While it may often provide a scoop for journalists, for companies it’s usually a horror scenario: Insiders divulge details of transactions before their scheduled release, and the media then broadcasts them to the world. At a corporate level, this can even cause a deal to collapse. Early preparation for such an emergency is the best defence to avoid this kind of fiasco.
When deals are leaked – State of emergency for companies10/08/2023
Such situations arise much more frequently than is often assumed. For 2022, the first Global Leaks Report from H/Advisors examined global deals worth more than USD 2 billion, almost half of them on the US market. The result is clear: Of the 267 deals examined worldwide, one-third – 89 transactions – were leaked, despite confidentiality agreements. That affected a total transaction volume of almost USD 800 billion.
Crucial factors – Western Europe often tops the leaks table
There are considerable differences in the various regions examined: 48 percent of transactions in Western Europe were leaked (and 75 percent of the eight deals with German participation covered by the study); a higher overall rate was reported only in the Asia-Pacific region at 55 percent. Conversely, only 28 percent of deals in the US were leaked.
Significant differences can also be observed across the various sectors. It’s clear in this regard that major names and public interest are particularly popular with journalists. Accordingly, the retail sector, including food and tobacco products, is affected more than average, at 48 percent. In comparison, the property sector recorded a leak rate of only five percent, despite a comparable number of deals. This was by far the lowest rate observed. Besides the retail sector, only air travel and the arms industry suffered a greater number of leaks, which is linked to the war in Ukraine and the increased demand for air travel following the pandemic.
The size of a deal is of particular importance in assessing the likelihood of leaks. Very high-value transactions are leaked much more frequently. In other words, the larger the deal, the more likely it is to be leaked. Deals worth USD 2-5 billion had a leak rate of 30 percent, those worth USD 26-50 billion 83 percent, and for those worth USD 51-75 billion, the rate was 67 percent.
According to the report, however, the size of the deals was usually not reported accurately, which is simply due to the fact that, in most cases, the price is often negotiated up to the last minute. The reporting was accurate in only one in five cases – although in almost half the leaked transactions, no precise volume was officially stated. By contrast, the element that was very often accurate in the examined leaks was the identity of the parties involved. In the US, the reporting was accurate in this regard in 79 percent of cases, 81 percent in Western Europe, and 85 percent in the Asia-Pacific region.
Unionisation as a special factor, especially in Germany and France
But why are deals leaked more frequently in Western Europe? While deals worth more than USD 2 billion are more common in the US, the confidentiality requirement seems to work better there. But that doesn’t mean that more secrets are being given away in Western Europe. There are simply other factors to consider. In the large Western European markets of Germany and France in particular, the unionisation factor must not be underestimated. Works councils and
unions often have to be involved at an early stage, and preliminary discussions are sometimes essential. The risk of leaks thus increases significantly.
The Western European deals examined in the H/Advisors Leaks Report were thus disclosed significantly earlier than those in other markets – an average of 76 days prior to the official announcement, whereas in the US transactions filtered out an average of just 23 days in advance. The only locations with an even shorter lead time were Eastern Europe, the Middle East and Africa, at 12 days prior to official disclosure. Here, too, the larger group with access to the information in Western Europe was relevant. The timeframes for leaks involving transactions with German participation varied significantly: For the six leaks that were examined, the interval between leak and official communication ranged from five to 180 days.
Who are the insiders giving the information away?
Leaked deals can have many potential sources. A leak can, of course, be useful for individual parties to the negotiations, especially in terms of bringing other potential buyers into the picture and drawing their attention to the deal, or conversely in scaring other competitors off.
That means leaks are generally intentional. They are a way of influencing the current situation, to depress or boost the price. But sometimes it’s just a matter of gaining the favour of a particular journalist and bolstering the relationship. Leaks may also occur as a result of preliminary discussions with journalists, if they fail to adhere to agreed embargoes. And information may also be leaked by competitors to prevent the risk of two companies combining to become a new market leader.
A distinction needs to be made between these situations and normal market rumours, which happen quite often. The various sectors are too well networked for that. But if rumours involve the disclosure of increasingly precise details, that may once again be a sign of deliberate action.
Prevention is key
Accordingly, early prevention is essential. As in most corporate emergency situations, dealing with potential leaks at an early stage can be worth its weight in gold when the worst-case scenario happens. The bottom line is that communications following a leak, in other words the way a company reacts, can significantly influence the integrity of the negotiations.
To begin with, the communications experts should take an in-depth look at all possible scenarios and play them out. Particular attention should be paid to who might be involved and the information that will have been leaked. Who benefits from the leak must also be highlighted. The different timeframes can also play a part and have clear repercussions. It is therefore important to prepare appropriate and accurate communications with the target groups. A financial investor may be “not amused” following a leak and consider withdrawing. The corporate communications team must be prepared for such cases, too. In addition to the target groups, attention should be paid to the use made of the various communications channels. After all, deals are increasingly being reported on in social media.
Once the communications department is prepared for all potential leak scenarios, media reporting must be rigorously monitored. Of course, there are often reports that will deviate from the actual circumstances. Careful consideration must therefore be given to determining whether these are just ordinary market rumours or whether details really are filtering out, necessitating active communications – sometimes including direct dialogue with the affected stakeholders.
Ultimately, only one thing is better than good preparation, i.e. avoiding a leak entirely. It is essential in this regard for top managers to swear their teams to secrecy as early as possible and hold them accountable. It has been shown that this is still the best method of preventing leaks. This approach applies not only to leaks but to many other business situations, too.
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This article appeared in German in issue 02_2023 of the online magazine Restructuring Business.
Daniela Münster, H/Advisors Deekeling Arndt