Tougher Regulation Fails to Halt M&A Leaks as Number of Leaked Deals Rises
- Almost 9% of deals leaked globally in 2015, up from 6% in 2014; deal leaks rise in all regions except Latin America; deal leaks in North America at seven-year high; Real Estate, Healthcare and Energy & Power sectors have highest rate of deal leaks
- Data shows leaks boost deal premiums and increase the chance of rival bids
New research published today by Intralinks (NYSE:IL) and Cass Business School, City, University of London, has found that the percentage of M&A deals leaked prior to their public announcement increased to 8.6% globally in 2015.
This represents an increase of 2.6 percentage points from 2014, when 6% of deals leaked prior to announcement, despite a general trend towards tougher regulations and enforcement by financial services regulators globally.
These are some of the findings of the latest Intralinks Annual M&A Leaks Report, the analysis for which was carried out by the M&A Research Centre at the University of London’s Cass Business School and Intralinks, the leading global provider of M&A deal management and secure content collaboration solutions. The report is based on an analysis of 5,024 deals announced between 2009 and 2015, of which 378 were identified as leaked deals.
Key findings
- Globally deal leaks increased to 8.6% of all deals in 2015, compared to 6% in 2014 and an average of 7.5% from 2009-2015
- North America (NA) had the highest percentage of deal leaks in 2015 (12.6%), followed by Asia Pacific (APAC, 7.2%) and Europe, the Middle East & Africa (EMEA, 5.9%)
- The top three countries for deal leaks in 2015 were India (20%), Hong Kong (12.9%) and the United States (12.6%)
- The top three sectors for deal leaks in 2015 were Real Estate (12.9%), Healthcare (12.5%) and Energy & Power (9.3%)
- The median deal premium for targets in leaked deals in 2015 was 53%, compared to a median deal premium of 24% for non-leaked deals, a difference of 29 percentage points
- Targets in leaked deals in 2015 attracted rival bids in 6.4% of cases, compared to 4.4% of cases for non-leaked deals
EMEA vs NA trends
The report also reveals that from 2009-2015, EMEA had the highest average percentage of leaked deals at 8.9%, whereas NA had the lowest average percentage at 6.9%. However, since 2014, this trend has reversed: in both 2014 and 2015, the percentages of deal leaks in NA were significantly higher than in EMEA. This trend reversal is due both to a fall in deal leaks in EMEA (below historical averages) and a sharp increase in deal leaks in NA: the incidence of NA deal leaks has increased for four consecutive years since the beginning of 2012, to a seven-year high of 12.6% in 2015.
National comparisons
The top three countries/regions for deal leaks in 2015 were India (20.0%), Hong Kong (12.9%) and the United States (12.6%). Canada ranked 4th with 12.5%, and both the US and Canada suffered significantly increased incidences of deal leaks in 2015 compared to both 2014 and their long term averages. Both countries also trended well above the global average of 7.5%. The UK ranks in 5th place for deal leaks in 2015 at 6.7% of all deals leaked, which means it is trending below its long term average from 2009-2015 (13.3%).
Percentage of deal leaks by country
|
Target Listing Location |
2015 (Rank) |
2014 (Rank) |
2009-2015 (Rank) |
|
India |
20.0% (1) |
15.8% (2) |
15.7% (2) |
|
Hong Kong |
12.9% (2) |
22.2% (1) |
17.3% (1) |
|
United States |
12.6% (3) |
8.0% (4) |
7.2% (6) |
|
Canada |
12.5% (4) |
7.7% (5) |
6.2% (7) |
|
United Kingdom |
6.7% (5) |
5.3% (6) |
13.3% (3) |
|
Korea |
5.3% (6) |
2.9% (7) |
9.3% (5) |
|
Japan |
3.1% (7) |
0.0% (10) |
4.3% (9) |
|
Australia |
3.0% (8) |
2.0% (8) |
3.4% (10) |
|
France |
0.0% (9) |
10.0% (3) |
5.6% (8) |
|
Germany |
0.0% (10) |
0.0% (9) |
9.4% (4) |
The effect of leaks on takeover premiums and rival bids
In common with the long-term trend, the study found that in 2015 targets in leaked deals achieved significantly higher takeover premiums than those in non-leaked deals. The median takeover premium for targets in leaked deals was 53% compared to 24% for non-leaked deals, a difference of almost 30 percentage points, the highest such difference for four years.
Leaked deals also had a higher incidence of attracting rival bids: in 2015, 6.4% of leaked deals attracted one or more rival bids, compared to 4.4% of non-leaked deals. It is not unreasonable to expect an increased incidence of rival bids to be at least partly responsible for increased takeover premiums in leaked deals.
Explaining the results
Globally, deal leaks increased in 2015 compared to the prior year: 8.6% of all deals in 2015 involved a leak of the deal prior to its public announcement, compared to 6% in 2014 and an average of 7.5% over the seven year time period. This is a reversal of the trend highlighted in the last Intralinks Annual M&A Leaks Report, which saw deal leaks fall to a six-year low of 6%. So what happened in 2015?
A notable recent trend has been increasing regulation and enforcement as regulators try to prevent market abuse, including deal leaks. From 2014 to 2015 the total number of enforcement actions (which include, but are not limited to, deal leaks) by the US Commodity Futures Trading Commission (CFTC), the US Financial Industry Regulatory Authority (FINRA) and the US Securities and Exchange Commission (SEC) increased by 58%, 8% and 7% respectively. The total sum of financial penalties levied in 2015 by the CFTC, the SEC and the Hong Kong Securities and Futures Commission (SFC) also increased compared to 2014. The UK’s Financial Conduct Authority (FCA) was an exception: the number of enforcement actions in 2015 was the same as in 2014 and the total sum of financial penalties levied fell by 38% in 2015 compared to 2014.
Philip Whitchelo, Vice President of Strategy and Product Marketing at Intralinks, comments on the findings: “In aggregate globally, regulators are placing an increasing focus on new regulations to tackle market abuse and enforcing penalties for financial misconduct. But our data shows this is not translating into fewer deal leaks.”
“One interpretation of these findings suggests that even an increased threat of enforcement is still not enough to deter leaks: in short, for some the potential benefits of leaking a deal still appear to outweigh the risks. Despite increasing scrutiny and regulation, this research shows that there are still obvious benefits associated with leaking a deal, including encouraging rival bids and boosting the value of bids,” he added.
Professor Scott Moeller, Director of the M&A Research Centre at Cass Business School comments on the findings: “Against the benefits, those leaking deals must also weigh the risks. Increased regulatory enforcement and new market abuse regulations in Europe mean that the reputational and regulatory threat from leaking deals is likely to increase, so, despite the recent increase in deals leaks, we would expect the long term trend in deal leaks to continue to decrease.”
Download the report
For more information on these findings, download the full report here.
Methodology
In the days leading up to a bid announcement, significant trading in the shares of the target company can indicate information is leaking about the deal. While not providing absolute confirmation of a leak in an individual deal, significant pre-announcement trading (SPAT) across a large sample can be used to examine patterns and trends in leaking across time periods and geographies.
M&A transaction data for announced deals during the period 1 January 2009 to 31 December 2015, share price and index price information were sourced from Thomson Reuters. The criteria for inclusion in the sample were that the target must be a listed entity, 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 2009-2015 was 5,024. 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 pure 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 378 out of the total number of deals of 5,024.
About Cass Business School
Cass Business School, which is part of City, University of London, is a leading global business school driven by world-class knowledge, innovative education and a vibrant community. Located in the heart of one of the world's leading financial centres, Cass has strong links to both the City of London and the thriving entrepreneurial hub of Tech City. It is among the global elite of business schools that hold the gold standard of triple-crown accreditation from the Association to Advance Collegiate Schools of Business (AACSB), the Association of MBAs (AMBA) and the European Quality Improvement System (EQUIS).
For further information visit: www.cass.city.ac.uk or to follow our research on Twitter, visit: @cassbusiness
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