M&A DEAL LEAKS – DO REGULATORS NEED TO DO MORE?

Philip Whitchelo, VP, Strategy & Product Marketing, Intralinks, looks at the state of M&A deal leaks and asks whether regulators are doing enough to deter them

Philip Whitchelo
Philip Whitchelo

Intralinks and the M&A Research Centre at the University of London’s Cass Business School recently published the 2017 Intralinks Annual M&A Leaks Report.

For the report, we analyzed almost 6,000 worldwide M&A deals involving public targets that were announced during 2009-2016. Using a statistical methodology that identifies significant movements in the share price of a target company in the six weeks before the deal is announced, we found 462 deals that leaked prior to their public announcement – an average rate of 7.7%, although in 2015 and 2016 the rate of M&A deal leaks jumped above the long-term average to 8.6%.

We also found very significant, and sometimes persistent, differences in the rates of deal leaks between countries. The table below shows, for the ten countries with the most M&A activity, the percentage of M&A deals which leaked prior to public announcement of the deal.

Percentage of M&A deals leaks by country

Country 2016 (rank) 2015 (rank) 2009-2016 (rank)
India 16.7% (1) 20.0% (1) 15.8% (1)
South Korea 16.1% (2) 5.3% (6) 10.2% (4)
Japan 12.0% (3) 3.1% (7) 5.1% (9)
Hong Kong 10.0% (4) 12.9% (2) 14.6% (2)
United States 9.8% (5) 12.6% (3) 7.6% (6)
Germany 9.1% (6) 0.0% (10) 9.3% (5)
Australia 7.5% (7) 3.0% (8) 4.0% (10)
United Kingdom 7.0% (8) 6.7% (5) 12.5% (3)
France 4.3% (9) 0.0% (9) 5.4% (8)
Canada 4.3% (10) 12.5% (4) 5.9% (7)

 What’s behind the differences in the rates of M&A deal leaks between countries?

The differences in rates of deal leaks between countries are, we believe, primarily the result of differences in cultural attitudes to “market abuse” and regulatory enforcement.

The rate of deal leaks in markets where leaking was rampant a decade or more ago, such as the UK, has reduced considerably – a reflection of new regulations against market abuse and much stricter enforcement. High profile cases in the UK, such as that of Ian Hannam, have undoubtedly focused minds among dealmakers and contributed to the decline in the rate of UK deal leaks.

In February 2012, the Financial Conduct Authority (FCA, the UK financial services regulator) fined Mr. Hannam, the former Chairman of Capital Markets at J.P. Morgan and Global Co-Head of UK Capital Markets at J.P. Morgan Cazenove, £450,000 for improper disclosure of inside information contrary to section 118(3) Financial Services and Markets Act 2000. The Upper Tribunal found that Mr. Hannam had leaked inside information in an e-mail about a potential M&A deal that one of his clients may be involved in as the target. No insider trading occurred in this case, but Mr. Hannam received a heavy fine, the disgrace of a court appearance and resigned from J.P. Morgan.

The FCA’s approach to detecting, investigating and prosecuting insider trading has also hardened considerably since the appointment of a new head of enforcement and market oversight in late 2015: Mark Steward, who previously held senior roles in enforcement at the Hong Kong Securities and Futures Commission (SFC) and the Australian Securities and Investments Commission where he pioneered insider-dealing prosecutions in the region. According to data obtained by Bloomberg News via a Freedom of Information request, the FCA opened a record number of insider trading cases in 2016, more than double any other year in the last decade.[1]

Hong Kong, which has historically had a high level of deal leaks, is also making more efforts to tackle market abuse and insider trading. For the period 2009-2016, Hong Kong was ranked on average as the second highest country for deal leaks, but dropped to 4th place in 2016. The rate of deal leaks in Hong Kong in 2016, at 10%, was the lowest level since 2012. In its annual report for 2015-2016, the SFC documents that it laid out 107 criminal charges against 15 individuals and five corporations during the financial year. At the same time, the total number of investigations rose by 12% and the number of investigations for insider trading rose by 20%, from the previous year.[2]

In the US, the rate of deal leaks reached a low of 3.1% in 2012, but then rose for three consecutive years from 2013 to 2015 to a seven-year high of 12.6% before dropping sharply to 9.8% in 2016. The US Securities and Exchange Commission (SEC) has been ramping up enforcement actions over the past three years, and has likely been concerned at the steady rise in deal leaks, so the drop in 2016 could be the fruits of a tougher enforcement regime beginning to pay off. In 2016, the SEC reports that it brought a record 548 standalone or independent enforcement actions, obtaining judgments and orders totaling more than US$4 billion in disgorgement and penalties. As far as insider trading is concerned, it charged 78 parties in 2016, slightly fewer than the 87 parties charged in 2015.

It is time to weigh the risks

As the analysis in our report shows, there appears to be one clear perceived benefit of leaking deals: significantly higher target takeover premiums resulting in higher valuations, possibly because of increased competition among acquirers for targets in leaked deals. To quantify this, in 2016 the difference in the median target takeover premium for leaked deals compared to non-leaked deals was US$21 million, i.e., an average of an extra US$21 million accrued to the shareholders of the targets in deals that leaked.

However, against the perceived benefits, those leaking deals must also weigh the risks. Regulators worldwide are tackling both insider trading (a criminal offence in most jurisdictions) and deal leaking (not always a criminal offence in all jurisdictions, but increasingly a civil or regulatory offence which could result in civil prosecution, “naming and shaming”, heavy fines or the suspension of securities licenses).

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