M&A deal leaks boost deal values by an average US$21 million
- Asia Pacific region records highest rate of leaked deals in 2016 at 9.7%
- Small percentage (8.6%) of worldwide deals leaked in 2016, the same as in 2015 and above a six-year low of 6% in 2014
- Difference between median target takeover premium for leaked deals versus non-leaked deals was US$21 million in 2016
- Worldwide consumer sector deal leaks jump by 7.8 percentage points to 15.5% in 2016 - the highest of any sector for eight years
Leaking information on mergers and acquisitions (M&A) before any public announcement of the transaction added an extra US$21 million to the average value of deals announced in 2016 that leaked, according to new research* from Intralinks, a business of Synchronoss Technologies, and Cass Business School, City University of London.
In addition to evidence of higher valuations for M&A deals that leak, the 2017 Intralinks Annual M&A Leaks Report found that 8.6% of worldwide M&A deals were leaked in 2016. This figure is unchanged from the previous year (2015) and above a six-year low of 6% in 2014. In 2014, worldwide deal leaks had been on a declining trend for the previous six years, but this trend reversed in 2015 and 2016 – despite the efforts of financial regulators globally in recent years to bring in new regulations to curb deal leaks, and increase enforcement actions and fines for market abuse and insider trading.
The Asia Pacific (APAC) region had the highest rate of deal leaks in 2016, at 9.7%. Of the 10 countries with the most M&A activity, the top three countries for deal leaks in 2016 were from APAC – India (16.7% of deals leaked), South Korea (16.1%) and Japan (12%). South Korea and Japan recorded an increased rate of deal leaks in 2016 compared to 2015. Countries and territories which reduced their rate of deal leaks in 2016 included India and Hong Kong.
Percentage of M&A deal leaks by country or territory
Target listing location | 2016 (Rank) | 2015 (Rank) | 2009-2016 (Rank) |
India | 16.7% (1) | 20.0% (1) | 15.8% (1) |
South Korea | 16.1% (2) | 5.3% (6) | 10.2% (4) |
Japan | 12.0% (3) | 3.1% (7) | 5.1% (9) |
Hong Kong | 10.0% (4) | 12.9% (2) | 14.6% (2) |
US | 9.8% (5) | 12.6% (3) | 7.6% (6) |
Germany | 9.1% (6) | 0.0% (10) | 9.3% (5) |
Australia | 7.5% (7) | 3.0% (8) | 4.0% (10) |
UK | 7.0% (8) | 6.7% (5) | 12.5% (3) |
France | 4.3% (9) | 0.0% (9) | 5.4% (8) |
Canada | 4.3% (10) | 12.5% (4) | 5.9% (7) |
Worldwide, the top three sectors for deals leaks in 2016 were consumer, retail and real estate. The real estate sector, which has the highest long-term average rate of deal leaks, dropped to 3rd place in 2016 and was replaced by the consumer sector, which increased its rate of deal leaks by 7.8 percentage points to 15.5%. This is the highest worldwide rate of deal leaks of any sector in the past eight years. Worldwide, the bottom three sectors for deal leaks in 2016 were healthcare, energy & power, and industrials.
As the report shows, there appears to be one clear perceived benefit of leaking deals: higher target takeover premiums resulting in higher valuations, as a result of increased competition among acquirers for targets in leaked deals. This has been true in each of the eight years analysed for this report. From 2009 to 2016, the median takeover premium for leaked deals was 47% versus 27% for non-leaked deals, a difference of 20 percentage points.
To quantify this, in 2016 the difference in the median target takeover premium for leaked deals compared to non-leaked deals 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 to 2016, 6.5% of leaked deals attracted one or more rival bids for the target compared to 5.8% of non-leaked deals.
There is also evidence that leaked deals have higher completion success rates: In the last three years (2014 to 2016), the worldwide completion success rate for leaked deals has been almost five percentage points higher than for non-leaked deals.
These results could point to one other perceived benefit of leaking a deal – it potentially leads to a better match between acquirer and target. Leaking a deal may flush out the “optimal” acquirer, i.e. the one who has the greatest synergies with the target (and who can therefore pay the highest price, hence the higher target takeover premiums for leaked deals).
Hong Kong, which recorded the second highest average percentage of deal leaks from 2009 to 2016, dropped to fourth place in 2016 with its lowest level of deal leaks (10%) since 2012. In its annual report for 2015 to 2016, Hong Kong’s Securities and Futures Commission (SFC) detailed 107 criminal charges against 15 individuals and five corporations. Total investigations rose by 12% and the number of investigations for insider trading grew by 20% from the previous year**.
In 2016, targets in leaked deals achieved a median takeover premium of 38% versus 26% for non-leaked deals, a difference of 12 percentage points. This is a 60% reduction compared to 2015, when targets in leaked deals achieved a 30-percentage point higher takeover premium.
Also, in 2016 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).
Philip Whitchelo, VP of Strategy and Product Marketing at Intralinks, a business of Synchronoss Technologies, said: “The rate of deal leaks in markets where leaking was rampant a decade ago, such as the UK, has reduced considerably: a reflection of new regulations against market abuse and much stricter regulatory enforcement. (Places) such as India and Hong Kong, which have comparatively high levels of deal leaks, are also making more efforts to tackle market abuse and insider trading. Overall, against the perceived benefits, those leaking deals must also weigh the risks, and those benefits appear to have reduced in 2016.”
Professor Scott Moeller, Director of the M&A Research Centre at Cass Business School said: “There will always be reasons why a target company may see a benefit to leaking a deal, and it is therefore unlikely that the level of deal leakage will ever be at - or near - zero. However, it is encouraging to see that the percentage of deals that leak is remaining largely flat, and at levels below where it was a decade ago.”
Interested?
Download the 2017 Intralinks Annual M&A Leaks Report
*Methodology
M&A transaction data for announced deals during the period 1 January 2009 to 31 December 2016, share price and index price information were sourced from Thomson Reuters. The criteria for inclusion in the sample were that the target must be an entity listed on a public stock exchange, that the transaction must involve the acquisition of majority control of the target and that the target's equity must have a sufficient trading history for its returns to be calculated. The final total sample of deals for the period 2009 to 2016 was 5,997.
A transaction was identified as involving a leak of the deal prior to its public announcement using the event study methodology, which compares the cumulative daily returns of the target in the period from -40 to -1 days prior to the public announcement of the deal with its expected returns. The target's expected returns are calculated using a linear regression model of the target's returns during a “normal” trading period against the market return.
A transaction was identified as involving a leak of the deal if the cumulative daily returns of the target in the period -40 to -1 days prior to the public announcement of the deal was statistically significantly different compared to its expected returns, at the 95% confidence interval for a normal distribution - meaning that there is only a 5% probability that the target's observed returns compared to its expected returns would occur in a random distribution of data, i.e. would be due to chance.
Unless otherwise indicated, all references to the region or country location of the target refers to the target's primary listing location. The total number of leaked deals for the entire period was 462 out of the total number of deals of 5,997.
**Securities and Futures Commission, Hong Kong (PDF)
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