M&A is up but leaks are down

It's official, 2015 has become a record year for global mergers and acquisitions, with deals totaling more than $4.3 trillion. Yet, research shows that leaks of deals under negotiation are in decline. In fact, in 2014, leaks dropped to a six-year low, according to analysis recently conducted by Intralinks and the Cass Business School at City University London.

Only 6 percent of deals under negotiation experienced leaks in 2014, down from 8.8 percent the prior year, indicating that tougher regulatory enforcement, tighter internal governance and transactional risks are looming over deal makers and shifting the dynamics of leaking confidential information.

Intralinks analyzed nearly 4,500 global transactions over the six-year period from 2009 through 2014, examining significant pre-announcement trading in the shares of a target company in the days leading up to the bid announcement, which is highly indicative of information leakage.

Mouth zipped
James Nazz | Fuse | Getty Images

Around the globe regulators are getting tougher. In major economies, such as the United States and Europe, the average size of fines has increased by 18 times over the past five years.

Concurrently, there has been a significant increase in the number of enforcement actions. It is no longer companies that face the majority of penalties.

Individuals increasingly are paying the price for their misdeeds, which in the past were often absorbed by their employers. Last year, 59 percent of U.S. Securities and Exchange Commission cases focused on individuals.

At the Commodities Futures Trading Commission, 45 percent of enforcement actions pinpointed people rather than corporate entities.

That's having a chilling effect on deal makers who are becoming more cautious about keeping their lips sealed during negotiations.There are other practical considerations for investment bankers. Leaked deals take significantly longer to complete, and face greater likelihood of never closing.

More aggressive regulatory enforcement has led to stricter corporate governance. Increasingly, companies are getting serious about not tolerating unethical leaks, recognizing that the release of confidential information poses potential legal and reputational risks.

Leaks are commonly thought to be tied to illegal insider trading, and indeed, the rise in volume in trading of target companies does point to such trading.

But leaks are also frequently a strategic maneuver used by both sellers and buyers to gain transactional advantages. In some cases,they're utilized to pressure a party to close a deal. Other times, sellers may leak in an effort to attract new buyers who will drive the price higher. Indeed, leaked deals are more likely to attract rival offers.

The analysis found deals involving a leak typically command a 51 percent takeover premium, compared to only 29 percent for non-leaked deals.

Interestingly, even as leaks are declining globally, there was a slight uptick last year in North America. Our analysis of mergers and acquisitions found a positive correlation between average deal size and leaks.

There have been a growing number of complex mega-deals in the U.S., which typically involve more participants in the negotiation process. With larger transactions, come larger investment banking and legal teams.

The more lips discussing a possible deal, the more potential there is to have a pair of "loose lips," intentional or unintentional.

The general trend, though, is for fewer leaks. And that trend should continue for the foreseeable future.

The threat of increased enforcement and potential prosecution resulting from leaks of confidential information is clearly a growing concern for deal insiders, which should make them more proactive in closely managing and monitoring their transactions. Most understand that the risks of leaking a deal now clearly outweigh the perceived benefits.

Furthermore, M&A activity is likely to decelerate through 2016, and as the market cools, the volume of leaks should as well.

These developments are healthy for the merger-and-acquisition process, and for individual investors. It's true, shareholders of a target company benefit when a leak drives up the acquisition price of the stock they hold.

But such leaks also can result in illegal insider trading, which is detrimental to the integrity of our markets. The less leakage, the more even the playing field for both individual and institutional investors.

Commentary by Matt Porzio, vice president of strategy for Intralinks, which offers secure online file-sharing systems for businesses. Follow him at @MattPorzio.