M&A Deal Leakage

Introduction

M&A executives and professionals have always been trained about protecting the integrity of Deal information and leaking any information about a transaction cross that ethical red line. However, data and facts portray a different picture. Running the right process, having the right security controls, and having well-trained teams with a clean conscience can ensure no leakage in M&A information.

M&A Deal leaks are more common than one might expect even after regulatory oversight and laws governing insider trading. According to a 2020 report from Intralinks, approximately 8-10% of Deal information leaks globally and this has followed the last 8 years. Europe and Asia have fared far worse than the United States over years.

Types of Leakage

There are multiple reasons for M&A Deal leakage, despite the best efforts and intentions of Deal teams, bankers, attorneys, advisors, and consultants, etc. There are two broad categories intentional leaks and accidental leaks.

Intentional leaks are propagated out by insiders with intricate knowledge of the deal, intentions can vary from transaction sabotage, alerting rivals, etc. Accidental leaks are not driven by clear motivations, but carelessness around information protection systems and humans. Based on my observations, Deals leak mostly in their later stages i.e., after term-sheet rather than the upfront acquisition intent stage. There are also visible symptoms before the public announcement e.g. increased surge in trading volume of target company shares targeting bid premiums as the alpha. A classic example of an accidental deal leak was Salesforce’s entire target scan deck being published on the internet via human and systemic deficiencies.

Wider access to corporate email calendars, meeting room calendars, social media posts with location tags all raise rumors, suspicions, and leaks. Once there is a rumor, validation becomes easier. None of these may break a deal, but open speculations, accusations, and room for sabotage too.

M&A Leakage Drivers

While accidental leakage is truly accidental, the intentional leakage has well thought out motives and drivers around them. The intentional leaks are originated from insiders who also know the risks and consequences. Let us examine a select few of these motives and drivers.

Valuation Premiums

Data also validates that leaked deals secured higher acquisition premiums over the non-leaked M&A transactions. According to the Intralinks report, median premiums on leaked deals was 48.2% while non-leaked deals commanded only 23.5%. These ranges in differential have been consistent across several years. An acquisition premium gap as substantial as this does motivate behavior changes across stakeholders.

More Bidders

This is the obvious and most effective reason behind deal leakage, more competitive bids lay the foundation for premiums. Intentional leaks raise the probability for rival bids, as rumors propagate more bidders join the race pushing acquisition prices higher. A good enough motivation for multiple constituents to deliver.

Executives and Management

Deal leaks are considered market abuse and could expose executives and the company to legal risk and financial consequences. Investor confidence and market image could come under scrutiny and most executives understand this. However, if you can examine the track records of management and executives from one deal leak and follow their career across multiple companies, the patterns of leakage have remarkable consistency!

Time to Close

While the odds of completing closure may not drastically vary, leaks do pressure the timelines to close. This aspect specifically becomes interesting when multiple tax situations of entities, executives, and transaction personnel are analyzed and understood depending on the time of the year and dates the closure is expected to march towards. Sellers want to expedite the Deal and close at the highest price.

Risks and Impact

Market abuse can have serious ramifications if done with nefarious motives e.g., drive up valuation, alter competitive dynamics, etc. M&A insiders have been fined by regulators on multiple occasions for leaking information, executives have been fired and there is an absolute wider consensus that intentional leaks might not be worth the stigma and reputational risk.

Once media has processed the leaks, the announcement day reduces enthusiasm from them, and analysts and stock prices get baked in with a limited uptick.

Managing M&A leaks commence by setting the tone at the top, right from the CEO. The NDA language, penalty clauses, advisor fee impact, and lower purchase price clauses can all be woven into transaction engagement terms as deterrents. Use ongoing communication and a robust set of systems and tools to manage access control to the flow of information during M&A.

Concluding Thoughts

The overall lure of leaking M&A deals continues to be lucrative, across many years data and observations have revealed that leaks are on the rise. Increased regulations, reputation risk, and enforcement have not proved to deter the situation completely and at least not with global consistency. Risks far outweigh benefits, especially larger deals in public markets. M&A leaks also trigger rival bids and enhanced valuations with takeover premiums paid by rivals and based on these factors, M&A deal leaks are expected to rise as years progress and will likely take an enhanced enforcement framework to mitigate.