Roger's Corner - June 13, 2008: Where's the Leak?

Domestic US stocks closed up a bit yesterday, as retail sales benefited from the economic stimulus checks, although leading indexes finished well off the day's highs, as oil prices continued to pound stocks. On big deals, Microsoft’s bid for Yahoo collapsed, as Yahoo moved in unison with Google on synergizing some search performances, possibly valued at $800 million in revenue.

Meanwhile, most on Wall Street agree that the Fed is poised to battle inflation, with Wall Street expecting an increase in interest rates—possibly as early as summer. Traders are also watching the G8 meeting of finance ministers and the surge in global inflation and the weak US dollar. Economic indicators aside, deal makers are also cautioned to use all necessary tools to ensure M&A middle market deals are protected from beginning to end.

Just as middle-market M&A deals rely on seasoned negotiating skills, so too do they rely on privacy and discretion. Recently, the Cass Business School in London was commissioned by IntraLinks, a provider of online workspaces, to conduct a research study that addresses the issues of M&A leaks as they impact deal closures.

First of its kind, the “M&A Leaks: Issues of Information Control” survey details the impact of pre-announcement market leaks in M&A deals. The survey scope covers 350,000 M&A deals between 1994 and 2007. Using rigorous search metrics the survey distills the number of deals that had been disclosed in the press prematurely.

The findings cast light on the sensitivities inherent within M&A activity and the destabilizing effects of press leaks. The research revealed that “while 97% of non-leaked deals are classified as friendly* this figure drops to 80 percent where there are instances of identifiable leaks.”

The study demonstrates that both target and bidder potentially may suffer as a result of a leak. The results indicate that the premium paid by a winner in a leaked deal is on average 13% lower than in non-leaked deals. This finding runs counter to the notion held by some sellers that a premature deal announcement will attract more bidders by drive-up pricing.

Further illustrating the impact of leaks, the study suggests that the average time for a non-leaked deal to complete is 62 days. If a deal, however, is leaked to the press this figure jumps, to an average of 43 days (70%), bringing the average time of closure to 105 days.

M&A deal teams consist of many people in multiple organizations. More than ever, it is imperative that deal makers be conscious of the electronic communication channels used within an organization. Controlling and monitoring the flow of information regarding a deal before it has been announced should be standard operating procedure. The time preceding a deal announcement, as everyone knows, is a particularly sensitive point in the M&A process. M&A deal firms should lead with the study’s advice and create a centralizing information system with a complete audit trail.

Deal data experts predict that as the industry seeks out efficiencies to manage and mitigate risk that new software architecture will emerge to assist with winning and closing deals. Whatever the future holds, it is clear that possible leaks should be addressed prior to any deal proceedings.

Check out these Virtual data providers for your next transaction:

- Merril Corporation
- Intralinks
- Bowne
- Transperfect Dealinteractive

* “Friendliness” is classified as a deal completed with a Board’s endorsement .

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