Loose Lips Sink Ships (and M&A Deals Too)
The business press has been putting a major focus on the return of M&A deals both large and small in the current market. The positive increase in deal activity is not just a hot topic in the press but also on the proliferation of M&A blogs that have grown dramatically in recent years.
20 October 2009
The business press has been putting a major focus on the return of M&A deals both large and small in the current market. The positive increase in deal activity is not just a hot topic in the press but also on the proliferation of M&A blogs that have grown dramatically in recent years. In fact, there are so many sources covering M&A activity that it is hard to ignore all the news about impending deals.
The flip side of coverage on mergers and acquisitions (as well as all the related speculation and rumor) is the risk of exposure for the companies involved. The increased exposure an impending merger, divestiture or acquisition gets from multitudes of news sources and media outlets makes a real impact on how and when it is announced. And when activity is leaked before the companies plan to announce it there can be real consequences to whether the deal meets its initial objectives. The Cass Business School in London studied just these effects in a study with Intralinks on how significant pre-announcement leaks are to deal-making results.
The stats that the study revealed speak for themselves and should compel the M&A community to take note. Leaks are detrimental for the sell side, increasing the chance that a deal will fail to close by 23%. If the deal does close after a leak, the news isn't much better: It will take roughly 70% longer to complete and at a 13% lower premium compared to non-leaked deals. This should put to rest any misconstrued logic that the intentional, premature announcement of a deal is a viable technique employed by targets (and their advisors) to increase competition/valuation for an asset. Leaks can erode value and put significant strain on the process for all parties involved.
Of course, leaked information is more than just a threat to closing deals and maintaining value-it is a legal and reputational risk that advisors dread. I recently got insight into the problem of deal confidentiality from a different angle when I met with an investment bank's operating and legal management. The bank's team mentioned that all too often they are part of legal inquiries from client counsel around this very subject and wanted to discuss securing information flow from the outset of their client engagements. Investment banks are often asked to supply detailed responses on anyone at the firm that may have been privy to the existence of a process or specific leaked info as well as the firm's internal policies and procedures for information security. This all makes for a stressful, time-consuming and costly problem and adds the threat of protracted litigation and the loss of trust among bankers' executive client base to the toxic mix.
While there is no perfect answer to the question of how to best protect the confidentiality of the deal process (and the associated high value information assets of a company), avoiding the pitfalls of email and keeping a watchful eye on all involved makes good business sense.
Look for a future post where I will detail some ways that advisors and their clients are tracking the deal process and protecting confidentiality (and themselves) by leveraging technology such as Intralinks virtual data rooms. Until then, we'll keep an ear to the ground, listening, waiting, and watching to see if more deal flow equals more chatter equals more leaks.