The New York Times DealBook calls it a ‘dark art.’ It’s the skill of strategically leaking M&A deal talks in order to give the seller an upper hand in the negotiations.

M&A transactions

This happens more often than you’d think, and not even the largest deals seem to be spared.  News of M&A transactions such as Dell Inc. (NASDAQ:DELL), H.J. Heinz Company (NYSE:HNZ), American-US Airways Group Inc (NYSE:LCC) and Liberty Media Corp (NASDAQ:LMCA) (NASDAQ:LMCB)-Virgin Media Inc. (NASDAQ:VMED) (LON:VMED) all seemed to find their way into the media well before the deals fructified, though it can’t be said whether the seller was responsible for the leaks in these cases.

Cass Business School and IntraLinks conducted a study of pre-announcement M&A activity and its effect on M&A outcomes. The study, “When No One Knows,” matched M&A transactions that used the Intralinks virtual data room with publicly announced M&A transactions from the Thomson Reuters SDC Platinum database – generating a data set of 519 transactions. These were examined for various facets of deal making including due diligence and leaks, and how these affected the ultimate conclusion of the deal.

Longer due diligence to the buyer’s advantage

The study observed that the buyer derived an advantage by dragging out due diligence, because of the increased chances of discovering problems with the target. On the flip side, a longer, more thorough due diligence increased the likelihood of the conclusion of the deal. The authors quote a partner at a UK law firm who says, “When buyers do extensive due diligence, negative things can pop up and then the buyer will either walk away or ask for compensation, so the seller will always try to limit the time frame for due diligence.”

Introducing competitive bidding with multiple buyers is a good strategy to neutralize this because the heat is then on the buyer to complete due diligence before somebody else concludes the deal.

Where there is a single bidder sellers solve this problem by strategically leaking the fact of ongoing talks in order to attract new bidders, says the study.

When most leaks occur

In fact the study found that leaks tend to occur further out into the due diligence phase, and crucially, the leaks appeared to be linked to the day of the public announcement of the transaction. “This provides further evidence that on aggregate leaks are intentional and a result of either the seller or buyer attempting to push negotiations in their favour,” says the study.

Graphically the phenomenon is explained in the following illustration:

1-dd-leak-trend M&A

Leaks: Intentional versus accidental

Interviews with market participants confirmed that intentional leaking was much more frequent than accidental leaking.

“Indeed, leaks look increasingly likely to be motivated by one party being unhappy with how negotiations are progressing and therefore choosing to leak information to push the deal in a direction they prefer, “ says the report.