Julie Kenny confirms that intense due diligence in M&A correlates to significant increase in deal success for acquirers, and lower takeover premiums for sellers

MUMBAI and LONDON, Oct. 25th, 2013 Julie Kenny of EFS Consultants (India) Pvt, a leading M&A and Private Equity Consultancy in Mumbai, today comments on a new research report that shows, for the first time, the economic & financial impact of pre-announcement M&A activity on acquirers and sellers. She says: “The research findings demonstrate that deals which have a longer due diligence period deliver significantly higher long term shareholder returns for acquirers, while also being associated with lower takeover premiums for sellers.” In our interview with her and other financial analyst she goes on to say: “ Other results also show that the majority of M&A deal leaks are deliberate and are intended to influence the outcome of the deal to the advantage of the leaker. I am not the only person coming up with these results there are many international renowned research schools and institutes that have come up with the same or similar conclusions”. She furthermore comments: “The old school believes that a large amount of Due Diligence is a nuisance. I have been representing acquiring parties and had to fight to prolong and complete an orderly Due Diligence Process for them only to be told that I was killing the deal. In most cases we achieved a better deal and thereby increased the shareholder value along with paving the way to a successful acquisition.”

 

This is not only the case for Indian deal making but applies world wide. Indeed these findings are corroborated by the M&A Research Centre (MARC) at Cass Business School, City University London, in a report with the titled “When no-one knows: pre-announcement M&A activity and its effect on M&A outcomes,”. This is new research report based on a sample over 500 publicly announced M&A transactions which used an Intralinks virtual data room (VDR) for due diligence between 2008 and 2012. In addition to this research, 30 M&A professionals were surveyed by “Mergermarket” to comment on the conclusions reached.

 

This research supports her findings and provides real evidence to support the widely held belief that a longer due diligence process results in better deal-making by acquirers. Those questioned suggested that longer due diligence processes provide acquirers with further information on the target that can be used to negotiate a lower price. Sellers, on the other hand, appear to loose out from deals with a longer due diligence period, and may thus be motivated to try to contractually limit the time spent for the due diligence period.

 

Moreover, this research report provides strong support for the commonly held belief that most M&A deal leaks are intentional. For the deals in the sample data that included a publicly listed target, the study found no evidence of leaks happening  before the opening of the virtual data room (“VDR”) by the sellers to external users for due diligence,  or 40 days afterwards. Interestingly, the study demonstrated that leaks taking place happen much farther into the well progressing due diligence process, when either the selling party or the acquiring party may have something to gain from such a leak. The study also demonstrates that the timing of a leak does not appear to be related to the date that the VDR opens, but is more closely linked to the deal announcement date. This clearly provides evidence that most M&A leaks are intentional, rather than accidental, and are intended to try to influence the deal to the advantage of the leaker.

 

In MARC previously released reports showed that leaked deals were associated with significantly higher takeover premiums, compared to non-leaked deals. The latest report demonstrates that deals with a more brief due diligence period have significantly higher takeover premiums. In combination, these findings strongly support the belief that sellers may leak as a tactic to shorten due diligence, increase competitive tension and thereby achieve a higher sale price.

 

In addition, the report provides new statistics on deal preparation and the due diligence procedures. Accordingly, the average length of the due diligence period is 124 days, with an average of 152 users given access to the VDR and an average of over 34,000 pages of due diligence information being disclosed to potential buyers. Naturally, a large number of staff and professionals involved in a deal explains the difficulty that could arise in trying to identify the source of any intentional leak.

 

Mr. Philip Whitchelo, the vice president of strategy and product marketing, Intralinks, commented: “This study reaffirms the importance to sellers of shorter due diligence periods in the M&A process. Sellers can speed up the due diligence process by providing relevant and well-organized information to bidders in a VDR that is easy to use.”

 

Professor Scott Moeller, Director of the MARC, agrees with Mrs. Kenny and said: “We believe that this study is unique in its ability to analyze the impact of due diligence on the value of M&A deals. This research indicates that acquirers who take the time to conduct a longer due diligence benefit significantly from a better understanding of the business case and a more realistic valuation of the deal. For sellers with high quality assets, competition for those assets should ensure premium valuations. However, for those deals with limited competitive interest, this research indicates that the longer the due diligence period, the greater the opportunity acquirers have to discover information that can be used to lower the price paid.”