Cracking down on M.&A. leaks may only make them more tempting.
Merger practitioners say fresh research showing that news is trickling out less often about companies for sale can partly be attributed to tougher rules and enforcement. Though loose lips come with less chance of deals closing, they also coincide with much higher premiums. Some bankers will always fancy that mix of risk and reward.
Discretion has spread postcrisis, according to a study by the Cass Business School in London commissioned by Intralinks, a provider of virtual data rooms. From 2008 to 2009, there was “significant pre-announcement trading” in the stock of a target company in 11 percent of cases. Over the following three years, the rate fell to 7 percent. Reduced merger activity over all may have played a part, but the British Takeover Panel’s recent disclosure rules and closer scrutiny of market abuse in the United States also probably had an effect.
The report suggests the financial hazards of gossip have grown. In the boom years from 2004 to 2007, 88 percent of deals that were leaked, either accidentally or intentionally, went on to close. That was roughly on a par with non-leaked transactions. From 2010 to 2012, only 80 percent of tipped deals reached the finish line, while nearly nine out of 10 of the ones kept quiet made it.
The rewards of indiscretion, however, have increased. Five years ago, the researchers discovered little difference in the takeover premiums paid for the two sets of deals from 1994 to 2007. Over the last few years, leaked deals attracted a sharply larger premium — 53 percent versus 30 percent. There’s no indication of causality, especially as unauthorized disclosures can come from either sellers or buyers. Yet the implications won’t be lost on advisers.
All else being equal, a $1 billion company being sold quietly would, according to the findings, fetch $1.3 billion. The price tag for a leaked deal would be $1.53 billion. Assuming a 3 percent fee, a banker would either have an 88 percent chance of pocketing $39 million or an 80 percent chance of $46 million. The second option is worth $2.5 million more. Wall Street’s collective ego will find that calculus enticing.
Jeffrey Goldfarb is an assistant editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.