The Real Cost of M&A Advice ANGELOANTONIO RUSSO, Bocconi University FRANCESCO PERRINI, Bocconi University How does the use of external advisors influence the value generated in complex acquisition processes? The greater the complexity, the higher the likeli- hood that managers seek outside advice to manage complex acquisitions, but they must be conscien- tious in their dealings with them. We argue and show that any outsourcing of this nature does add to the expense of the acquisition and requires a dif- ferent approach to the engagement of expert advice in these contexts. Ó 2005 Elsevier Ltd. All rights reserved. Keywords: Acquisition process, Value of the deal, Complexity of the acquisition, External advisor Introduction In recent years, many firms in Europe have invested in an increasing number of acquisitions, and a con- current and crucial interest in growth strategies has also emerged: the need to grow fast in order to quickly obtain resources and competences that other firms already have, the need to venture into new industries and geographical areas to diversify their own activity, and the need to increase their market shares. Acquiring new companies can be a fast and flexible way to access new resources and skills, but at the same time, when this process is complex, prob- lems are inevitable. Many acquisitions fail, and many acquiring firms still pay high prices that in turn increasingly impede solid earnings growth even in a strong economy. The growing importance of developing the best possi- ble skills to manage the acquisition successfully sug- gests that the acquisition process is worth further research. We investigated the influence of the com- plexity of the acquisition process and the presence of an outside consultant on the premium paid by the acquiring firm. Managing the complexity of an acqui- sition process means to control issues specific to, for instance, cross-border acquisitions (vis-a`-vis domestic alternatives), transactions involving firms operating in different industries (as opposed to horizontal ones), and hostile (rather than friendly) acquisitions. Such transactions typically present hazards to the final suc- cess, the seeds of which could be seen even at the nego- tiation stage, whereas the acquiring firm might end up paying even more than the target value. Therefore, often, an outside consultant is retained based on its perceived ability to improve the odds of the acquisi- tion process. Nevertheless, the consultant’s self-inter- est can be an added factor in the bargaining process as well, with unexpected consequences on the final out- comes of the bargaining process. Complexity and advice sourcing can both influence the price paid by the acquiring firm. Acquiring man- agers must thus choose between the strife of weath- ering complexity on their own or the expense (in terms of both cost and bargaining hazards) of hiring an outside consultant when they want to complete an acquisition. To test the impact of these two inter-related factors on the result of the bargaining process, we used a sample of 1,380 acquisitions completed in Europe between 1988 and 1997. We found that different levels of com- plexity of the acquisition process do influence the acquiring managers’ decision to hire an outside con- sultant, but also that the presence of the consultant in- creases the purchase cost of the acquisition in many different scenarios. We conclude that managers of acquiring firms need to reflect carefully on the overall costs of hiring outside consultants to handle complex acquisitions, and recommend negotiating their con- tinued involvement in the post-acquisition stage, or at least a contingency payment based on the final suc- cess of the entire acquisition process. Managing Complexity in Acquisitions Managing the acquisition process involves still other limits and constraints on the success of an acquisition. But there are also positives including synergies, growth rates, market shares, technical resources, European Management Journal Vol. 24, No. 1, pp. 49–58, February 2006 49 doi:10.1016/j.emj.2005.12.007 European Management Journal Vol. 24, No. 1, pp. 49–58, 2006 Ó 2005 Elsevier Ltd. All rights reserved. Printed in Great Britain 0263-2373 $32.00