When no one knows: pre-announcement M&A activity and its effect on M&A outcomes
The result of research by the M&A Research Centre at Cass Business School, City University London, and Intralinks, into how the pre-announcement due diligence period affects M&A deals and deal success.
This report presents unique insights and evidence, never previously disclosed, that have profound implications for bidders, sellers and advisers and answers some of the following questions:
- What is the relationship between due diligence and deal success for the acquirer?
- How does due diligence affect value for the target/seller?
- What are the differences in due diligence between public and private company targets?
- When do deals leak, who leaks them and why, and what happens when deal leaks occur?
Longer due diligence results in a higher likelihood of deal success
The study found a strong positive statistical relationship between the length of the due diligence period and deal performance, as measured by acquirer total shareholder returns. This is an intuitive result but has not been shown before and affirms the very high importance of conducting rigorous due diligence.
Longer due diligence is to the advantage of the buyer (and to the disadvantage of the seller)
The research found a negative statistical relationship between the length of the due diligence period and the takeover premium, as measured by the offer price over the share price average for Day -50 to Day -40 prior to the announcement of the deal. This suggests that the results of increased due diligence provide the buyer with additional information that can be used during the negotiation to drive the sale price down.
Due diligence is done more quickly on public companies
The study found a negative statistical relationship between the length of the due diligence period and the listed status of the target, with deals involving listed targets having a shorter due diligence period. This can be attributed to the greater transparency of, and easier access to, information for listed targets.