As recently as last February, the premature leak of a merger deal occurred. The Securities and Exchange Commission froze the Goldman Sachs account of a Swiss trader who allegedly bought a large number of Heinz call options the day before Berkshire Hathaway and 3G Capital agreed to buy Heinz.
But intentional or unintentional leaks involving global mergers and acquisitions have dropped in the past four years. They have fallen from a high of 11 percent of deals during 2008 to 2009, to 7 percent in the period 2010 to 2012, according to the M&A Research Centre at London’s Cass Business School.
One reason, at least in the case of intentional leaks, is a subdued deal-making environment, says Cass. “The target is less likely to be able to stoke up a bidding war and will therefore focus on getting the initial deal done,” says a new report from Cass. But there is another: What was once a more common practice may now be judged as too risky.
A report of 4,000 transactions from 2004 to 2012 released Tuesday by the Cass Business School and data room company IntraLinks did find some evidence that M&A leaks can help a deal. (The study used heavy pre-announcement share trading as an indicator of a leaked transaction.)
In the past eight years, deals in which there was significant pre-announcement trading (SPAT) achieved higher bid premiums over the target’s undisturbed share price, according to the Cass study. From 2010 to 2012, targets in leaked transactions got a 53 percent bid premium on average, versus 30 percent for unleaked deals.
That may be because the initial bid sets a floor price and premium for the target, the Cass report says. In addition, when an initial bid is leaked prematurely the second bidder “gains valuable information and time.”
On the buyer side, it’s advantageous for an acquirer to leak a bid when it wants to derail a deal or speed it up, international investment bankers interviewed by Cass say. A leak is a way to extend a deal’s completion time, frustrating sellers and causing them to end negotiations to look for another buyer. The first bidder then may be able to walk away without paying a breakup fee.
Some M&A practitioners also think leaks from a buyer or seller can drive a deal forward by pressuring the other party. A leak from a seller can force a prospective buyer, for example, to formally declare its interest.
But the chorus of voices from M&A practitioners is clear – prematurely talking about a deal or letting information slip out is too risky. “We rarely see it nowadays, even among private companies,” says Howard E. Johnson, managing director of Veracap M&A International. Aside from potential severe legal ramifications, divulging a deal before a formal announcement comes at a high cost, says Johnson. “If [a company] is going to use that as a tactic they need to be very careful – they have to have a good story behind the leak because it may have unintended consequences.”