without effective management, it can also create serious problems.
As one corporate executive put it, advisors are the “horsepower [necessary] to get the deal done.” Another interviewee argued, “When done right multiple advisors can add perspective and keep [everyone] on the top of their game.” But the interviewees also emphasized that “an overcrowded M&A kitchen [can be a] recipe for disaster,” for four key reasons:
1. Hiring more advisors slows down decision-making.
As one interviewee explained, “the most important thing in an acquisition is getting the right information at the right time.” Having “too many people in the room slows down the decision-making process,” which can end up hurting the deal.
2. More advisors means more potential for leaks.
When it comes to M&A, “discretion is key.” Success hinges on keeping sensitive information such as prices, terms, and even the existence of the deal private — but our interviewees described how “backchanneling” among stakeholders means that inevitably, even with the best of intentions, “more people means more leaks” that can damage or even destroy deals before they are announced.
3. The middle ground can be the worst option.
Multiple advisors often provide conflicting advice, forcing executives (or even advisors themselves) to attempt to find a middle ground that incorporates elements of each perspective. Unfortunately, this middle ground is sometimes less effective than either recommendation would be on its own. As one interviewee put it, “when two advisors come in together and produce one piece of advice, they have to compromise, and they subtract from each other.” Rather than adding up to more than the sum of their parts, balancing input from multiple conflicting advisors can sometimes produce less value than simply following one.
4. The more people, the more egos.
Most importantly, with multiple advisors, egos and politics come into play. Our interviewees described how their advisors ended up “competing with each other…trying to outsmart each other…trying to be top dog.” One manager even suggested that having multiple advisors working on the same acquisition was like dealing with children: “They’re always fighting over how to divide the pie,” they explained. “Sometimes you just have to pull them aside and make them play nice.”
…But It Is Possible to Manage a Crowded Kitchen
These challenges are understandable. After all, advisors are often direct competitors, so while each may add value individually, it’s hardly surprising that they don’t have the routines or the incentives in place to work together effectively.
The good news is, our interviews also suggested that in situations that necessitate or would benefit from multiple advisors, it is possible to overcome these pitfalls. Of course, effectively managing a team of advisors who aren’t accustomed to collaborating is no small feat. But we’ve identified six strategies that can help executives maximize their chances of success when working with multiple advisors:
1. Make teamwork a requirement.
While you may be tempted to hire advisors from the most prestigious firms or with the most impressive resumes, these credentials are no guarantee of performance. Instead, when selecting advisors, emphasize that mutual respect and the ability to play well with others are non-negotiables. As one advisor shared with us, “the dynamics in the team and our reputation of working together with others are often a key factor that determine if we are selected for a deal.”
2. Clearly define responsibilities.
To minimize potential for conflict, explicitly assign advisors to specific tasks — and enforce this division of labor by assigning an internal owner to “maintain ongoing clarity of [each advisor’s] project scope.” If advisors start to drift and step on each other’s toes, don’t be afraid to solicit help from the CFO or CEO to keep everyone on track.
3. Involve senior leaders from the start.
When problems emerge late in a negotiation, it’s often because of misalignment early on. To ensure advisors are given consistent instructions and deals are set up for success, it’s critical for senior leaders to be actively involved from the get-go. As a corporate head of M&A explained, “you don’t want to mess around at the start and then regret things at the finish line.”
4. Align incentives.
Many advisory firms operate under traditional “No Cure, No Pay” incentive structures. That is, if the deal doesn’t get closed, the advisors don’t get paid. Our research suggests, however, that this approach can lead to poor teamwork and decision-making, because advisors are incentivized to close deals at all costs rather than to reach the best possible terms for the client firm. To address this, our interviewees suggested that a “client satisfaction bonus” structure, in which the firm has the option to pay slightly more (a bonus) or less (a malus) than the agreed-upon advisory fees depending on the outcome, helps “avoid conflicts of interest and protect [advisors’] objectivity.” While optimal compensation structures may vary depending on the specifics of a given deal, revisiting traditional schemes can help to align incentives and curb opportunistic behavior that ends up harming everyone.
5. Learn from your successes — and your failures.
No matter the outcome, every deal is an opportunity to learn and increase your chances of future success. To capitalize on that opportunity, proactively collect feedback from everyone involved throughout the project, and organize lessons learned sessions and post-mortem reviews with advisors, your own colleagues, and your counterparts. For example, one head of M&A described how, whether informally or more systematically, they always “kept records on how things fared in each relationship [with advisors, to inform] future choices.” Then, once you’ve gathered and documented this valuable information, use it to institutionalize effective best practices and build mechanisms to prevent yourself and your team from reverting to bad habits.
6. Invest in relationships.
As one of our interviewees put it, “this is a first-name business.” Building long-term, personal relationships with trusted advisors doesn’t just reduce the risk of misalignment — it reduces the risk of wasting substantial resources on mediating between uncooperative, ego-driven advisors. “In a deal, it’s important to signal that there’s a joint future,” an advisory partner told us. Similarly, “as a serial M&A player,” an M&A head explained, “we work only with the best, and we are #1 on their priority list. We can’t afford to lose time with beauty contests each time, and we have no interest in opportunistic behavior.” While it may be tempting to shop around, the most successful deals tend to be conducted by executives and advisors who’ve already worked together and developed real, lasting relationships.
. . .
By design, M&A advisors are highly competitive. Their default routines and incentives are generally geared toward maximizing individual performance, not collaboration. As such, it’s only natural that stock market valuations reflect how challenging it can be to get them to play nice — but our research shows that it’s not impossible.
To the contrary, when they’re managed with an eye toward teamwork and long-term results, multiple advisors can in fact add substantial value. In the complex kitchen that is M&A, learning to deal with multiple cooks isn’t just necessary — it’s often the best recipe for success.