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Longer due diligence in M&A linked to increase in deal success but lower premiums

Cass and Intralinks research also shows, for the first time, that most M&A deal leaks are intentional

Cass Business School and Intralinks® Holdings Inc, today released a new research report that shows, for the first time, the financial impact of pre-announcement M&A activity on acquirers and sellers.

The research findings demonstrate that deals which have a longer due diligence period deliver significantly higher long term shareholder returns for acquirers, while also being associated with lower takeover premiums for sellers. Other results also show that the majority of M&A deal leaks are deliberate and are intended to influence the outcome of the deal to the advantage of the leaker.

The report titled "When no-one knows: pre-announcement M&A activity and its effect on M&A outcomes", is based on research on a sample of 519 publicly announced M&A transactions which used an Intralinks virtual data room (VDR) for due diligence between 2008 and 2012. In conjunction with the research, 30 M&A professionals were surveyed by Remark to comment on the findings.

The research is the first to provide real evidence to support the widely held belief that a longer due diligence process results in better deal-making by acquirers. The results of the research show that acquirers derive a significantly higher financial benefit from deals with a longer due diligence period - which, according to the survey comments, provides those acquirers with additional information on the target that can be used to negotiate a lower price. Sellers, on the other hand, appear to be at a disadvantage from deals with a longer due diligence period, and may thus be motivated to try to limit the amount of time allowed for due diligence.

The research also provides strong support for the popular conviction that most M&A deal leaks are intentional. For those deals in the data sample that had a publicly listed target, the study found no evidence of M&A leaks either before the opening of the VDR to external users for due diligence or up to 40 days afterwards. Instead, the study showed that any leaks that take place happen much further into the due diligence phase, when either the seller or acquirer may have something to gain from a leak. The study also showed that the timing of a leak does not appear to be related to the date that the VDR opens, but is more closely linked to the deal announcement date. This provides further evidence that most M&A leaks are intentional, rather than accidental, and are intended to try to influence the deal to the advantage of the leaker.

Our previous report released earlier this year showed that leaked deals were associated with significantly higher takeover premiums, compared to non-leaked deals. The report released today also shows that deals with a shorter due diligence period have significantly higher takeover premiums. Together, these results strongly support the belief that leaking is being used as a tactic to shorten due diligence, increase competitive tension and thereby achieve a higher sale price.

The report also reveals new statistics on deal preparation and the due diligence process. According to the report, the average length of the due diligence period is 124 days, with an average of 152 users given access to the VDR and an average of over 34,000 pages of due diligence information being disclosed to bidders. The large number of individuals involved in a deal explains the difficulty that could arise in trying to identify the source of any intentional leak.

Cass Professor Scott Moeller, commented: "We believe that this study is unique in its ability to analyse the impact of due diligence on M&A. This research indicates that those acquirers who take the time to conduct a longer due diligence, presumably to understand better whether the business case stacks up and the valuation is realistic, do benefit significantly. For sellers with high quality assets, competition for those assets should ensure premium valuations. However, for those unfortunate deals with limited competitive interest, this research implies that acquirers can press their advantage to lengthen the due diligence period to attempt to discover information that can be used to lower the price paid."

Philip Whitchelo, vice president of strategy and product marketing, Intralinks, commented: "This study reaffirms the importance of due diligence in the M&A process and provides a very strong incentive for sellers to provide relevant and well-organised information to bidders in a VDR which is easy to use. This is to ensure a reasonable, but not overly lengthy, period of due diligence. This applies particularly to smaller companies, or those infrequently engaging in M&A, who may lack the experience or resources compared to larger or more M&A-active companies. In these cases, the role of qualified advisers is obviously very important."

The report can be downloaded here.

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