Loose Lips Sink Deals, Too

Study by London's Cass Business School finds fewer than half of M&A transactions get done if they are prematurely revealed, while it's 72 percent f...
Roy HarrisJune 3, 2008

How important is it for companies to prevent leaks about a possible merger transaction, and otherwise control the flow of deal-related information?

It’s critical in such areas as completion rate, length of time to close, and premium paid, according to a new study conducted by London-based Cass Business School.

The Cass research — which included results among more than 350,000 mergers and acquisitions between 1994 and 2007 — found that 49 percent of all leaked deals are completed, for example, compared to a 72-percent completion rate for those not leaked.

Cass presented its research, titled “M&QA Leaks: Issues of Information Control,” as possibly the world’s first project focused on pre-announcement market leaks. “The exhaustive research project cast light on the sensitivities inherent within M&A activity and the destabilizing effect a press leak could have on the deal process,” the school said. It noted that 97 percent of non-leaked deals were classified as friendly transactions — defining friendliness as having a board endorsement — while in the case of leaked deals, 80 percent were considered friendly.

Premiums also appeared to be significantly hurt in the case of leaked deals, according to the research, which was commissioned from Cass by a provider of online work spaces, IntraLinks. Results indicated that in the case of a leaked deal, the premium paid by the acquirer averages 13 percent lower than it does for non-leaked transactions. “This runs counter to the belief by some sellers that a premature deal announcement will attract more bidders and drive up pricing,” the producers of the report said.

Findings also showed that the average time taken to complete a non-leaked deal was 62 days, with the average completion time soaring by 70 percent — to 105 days — in the case of a deal that is prematurely announced.

Professor Scott Moeller, an M&A lecturer at Cass, and a former managing director and senior investment banker at Deutsche Bank and at Morgan Stanley, supervised the research. “Market leaks and insider trading receive considerable press attention, but this is the first study to identify the impact of pre-announcement leaks to the press,” Moeller commented. “Companies would be wise to heed the factors identified in this research so that they are fully aware of the historical impact of such leaks on deal activity.”