Controlling leaks

22 July 2008

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new research suggests that leaks to the press can cost time and money and affect the certainty of deals. By Ashley Wassall

(This feature is taken from Private Equity Europe - the pan-European publication from the publishers of unquote")

In the current volatile economic climate, there has been a sharp increase in the amount of press column inches being devoted to business and economic affairs. This, though, is not a new trend; the global M&A market is now covered from every angle by a dearth of specialist publications and all significant events are heavily scrutinised by the mainstream press, a fact of life with which the private equity industry in particular has become all too familiar. M&A activity in the modern age, it seems, is no longer merely a matter of financial dealings, but is considered to be a significant feature within the wider social landscape.

One of the many side effects of this is the increasing difficulties associated with information control, with many deals appearing in the press before any official announcement has taken place. There has evolved a conventional wisdom as to what impact this phenomenon has had on transactions, particularly in terms of timing, pricing and deal certainty, but this until now remained purely a matter of conjecture. A new study, commissioned by data monitoring company IntraLinks and conducted by the Cass Business School, has attempted to rectify this information imbalance.

The report, based on a universe of over 350,000 transactions between 1994 and 2007, revealed some startling statistics regarding the de-stabilising effect that pre-announcement leaks can have, with less than half of all prematurely disclosed deals completing, compared to 72% for non-leaked transactions. According to Professor Scott Moeller, who supervised the research, this discrepancy can be largely accounted for by examining why the leak occurs in the first instance: “A deal that leaks will most often have some feature that someone doesn’t like. The urban myth that the press get wind of deals accidently is just wrong; in most cases it is deliberate”. This idea is reinforced by that fact that 20% of leaked deals were classified as unfriendly (that is, completed without endorsement from the company’s board) compared to just 3% in non-leaked deals.

In addition, deals which are leaked to the press were shown to take considerably longer to complete than non-leaked transactions. Though this is not surprising in itself, the scale of the difference is remarkable, with prematurely announced deals taking on average 105 days to complete, compared to just 62 for those that are not leaked. Again, Moeller argues that this is most likely due to the nature of deals which are leaked, particularly if the offer does not have the backing of the board. However, he also suggests it may be a result of alternative bidders entering the process, something which may provide another reason as to why leaks occur. “They tend to happen in the later stages of the process when there are a lot of people involved in the deal and sometimes the advisors are actually authorised to leak details, for example because the target isn’t happy with the offer and wants to attract more potential buyers” he claims.

Despite this, and perhaps most surprisingly of all, the report revealed that the premium being paid in cases where the transaction was leaked is on average 13% less than in non-leaked deals. “Initially we were surprised and couldn’t explain that one,” Moeller concedes, “but talking this through with a number of dealmakers, it's been suggested that it could be because these deals have been the subject of rumours over an extended period, which might have driven the price up before the leak and therefore made the premium proportionately less”. This argument would seem to fall in line with the view of many that press rumours drive prices up, but only really explains buyouts of public companies, which have a constantly fluctuating value. Perhaps an alternative explanation is that it is difficult to generate a high valuation once an offer price has been leaked, as this establishes in people’s minds what the company is thought to be worth.

Overall it is clear that deals which are leaked to the press prematurely are far more problematic for buyers, and can even impinge on vendor price expectation. What is surprising, though, is the extent of these effects, with deals taking a substantially longer time to complete and not completing at all in more than half of cases. It is a compelling argument that such leaks and their subsequent side-effects are deliberate and are designed to further individual agendas, something which is facilitated by a news-hungry media that feeds on negative stories. Controlling the flow of information therefore seems to be of paramount importance in the contemporary market place, particularly for private equity buyers, which, as a result of the industry’s unhealthy reputation, are a vulnerable and easy target.