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Mergers & Acquisitions

When dealmakers get together to begin the process of exploring an M&A transaction, especially those who use secure data rooms like those provided by IntraLinks Holdings Inc. (NYSE: IL), secrecy is a highly valued commodity.

A recent study by IntraLinks and Cass Business School in London found the percentage of global M&A deals leaked before their public announcement increased 8.6% in 2015. The increase in 2014 was just 6%.

Financeboards spoke with IntraLinks VP of Strategy and Product Marketing Matt Porzio in order to review the highlights of the study.


WooTrader: First, how does this study define a leaked deal?

Matt Porzio: This study looks more at the statistical technique as an event methodology. We look for abnormal market returns.

This would be anything that is statistically significant, well above what was previously happening with a stock for a deal that eventually does get announced.

WooTrader: What about a deal is leaked? Target? Acquirer? Proposed terms?

Our analysis tells us that there is a 95% likelihood that the potential for a transaction was leaked. The simple definition would be “this particular target is in play.” What we are really looking at is abnormal target activity.

Since some leaks are reported on, we can use the data we have from those to determine all the ones that were likely leaked and we can look at the deals statistically to see when the leak likely occurred.

WooTrader: Who does the leaking?

Leaking is heavily slanted toward the target looking to increase competitive tension either by forcing the prospective buyer to raise the bid or to entice other bidders to come on board.

There are instances, though where an acquirer might be locked in, getting cold feet, hoping someone will come in and relieve them. Another thing that can happen is the leak comes from executives, a disgruntled employee or even shareholders in the acquirer organization.

WooTrader: What are possible additional motivations?

Executives might feel they won’t play a role in the new entity. A disgruntled employee may have ax to grind. Shareholders might feel the deal won’t be to their benefit.

One thing that’s important to note is that typically the leak is intentional, not incidental. It’s a dangerous game to play, not only from a regulatory basis but also when a potential deal is leaked it can take longer and increase the risk of the deal not closing.

WooTrader: Is there a payoff in monetary terms when deals are leaked?

Yes. Stats show that on average the target gets a 50% premium on a leaked deal versus a 28% premium on a non-leaked deal. The payoff is that premium, which is significant.

WooTrader: Regulations have stiffened since the end of the financial crisis yet there’s been an increase in leaks? Why is that?

It depends on the time period. For example, in the U.S. there has been an uptick in regulations and leaks in the most recent time period but if you look at the whole time period and consider the free-wheeling, less regulated days before the global financial crisis, global leaks at that time were on a much higher level.

Since then, especially in areas where deal makers are more process oriented you see a decrease in deal leaking. The German market is a good example of the impact of regulations on slowing down leaks. Not that many people go to jail for this but the reputational risk is significant.

WooTrader: What role do companies like IntraLinks play when it comes to stopping leaks?

Secure data rooms like those found at IntraLinks can’t stop the “loose lips” aspect of deal leaking, but they can slow down the acceptance of rumors by keeping data secure so there is no real confirmatory data behind the rumor.

Things like multi-factor authentication help guard against people logging in from places where they shouldn’t, such as Moscow (laughs).

WooTrader: What country is doing the most to halt leaks and how does that impact dealmaker choices?

Historically the shift away from leaking in Europe has been with places like Germany. In addition, one market that is pretty tight is the Japanese market. The Japanese market is based on trust so there’s a strong social and moral incentive not to leak.

Hong Kong and India, on the other hand, can be “leaky.” If you’re an active acquirer looking at different regions you may have second thoughts about one of these regions that is known for leaks. It’s another factor for people on both sides of deal making to consider.

WooTrader: Why are Real Estate, Health Care and Energy sectors with more leaks than others?

My experiences suggest those sectors require data to be gathered from many people. The more people involved, the greater the chance there will be a leak.

Real estate might lean more toward an open process and even forgive leaking as the deal gets to the end and somebody feels there may be a better deal out there to be had.

Finally, it can be what I call “deliberate accidental.” That’s when somebody has knowledge who probably shouldn’t, thinks they are doing something good and leaks without realizing the harm it can cause.


WooTrader: What (if anything) can acquirers do to stop leaks?

There isn’t a lot that can be done unless they are willing to put pressure on targets by walking away from deals when a leak occurs.

At the end of the day if someone is hell bent on creating that competitive tension, getting more bids and trying to juice the premium by putting pressure on acquirers, you’re not going to stop them.

For more on this topic see the full IntraLinks/Cass School report here.

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