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A watertight case against leaks

Details of mergers and acquisitions used to turn up regularly in the papers during negotiations. There is a very good reason why that has changed, says a Cass study. Jill Insley reports.

City journalists in Fleet Street used to call it the Friday-night drop. PR firms would deliver information about merger and acquisition discussions to Sunday papers to ensure wide weekend coverage for their clients.
Companies that had begun talks with a potential takeover target would use the drop to smoke out interest in their bid. And if the chairman and board of the takeover target were dragging their heels, news of an approach could spur shareholders into asking why.
But leaks, as opposed to pre-planned announcements, appear to be on the wane. A study by Cass's M&A Research Centre found that the number of merger and acquisition deals being leaked had dropped dramatically in the past two years in response to tighter regulation and an increased danger of leaked deals failing to complete.
The number of leaks globally fell from 11 per cent in 2008-09 to 7 per cent in 2010-11, according to the study commissioned by global virtual data room provider Intralinks. Leaked deals took an average of a week longer to execute and, in the most recent period analysed, were 9 per cent less likely to complete than deals that were kept confidential.

Reasons for decline
Dealmakers interviewed by Mergermarket for the report, M&A Confidential: What Happens When Deals Leak, said there were three key reasons for the decline in leaking.
Firstly, regulation has become stricter and enforcement more active. This is particularly noticeable in the UK, where leaks have fallen from 22 per cent of deals in 2004 to 13 per cent in 2010-12. A UK investment banker questioned for the report said: "Earlier everyone just accepted deal leaks in the UK, but not now. The government has come down hard and believe there will now not be a large disparity in the number of leaks in the UK and US."
Secondly, better tools for maintaining confidentiality have been developed and adopted, such as virtual data rooms and secure file sharing.
The third and perhaps most significant reason has been the subdued dealmaking environment following the collapse of Lehman Brothers. This may have encouraged those involved in M&A to play it safe and not complicate a deal by leaking.

Spotting trends
The Cass study looked for significant preannouncement trading (SPAT) in the shares of target companies as an indication that information about a prospective deal had been leaked. While this is not absolute confirmation of a leak, SPAT across a large sample can be used to examine patterns and trends. Cass's research team, led by Professor Scott Moeller, Director of the M&A Research Centre, looked at more than 4,000 transactions from 2004-12.
Mergermarket conducted interviews with 30 M&A practitioners in Europe and the US to help to understand the reasons for some of the trends identified.
"Most deal leaks appear to be deliberate," says Professor Moeller. "In the early period analysed, 2004-07, 9 per cent of bids displaying SPAT attracted a rival bid, compared with 7 per cent where no SPAT was detected, so leaking appears to be a way to flush out a higher bid. This tends to push up the price of the company: on average, leaked deals complete with premiums 18 percentage points higher." The interviewers found as well that buyers often use leaks as a tool to scupper a deal they no longer want to complete without having to pay a penalty for breaking the agreement.
But the Cass research shows that since 2008 there has been no benefit, except for an increased premium for the target, for either side to leak, with both leaked and non-leaked deals now having only a 5 per cent chance of attracting a second bid.
Moreover, nine out of ten respondents to the survey believed that leaking a deal could backfire. One, a partner in a German law firm, said: "If the leak has seriously damaged the prospects for the deal then bidders will end up walking out."

Impact on deals
This seems to be borne out by M&A figures for the past two years. While there is little evidence of impact on the likely success of deals which have been leaked over the entire survey period, during 2010-12 transactions involving leaking completed only 80 per cent of the time, compared with 88 per cent of those which had not been leaked.
"In the vast majority of cases, neither the buyer nor the target want the deal to leak, with both parties usually benefiting from keeping a takeover secret until they are ready to announce the transaction," said Philip Whitchelo, Vice-President of Strategy and Product Marketing at Intralinks.
"It is clear from our research that the risks associated with leaks are rising. As a result there is evidence that sellers and their advisers are taking the issue of pre-announcement deal confidentiality much more seriously."
However, Anna Faelten, Deputy Director of the M&A Research Centre and co-author of the report, does not believe the decline in leaking will be sustained once M&A activity recovers.
"When the global economy and, therefore, the general environment for M&A activity picks up, it will be easier to get away with leaking as there will be more transaction activity, making it harder for regulators to pursue suspected leaks, and there will be more incentive to leak as more buyers will come forward to make a competing bid," she says. "However, I still think deal leaking in the UK will remain lower than historic levels."

Jill Insley is a freelance writer. She can be contacted at jill@insleymedia.com

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