The number of mergers and acquisitions deals that leak has declined dramatically over the last two years, as the risks from leaking rise and regulatory pressures increase, according to research from IntraLinks.
The research study, conducted with the M&A Research Centre at Cass Business School, London and Remark, examined more than 4,000 transactions from 2004 through 2012 and interviewed 30 M&A practitioners in Europe and the US. It found that leaked deals take longer to execute and are significantly less likely to close.
The research interviews also showed that most deal leaks are deliberate, with leaking by sellers responsible for driving higher bid premiums and leaking by bidders or third parties done to terminate bid discussions.
“In the vast majority of cases, neither the buyer nor the target want the deal to leak, with both parties usually benefitting from keeping a takeover secret until they are ready to announce the transaction,” says Philip Whitchelo, vice president of product marketing at IntraLinks. “It’s clear from our research that the risks associated with leaks are rising. As a result there’s evidence that sellers and their advisers are taking the issue of pre-announcement deal confidentiality much more seriously.”
The research examined significant pre-announcement trading in the stock of a target company in the days leading up to the bid announcement, which is highly indicative of information leakage about the deal.
There has been a drop in leaked deals from a peak of 11 per cent during 2008-2009, to seven per cent during 2010-2012. In interviews, dealmakers suggested three main reasons for this fall: better tools for maintaining confidentiality, stricter regulatory enforcement and a slowdown in the dealmaking environment, where buyers aren’t as likely to encourage rival bids and sellers are more cautious of complicating and delaying bid discussions.
The study found that on average leaked deals took over a week longer to close than those that did not leak. In addition, in the last two years, leaked deals were nine per cent less likely to actually complete than deals that were not leaked.
A geographical breakdown from 2004-2012 showed that leaks were far higher in EMEA (14 per cent) compared to the US (seven per cent). However, analysis shows that this gap is shrinking fast, with UK leaks shrinking from a high of 22 per cent during 2004-2007 to 13 per cent during 2010-2012. While comparisons across territories is difficult, in the study interviews, there was widespread agreement amongst M&A practitioners that this was largely due to much stronger regulatory enforcement in the UK since 2008.
Despite the risks involved, deals leak for a reason. The study found that leaked deals that complete result in significantly higher takeover premiums than non-leaked deals, with the average difference being 18 percentage points. For acquirers, leaked deals delivered higher long-term returns than non-leaked deals, with the average difference being eight percentage points. The research interviews suggested that the reasons for both of these increases are the higher quality of targets involved in leaked deals.
“The study demonstrates that the current subdued M&A market makes leaking less beneficial, as it means that a company is far less likely to attract a rival bid,” says Professor Scott Moeller, director of the M&A Research Centre, Cass Business School. “It also has implications in terms of enforcement as fewer deals means that there are fewer places to hide, and any leaked deal is likely to receive a lot of attention. It’s analogous to a single car speeding on a quiet road, which is more likely to get pulled over than a car on a busy road where everyone is speeding.”