Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Clients come first. In investment banking, a world where dealmakers spend years (or even decades) cultivating relationships with company executives, that mantra rings loud and clear. 

Bankers advising on mergers and acquisitions have historically tied their fates to that of clients, generally pocketing the bulk of their fees only when a deal crosses the finish line. It's an outcome that's far from guaranteed, especially when it comes to megadeals -- the biggest cash cows of them all.

Can't Say They Didn't Try
Billions of dollars worth of deals have been terminated in recent years, with many blocked by regulators. That's led to lost fee income for banks that advised on them.
Source: Bloomberg
*Data reflects announcement date. It doesn't include withdrawn deals such as the potential tie-ups between United Technologies and Honeywell; and Twenty-First Century Fox's one-time pursuit of Time Warner

Such transactions can have a tough time getting past antitrust regulators, which most recently blocked two huge would-be tie-ups in the health insurance industry: that of Aetna Inc. and Humana Inc., and of Anthem Inc. and Cigna Corp. (Aetna and Humana abandoned their deal this week rather than appeal a judge's ruling. Anthem is still putting up a fight, though its likelihood of prevailing is low. Both transactions were years in the making, having been announced in July 2015.)

Assuming both mergers end up being officially terminated, here's what advisers will get and what they'll leave on the table, as measured by what they have been paid already and what they would have been owed if the deals were sealed:

Now or Never
Some advisers on the two giant health insurance deals have fared better than others. Both transactions have been blocked by antitrust regulators.
Source: Company filings
*Percentages reflect portion of total advisory fees that were not contingent on the deal's completion

While the upfront payments received by Goldman Sachs Group Inc., Citigroup Inc. and Lazard Ltd. are in line with industry averages, the other three banks-- Morgan Stanley, Credit Suisse Group AG and UBS AG -- appear to be bucking the norm. That's according to data provided by Freeman & Company, which shows that bulge-bracket banks tend to peg 87 percent of their advisory fees on the outcome of a deal, compared to 76 percent at boutique and independent investment banks. Some of this difference can be explained by the fact that banks providing fairness opinions generally earn fees for doing so when merger agreements are signed.  

The current fee structure, lopsided as it is, more closely aligns big banks' interests with their clients. That said, a case could be made for bulge-bracket firms to consider altering their payment structures -- at least on combinations that run the risk of regulatory pushback -- so they're less reliant on whether or not the transactions ultimately get done. And there is precedent for this.

Maybe...Close the Gap?
The average percentage of advisory fees contingent on deal closure
Source: Freeman & Co.
*Data based on sample of U.S. deals above $1 billion in size where fee breakdown was publicly disclosed in the merger agreement or other filing

Clients have shown a willingness to pay more upfront to smaller, independent firms simply because they aren't as diverse as their larger counterparts and would have a harder time recovering from lost fees. Take for instance the merger that created Kraft Heinz Co.: H.J. Heinz Co. paid Bank of America Merrill Lynch $2 million for a fairness opinion upfront and $19 million when the deal was consummated, making 90 percent of its fees contingent. But the Heinz board of directors's "transaction committee" paid Moelis & Co. $4 million for its opinion, $1 million for its role as an adviser and $5 million when the merger closed -- making half its fees contingent.

When deals break, banks often console themselves knowing that if all goes to plan, they'll get a role on the "next one". This level of heartache can be avoided if they simply avoid absorbing a bigger blow than necessary and convince clients to cough up a sliver more at the outset. With many bulge-bracket banks trading at or near records, it's not like shareholders are looking for additional reasons to cheer. That said, a boost in advisory revenue thanks to up-sized upfront payments wouldn't hurt. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Both Credit Suisse and UBS delivered fairness opinions; Morgan Stanley didn't.

To contact the author of this story:
Gillian Tan in New York at

To contact the editor responsible for this story:
Beth Williams at