Stronger regulatory enforcement, tighter internal governance, and the increased risks to the transaction has led to the number of leaked M&A deals in 2014 falling to its lowest level in six years, according to Intralinks.
The fall in the percentage of deals involving a leak prior to the announcement of the deal is being attributed to the combined effects of stronger regulatory enforcement, tighter internal governance, and the increased risks to the transaction when leaking a deal.
The Intralinks M&A Leaks Report reveals that 6.0 per cent of all deals in 2014 involved a leak, compared to 8.8 per cent for the previous year, and an average of 7.4 per cent over the six years between 2009 and 2014.
The report, commissioned by Intralinks, with analysis carried out by the M&A Research Centre at City University’s London Cass Business School, looked at deal leaks globally from a total sample of 4,475 M&A transactions for the period 2009-2014.
The report reveals that over the entire six year period, 2009-2014, deals in Europe, the Middle East and Africa (EMEA) showed the highest average percentage of leaked deals at 9.2 per cent whereas North American deals showed the lowest average percentage of leaked deals at 6.3 per cent. In 2014, however, deal leaks in EMEA fell to the lowest percentage for the period, at 3.8 per cent, and EMEA had the lowest percentage of deal leaks of the four global regions.
Of countries with active M&A markets: the top three countries for deal leaks over the entire six year period were Hong Kong (18.6 per cent), India (15.2 per cent) and the UK (14.1 per cent); Australia had the lowest percentage of deal leaks over the period, at 3.5 per cent; the U.S., at 6.6 per cent, had the median percentage of leaked deals.
Deal leaks in the UK, having peaked at 26.3 per cent in 2013, fell sharply in 2014 to 5.3 per cent, its lowest level for the entire period. In Germany, the findings were even more dramatic, with no deal leaks recorded at all in 2014, following a peak of 22.2 per cent in 2013.
The report also finds that targets in leaked deals achieved significantly higher takeover premiums than in non-leaked deals. Over the entire time period, the median takeover premium for targets in completed leaked deals was 51.2 per cent compared to 29.2 per cent for non-leaked deals, a difference of 22 percentage points. This may be due to leaked deals having a higher tendency of attracting rival bids. Over the entire time period, 7.3 per cent of leaked deals attracted a rival bid compared to 6.1 per cent of non-leaked deals.
Leaking a deal may also, however, result in unwanted regulatory and media attention which can negatively affect the transaction. The report found that globally overall leaked deals have a longer time to completion than non-leaked deals, with the average difference of 30 days being especially acute in EMEA. The exception to this was in North America, where leaked deals completed on average 15 days faster than non-leaked deals.
“Overall we’re seeing a drop in the volume of deals being leaked worldwide,” says Philip Whitchelo, vice president of strategy and product marketing at Intralinks. “Regulatory enforcement and internal governance are having a noticeable effect on the number of leaked deals. In addition, the risk of reputational damage for parties involved in leaking a deal, unwanted attention from financial regulators and the potential risks to the deal from extended completion times are a major deterrent.”
The last two years have seen a significant rise in enforcement actions and fines for market abuse, with the average size of a fine in major economies such as the US and Europe increasing by 18 times Global Enforcement Review 2015, Duff & Phelps over the past five years.
There has also been a growing focus on penalising individuals and executives as opposed to simply fining firms. For example, following the UK Financial Conduct Authority (FCA)’s announcement of a new accountability regime earlier this year, we would expect to see the percentage of deal leaks in the UK to continue falling.
“In future we will see regulators shift towards a greater use of data and quantitative analytics to uncover market abuse and also criminal activity such as insider trading,” Whitchelo says. “Irregular share price activity is now easier to detect and investigate, and is the signal this report uses to determine a deal leak. As regulators get more sophisticated in the way they use technology, we expect deal leaks to continue to drop.”
Commenting on the report, Professor Scott Moeller, Director of the M&A Research Centre at Cass Business School, says: “Sellers and their advisers are clearly taking the issue of pre-announcement deal confidentiality much more seriously when compared to a few years ago. The various market abuse scandals have caused reputational damage and resulted in significant corporate fines and even convictions of individuals. Combined with an increasing environment of regulatory enforcement, the risks associated with leaking a deal now far outweigh the perceived benefits.”
