In the 1976 film “All The President’s Men,” two Washington Post journalists are helped by an anonymous informant at the very heart of the Watergate conspiracy, known as “Deep Throat.” Deep Throat advises them to “follow the money” if they want to uncover the trail of the conspirators (all the way to the White House).
But what has “All the President’s Men” got to do with M&A transactions?
Well, readers of our recently published 2017 Intralinks Annual M&A Leaks Report might also be advised to “follow the money” if they want to understand why some M&A deals leak.
For the report, Intralinks and the M&A Research Centre at the University of London’s Cass Business School analyzed almost 6,000 worldwide M&A deals involving public targets that were announced during 2009-2016. Using a statistical methodology that identifies significant pre-announcement trading in the shares of a target company in the six weeks before the deal is announced, we found 462 deals that leaked prior to their public announcement – an average rate of 7.7 percent.
We found that leaked deals are associated with significantly higher target takeover premiums than non-leaked deals. 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, the difference in the median target takeover premium for leaked deals compared to non-leaked deals during 2009-2016 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 percent of leaked deals attracted one or more rival bids for the target compared to 5.8 percent of non-leaked deals.
We also found evidence that, especially in the past three years, leaked deals have a higher completion success rate than non-leaked deals. One potential explanation for this is leaking a deal may flush out the “optimal” acquirer, i.e., the one who has the greatest synergies with the target. The optimal acquirer can pay the highest price, hence the higher target takeover premiums for leaked deals, and therefore the greatest incentive to complete the deal.
These results all point to the one clear perceived benefit to leaking deals: higher target valuations, as a result of increased competition among acquirers for targets in leaked deals.
However, at the same time, as financial regulators globally are increasing efforts to tackle market abuse and insider trading, the perceived benefits to leaking deals may be reducing.
In 2016, targets in leaked deals achieved a median takeover premium of 38 percent vs. 26 percent for non-leaked deals, a difference of 12 percentage points. This was a 60 percent reduction compared to 2015, when targets in leaked deals achieved a 30-percentage point higher takeover premium.
Also, in 2016, for the first time since 2012, 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). There is a historic tendency for leaked deals to attract a higher rate of target rival bids, which can usually explain why there are higher target takeover premiums for leaked deals, as well. It is interesting that both the rate of rival bids and the difference in takeover premium numbers for leaked and non-leaked deals dropped at the same time.
There’s no denying that money may be the primary incentive for leaking deals. But that incentive may be becoming less appealing.
To find out more about M&A deals leaks, you can download the latest Intralinks Annual M&A Leaks report here.