In Defense of M&A Leaks

Normally, an academic study as inane as “M&A Confidential: What Happens When Deals Leak” would be dismissed for what it is: a blatant, lame attempt to gin up some public attention for its sponsors.

Yet things turned out differently this time -- it got a little notice largely because Andrew Ross Sorkin of the New York Times’s DealBook and CNBC took a shine to it. The research is worth taking the time to debunk not just because of its superficiality but because there’s a chance it may be used as ammunition in calling for regulation or enforcement that would, in fact, be harmful to financial markets and investors.

The study -- a concoction of the Cass Business School in London; IntraLinks Inc., a company that facilitates the sharing of confidential corporate information; and MergerMarket Group, which compiles M&A “league tables” -- had a bunch of underwhelming findings. It noted that deal leaks, once an epidemic in the U.K., have actually decreased globally. And then it concluded with this logical pretzel: A leak increases the chance that a deal will get scuttled but, if it doesn’t, a leak will increase the takeover premium. Got that?

Anyone who has spent time doing deals on Wall Street is likely to ask, “Since when are ‘deal leaks’ a problem, anyway?” The problem for mergers-and-acquisitions bankers these days is not leaks about deals, but deals generally. With announced M&A deal values falling 10 percent so far in 2013 compared with last year, and down 45 percent from the fourth quarter of 2012, there is barely enough activity to keep the high-priced M&A experts busy.

The study conveniently overlooks the important fact that the “leak” of a merger between two publicly traded companies serves a very important -- essential, even --function in the merger market: Getting stock out of the hands of a company’s long-term shareholders and into the hands of short-term arbitrageurs who make sure that deals get done. This is, generally speaking, in the interests of all shareholders.

Here’s how it works: At the time of either a formal -- or informal, such as a “leak” -- announcement of a takeover or merger, the stock of the target company (and often its suitor) will trade in huge volumes and generally at a premium to where it has been trading the day before, at prices approaching the stated value of the deal. Long-term shareholders, many of whom have been waiting years for this happy day to arrive, quickly make the calculation about whether it is better to hold out for the deal to close, squeezing out the last penny of value, or if it is better to avoid the risk, cash out and look for a new investment.

The deal announcement, whether by leak or fancy press conference, gets the process of getting stock out of the hands of the people who want money now and into the hands of the arbitrageurs who are willing to take the risk -- and there are often serious financial risks involved -- of the deal closing. The arbitrageurs, mostly hedge funds these days, calculate the odds of a deal closing and how much they can make by buying the stock at a discount to the stated deal price and then holding it for the ultimate payoff.

Everybody’s happy: The long-term holders get their cash; the arbitrageurs make some quick money but take risks they are well suited to take, and the companies involved get shareholders who want nothing more than for a deal to close, and fast, as long as the price is right. That’s what keeps the heart of capitalism beating strong - and “leaks” play an important role.

No less an M&A authority than the legendary Felix Rohatyn, once my boss at Lazard Freres & Co., explained to a congressional subcommittee in 1969 how the arbs provide a valuable service. “The arbitrageur is willing to take the risk that the transaction will go through and to profit by the difference between the present market and the ultimate realized value,” he said. Titanic Wall Street figures such as Gus Levy and Robert Rubin, both onetime senior partners at Goldman Sachs Group Inc. and the latter a Treasury secretary, made their professional bones, and fortunes, as merger arbitrageurs.

Of course, as the insider-trading scandals of the 1980s and of this decade have made abundantly clear, the sharing of -- and trading on -- material, nonpublic information such as the price that one company will pay for another, and when, is ripe for abuse and should be punished. Yet the “leaking” of the facts relating to a proposed merger or acquisition is the opposite of insider trading. It is the dissemination of material information to the marketplace in a way that gets the gears of capitalism moving to everyone’s benefit.

Intralinks has products to sell: secure digital-data rooms and what it says is a network of “two million” M&A professionals. Paying for the imprimatur of a respected international business school to report that such services are a valuable investment is a clever way of going about it (in fact, you have to register on the company’s website to get a look at the report). But not if you arrange a study based on the idea that there is a major problem where none actually exists. Then again, that was probably the point.

(William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase, against which he lost an arbitration case over his dismissal. The opinions expressed are his own.)

To contact the writer of this article: William D. Cohan at wdcohan@yahoo.com

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net

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