Tuesday 26 February 2019 9:29 am | Updated: Tuesday 04 June 2019 7:27 pm

Leaked information on M&A deals leads to higher valuations

Leaking information on mergers and acquisitions (M&A) deals before any public announcement of the transaction added an extra US$21m to the average value of deals announced in 2016 that leaked, according to new research from Intralinks and Cass Business School.

In addition to evidence of higher valuations for M&A deals that leak, the 2017 Intralinks Annual M&A Leaks Report, published today, found that 8.6 per cent of worldwide M&A deals were leaked in 2016.

This figure is unchanged from the previous year (2015) and above a six-year low of 6 per cent in 2014. In 2014, worldwide deal leaks had been on a declining trend for the previous six years, but this trend reversed in 2015 and 2016 – despite the efforts of financial regulators globally in recent years to bring in new regulations to curb deal leaks, and increase enforcement actions and fines for market abuse and insider trading.

Of the ten countries with the most M&A activity, the top three countries for deal leaks in 2016 were India (16.7 per cent of deals leaked), South Korea (16.1 per cent) and Japan (12 per cent). The three countries recording the lowest percentage of deal leaks in 2016 were Canada (4.3 per cent), France (4.3 per cent) and the UK (7 per cent).

Why do M&A deals leak?

The rate of deal leaks has reduced considerably: a reflection of new regulations against market abuse and much stricter regulatory enforcement.

Philip Whitchelo, Vice President of Strategy and Product Marketing, Intralinks

The report shows that there appears to be one clear perceived benefit of leaking deals: higher target takeover premiums resulting in higher valuations, as a result of increased competition among acquirers for targets in leaked deals. This has been true in each of the eight years analysed for this report: from 2009-2016, the median takeover premium for leaked deals was 47 percent vs 27 percent for non-leaked deals, a difference of 20 percentage points. To quantify this, in 2016 the difference in the median target takeover premium for leaked deals compared to non-leaked deals was US$21 million, i.e., an average of an extra US$21 million accrued to the shareholders of the targets in deals that leaked.

Leaked deals are also associated with a higher rate of rival bids for the target than non-leaked deals: from 2009-2016, 6.5 per cent of leaked deals attracted one or more rival bids for the target compared to 5.8 per cent of non-leaked deals.

There is also evidence that leaked deals have higher completion success rates: In the last three years (2014-2016), the worldwide completion success rate for leaked deals has been almost 5 five percentage points higher than for non-leaked deals.

These results could point to one other perceived benefit of leaking a deal – it potentially leads to a better match between acquirer and target. Leaking a deal may flush out the “optimal” acquirer, i.e. the one who has the greatest synergies with the target (and who can therefore pay the highest price, hence the higher target takeover premiums for leaked deals) and therefore also the acquirer who has the greatest incentive to complete the deal.

The influence of regulatory enforcement against deal leaks

In 2016, the US Securities and Exchange Commission (SEC) brought a record 548 standalone or independent enforcement actions, obtaining judgements and orders totalling more than US$4 billion in disgorgement and penalties. The SEC also charged 78 parties with insider trading in 2016, compared to 87 parties in 20152. As our report shows, the rate of deal leaks in the US dropped from 12.6 per cent in 2015 to 9.8 per cent in 2016, which may be a result of the SEC’s enforcement strategy.

Elsewhere, fines issued by the UK’s Financial Conduct Authority (FCA) were the lowest since the financial crisis, down by 98 per cent from £905 million in 2015 to £22m in 2016.

But according to the FCA’s own data, it opened a record number of insider trading cases in 2016. Hong Kong, which recorded the second highest average percentage of deal leaks from 2009 to 2016, dropped to fourth place in 2016 with its lowest level of deal leaks (10 per cent) since 2012. In its annual report for 2015-2016, Hong Kong’s Securities and Futures Commission (SFC) detailed 107 criminal charges against 15 individuals and five corporations. Total investigations rose by 12 per cent and the number of investigations for insider trading grew by 20 per cent from the previous year.

Is leaking deals becoming less attractive?

There will always be reasons why a target company may see a benefit to leaking a deal… it's unlikely that the level of deal leakage will ever be at – or near – zero.

Professor Scott Moeller, Director of the M&A Research Centre, Cass Business School

In 2016, targets in leaked deals achieved a median takeover premium of 38 per cent vs. 26 per cent for non-leaked deals, a difference of 12 percentage points. This was a 60 per cent reduction compared to 2015, when targets in leaked deals achieved a 30-percentage point higher takeover premium.

Also, in 2016 the rate of rival bids for leaked deals and non-leaked deals was almost the same (in fact, non-leaked deals had a marginally higher rate of rival bids for the target than leaked deals).

So, with the perceived benefits of leaking deals reducing in 2016, and regulatory enforcement against market abuse continuing to increase, could the appeal of deal leaks be waning?

Philip Whitchelo, Vice President of Strategy and Product Marketing at Intralinks, a business of Synchronoss Technologies, said, “The rate of deal leaks in markets where leaking was rampant a decade ago, such as the UK, has reduced considerably: a reflection of new regulations against market abuse and much stricter regulatory enforcement. Countries such as India and Hong Kong, which have comparatively high levels of deal leaks, are also making more efforts to tackle market abuse and insider trading. Overall, against the perceived benefits, those leaking deals must also weigh the risks, and those benefits appear to have reduced in 2016.”

Professor Scott Moeller, Director of the M&A Research Centre at Cass Business School also commented, “There will always be reasons why a target company may see a benefit to leaking a deal, and it is therefore unlikely that the level of deal leakage will ever be at – or near – zero. However, it is encouraging to see that the percentage of deals that leak is remaining largely flat, and at levels below where it was a decade ago.”