Dealing with a deal leak

December 2018 | FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

December 2018 Issue

Leaking information about an impending transaction, prior to any public announcement, can appeal to parties on both the buy and sellside. Though the parties may have different motivations for such a leak, there is often an ulterior motive, and it is often financial gain.

According to Intralinks’ 2017 Annual M&A Leaks Report, deal leaks added an extra $21m to the average value of deals announced in 2016. And leaks have continued to make an impact. According to the 2018 version of the Intralinks’ report, leaked deals were associated with significantly higher target takeover premiums than non-leaked deals in 2017; also, targets in leaked deals achieved a median takeover premium of 34.4 percent compared with 20.6 percent for non-leaked deals.

Though overall leaks declined in 2017, 8 percent of all deals involved a leak, down from 8.6 percent in 2016. This was still above the average of 7.7 percent over a nine-year period from 2009-2017. So, what is causing these leaks to occur, and how can they be plugged?

Motivations

On the sell side, a leak may encourage competing bids to emerge, thereby driving up the acquisition price. From 2009-2017, the median target takeover premium for leaked deals was 44.4 percent, compared with 26.5 percent for non-leaked deals. A leak may attract the most favourable acquirer with the greatest synergies with the target.

On the buy side, an acquirer that believes the seller is stalling for time may leak details of a proposed merger in order to pressurise the target’s shareholders and spur them into action. A leak may force the hand of a board reluctant to pursue a deal, calling the company’s shareholders to arms. There may even be leaks from third parties who may wish to sabotage a deal.

“Considering the size of the teams involved in a pending deal, on both the buy and sell-side, it is little wonder that sometimes deals leak to the press before a formal announcement is made.”

On a personal level, there are a number of reasons why an executive might leak a possible deal. Perhaps they do not expect to have a role in the new entity; perhaps they are disgruntled and have an axe to grind. Perhaps they feel the deal will not benefit them financially. Considering the size of the teams involved in a pending deal, on both the buy and sell-side, it is little wonder that sometimes deals leak to the press before a formal announcement is made.

Risks and rewards

Regardless of the reason behind a leak, or which side of the transaction it came from, there are financial risks involved. The seller may receive a higher premium, but there is also an increased chance that the deal fails to reach completion. Customers, vendors and suppliers, for example, may be spooked by the leak and wonder if the change of ownership will have a negative impact on the existing relationship. Also, productivity may suffer if employees are concerned about the fate of the company and their role within it.

Leaks are also drawing the attention of financial services regulators. Globally, authorities are leading the charge against market abuses, including deal leaks, by introducing greater regulations and enforcement actions against wrongdoers. In 2017, the changing and more stringent regulatory landscape had an impact, resulting in fewer leaks in all jurisdictions, with the exception of Asia-Pacific, which saw an increase, from 9.7 percent of deals in 2016 to 10.8 percent in 2017.

The efforts of regulators do seem to be working in certain jurisdictions. In the UK, for example, leaks were more prevalent until the Financial Conduct Authority (FCA) hardened its stance. IN one case, the FCA handed a £450,000 fine to Ian Hannam, the former chairman of capital markets at J.P. Morgan for leaking inside information in an email about a potential deal involving one of his clients as the target.

Different jurisdictions have varying frequencies of deal leaks, partly as a result of rules governing a company’s conduct when a takeover offer has been received, as well as cultural attitudes toward leaking.

“While deal leaking decreased in both the Americas and Europe in 2017, the Asia-Pacific region continued to buck that trend, making APAC the region with the highest rate of deal leaks for the second consecutive year. This is probably a reflection of a combination of a greater cultural tolerance of deal leaking and a less well-developed regulatory and enforcement environment compared to Europe and North America,” wrote Philip Whitchelo, Intralinks’ vice president for strategic business development. “As markets globally continue to align their regulatory standards and increase their levels of enforcement, we can expect to see the downward trend in worldwide deal leaks continue.”

For companies pursuing M&A, unfortunately, there is little that can be done to prevent news of an impending transaction becoming public. If a party is intent on leaking a deal – regardless of their motivation – they will find a way to do so, irrespective of the repercussions.

Richard Summerfield