M&A Deal Leaks: Are Regulators Doing Enough?
29 June 2017
Professor Scott Moeller, Director of the M&A Research Centre, and Dr Valeriya Vitkova, Senior Researcher, Cass Business School, City, University of London
If we see significant pre-announcement trading (SPAT) before a merger and acquisition (M&A) deal is announced, it’s highly likely that the deal has been leaked. The latest Intralinks Annual M&A Leaks Report, published in association with Cass Business School, uses a statistical methodology to detect SPAT and thereby determines how the number of deal leaks varies from year to year. For the sake of stating the obvious, one deterrent to leaking a deal is getting caught. So, is regulatory enforcement preventing M&A deal leaks? Or do regulators need to do more?
Well, it varies from country to country. We’re seeing some progress in the United States (US) and the Europe Middle East and Africa (EMEA), however some Asia Pacific (APAC) countries are still playing catch-up.
The 2017 Intralinks Annual M&A Leaks report shows the rate of deal leaks in the US dropped from 12.6 percent in 2015 to 9.8 percent in 2016 (after having risen each year from 2013 to 2015) – potentially a result of the Securities and Exchange Commission’s (SEC) enforcement strategy. In 2016, the SEC brought a record 548 standalone or independent enforcement actions, obtaining judgments and orders totaling more than US$4 billion in disgorgement and penalties. As far as insider trading is concerned, it charged 78 parties in 2016, slightly fewer than the 87 parties charged in 2015. According to the SEC, some of these cases involved complex insider trading rings – and the use of new data analytics platforms were a big support in spotting suspicious activity., 
The picture is slightly different in the UK. Fines issued by the Financial Conduct Authority (FCA) were the lowest since the financial crisis, plummeting by 98 percent from £905 million in 2015 to £22m in 2016. But this was not due to fines related to insider trading; rather to the winding down of investigations into market scandals such as LIBOR and PPI mis-selling. However, according to FCA data obtained by Bloomberg News via a Freedom of Information request, the FCA opened a record number of insider trading cases in 2016, more than double any other year in the last decade. This proactive push to stamp out insider trading could be a big contributor to the UK’s recent reduction in the rate of M&A deal leaks compared to its long-term average: in 2016, the rate of M&A deal leaks in the UK was 5.5 percentage points lower than its average for the period 2009-2016, although it has been creeping up slightly over the past three years.
In APAC, regulators are making inroads in tackling market abuse and insider trading, but have a longer way to go. In 2016, among the top ten countries with the largest M&A markets, those with the highest rates of M&A deal leaks were India, South Korea, Japan and Hong Kong. Hong Kong, which for the period 2009-2016 was ranked on average as the second highest country for deal leaks, dropped to 4th place in 2016. The rate of deal leaks in Hong Kong in 2016, at 10 percent, was the lowest level since 2012. In its annual report for 2015-2016, the Hong Kong Securities and Futures Commission documents that it laid out 107 criminal charges against 15 individuals and five corporations during the financial year. At the same time, the total number of investigations rose by 12 percent and the number of investigations for insider trading rose by 20 percent, from the previous year.
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. Countries 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. Regulators are tackling both insider trading (a criminal offence in most jurisdictions) and leaking (not always a criminal offence in all jurisdictions, but increasingly a regulatory offence which could result in “naming and shaming,” fines or suspension of licenses to practice). With the number of worldwide M&A deals remaining relatively high, any further heating or cooling of the market in 2017 and 2018 could also affect the ability of regulators to identify – and eventually prosecute -- deal leaks.
To find out more about M&A deals leaks, you can download the latest Intralinks Annual M&A Leaks report here.
Professor Scott Moeller
Scott Moeller is the director and founder of the M&A Research Centre at Cass Business School where he also a Professor in the Practice of Finance. Scott’s most recent book, published by John Wiley & Sons, was published in July 2009: Surviving M&A: Making the Most of Your Company Being Acquired. Another book now in a 2014 second edition (co-authored with Professor Chris Brady) is entitled Intelligent M&A: Navigating the Mergers and Acquisitions Minefield and discusses the role of business intelligence in major financial restructurings, and received a number of awards.