Due diligence
“New insights into preannouncement M&A activity and its effect on M&A outcomes” A research report by the M&A Research Centre at Cass Business School, City University London, and Intralinks Philip Whitchelo VP Strategy & Product Marketing, Intralinks 30 October 2014 Mergermarket Italian M&A and PE Forum Copyright © Intralinks 2014 All rights reserved
1
Notice This document contains information that is proprietary and is the property of Intralinks Inc. It may be used, distributed and reproduced only in its entirety or, if only part of the information contained herein is used, distributed or reproduced elsewhere, then this use, distribution or reproduction must be accompanied by this notice.
Copyright © Intralinks 2014 All rights reserved
2
Why do we care about the pre-announcement period? Strong evidence that measures of ultimate deal success are driven by pre-announcement factors.
Due diligence is a critical pre-announcement factor…but has been difficult to study using empirical data. This research used a unique data set to analyse the effect of pre-announcement due diligence variables on targets/sellers, acquirers and deal outcomes. Copyright © Intralinks 2014 All rights reserved
3
What we did
Metadata on 640 global deals that used an Intralinks VDR, 2008-2012
Metadata included variables such as length of due diligence, number of users, number of pages, etc. Matched to publicly announced deals. Final sample = 519 bids.
Copyright © Intralinks 2014 All rights reserved
Multivariate regression analysis Test for statistically significant relationships between public data variables such as acquirer returns, takeover premiums, deal size, etc., and the VDR metadata. Event study used to look at evidence of leaks, when they occur and their relationship to due diligence.
Interviews with 30 M&A practitioners
10 lawyers, 10 accountants and 10 corporate development executives. Provide behavioural context to the data analysis results.
4
1. Longer due diligence equals… …higher return for the acquirer. Median long term (12 mo.) acquirer total shareholder return vs. local market equity index 10.0%
7.7%
5.0%
Long due diligence Medium due diligence Short due diligence
0.0% -5.0% -10.0% Copyright © Intralinks 2014 All rights reserved
-3.8% -6.8%
7
2. Longer due diligence equals… …lower takeover premium for the target. Median announcement day target premium vs. target share price ADay -40/-50* 50%
41%
40% 30%
25%
20%
35% Long due diligence Medium due diligence Short due diligence
10% 0% *(Offer price / Share price average from day -50 to day -40 (trading days) prior to the announcement of the deal)-1, displayed as %
Copyright © Intralinks 2014 All rights reserved
8
Example of impact on target/seller and advisor …for a target with a $1bn standalone value, the seller gains $130m of value and the advisor gains an extra $3m in fees, or 10%, by avoiding a long due diligence period.
Value ($m) 1500 1000
+10% 25 250
28 380
30 25 20 15
500
1000
1000
10 5
0
Long due diligence
Copyright © Intralinks 2014 All rights reserved
Short/medium due diligence
Takeover premium Standalone value Advisor fee
0
9
3. Public targets equal… …shorter due diligence period. Median due diligence period until public announcement 120
107
100 80 Days 60 40
75 Public target Private target
20 0 Copyright © Intralinks 2014 All rights reserved
10
4. Larger targets equal… …shorter due diligence period. Median due diligence period until public announcement vs. transaction value 140 120 100 80 Days 60 40 20 0
132
101
114 88
79
67
60
50
41
28
21
Transaction value ($m) Copyright © Intralinks 2014 All rights reserved
11
5. M&A deal leaks are deliberate… …not driven by VDR opening, but related to day of announcement.
Copyright © Intralinks 2014 All rights reserved
12
Leaked deals deliver… …higher takeover premium for the target. Median bid premium over target undisturbed share price* 60%
54%
50%
43%
40% 30%
25%
43%
40%
22%
23%
27%
No leak Leak
20% 10% 0%
Global
APAC
EMEA
N. AMERICA
*Data taken from “M&A Confidential: what happens when deals leak”, a research report by Cass Business School and Intralinks Copyright © Intralinks 2014 All rights reserved
13
Since 2010, leaked deals are less likely to close… …higher risk for the target/seller. Percentage of deals completed* 90% 88% 86%
88%
88%
86%
85%
84% 82% 80%
79%
80%
No Leak Leak
78% 76% 74%
2004-2007
2008-2009
2010-2012
*Data taken from “M&A Confidential: what happens when deals leak”, a research report by Cass Business School and Intralinks Copyright © Intralinks 2014 All rights reserved
14
Reputational risk from leaking deals is rising… …increased regulatory enforcement against leaking, as well as insider trading.
Copyright © Intralinks 2014 All rights reserved
15
Significant recent decline in European leaks… …but still above US levels.. Percentage of deals displaying pre-announcement leak* 25% 20%
22% 19%
18%
15%
13%
10%
7%
8%
8%
UK 9%
DACH 7%
US
5% 0%
2004-2007
2008-2009
2010-2012
*Data taken from “M&A Confidential: what happens when deals leak”, a research report by Cass Business School and Intralinks Copyright © Intralinks 2014 All rights reserved
16
What factors were not significant for due diligence • Cross-border vs. domestic deals • Geography (although some indication that North America and US deals had shorter due diligence than EMEA and UK deals, and that there were more pages of information in North America and US deals than EMEA and UK deals) • Number of users of the VDR • Top tier advisor • Industry relatedness of buyer and seller • Number of bidders • Year of completion
Copyright © Intralinks 2014 All rights reserved
17
Conclusions Buyers use increased due diligence to reduce price Sellers need to allow reasonable but not overly lengthy due diligence Sellers can increase competitive tension – better buyer research Sellers can shorten due diligence - be well prepared and organised M&A deal leaks can be used to influence deal negotiations – but high risk Copyright © Intralinks 2014 All rights reserved
18
Questions Philip Whitchelo VP Strategy & Product Marketing Tel: +44 207 5495207 E-mail: [email protected].
Copyright © Intralinks 2014 All rights reserved
19
1
Notice This document contains information that is proprietary and is the property of Intralinks Inc. It may be used, distributed and reproduced only in its entirety or, if only part of the information contained herein is used, distributed or reproduced elsewhere, then this use, distribution or reproduction must be accompanied by this notice.
Copyright © Intralinks 2014 All rights reserved
2
Why do we care about the pre-announcement period? Strong evidence that measures of ultimate deal success are driven by pre-announcement factors.
Due diligence is a critical pre-announcement factor…but has been difficult to study using empirical data. This research used a unique data set to analyse the effect of pre-announcement due diligence variables on targets/sellers, acquirers and deal outcomes. Copyright © Intralinks 2014 All rights reserved
3
What we did
Metadata on 640 global deals that used an Intralinks VDR, 2008-2012
Metadata included variables such as length of due diligence, number of users, number of pages, etc. Matched to publicly announced deals. Final sample = 519 bids.
Copyright © Intralinks 2014 All rights reserved
Multivariate regression analysis Test for statistically significant relationships between public data variables such as acquirer returns, takeover premiums, deal size, etc., and the VDR metadata. Event study used to look at evidence of leaks, when they occur and their relationship to due diligence.
Interviews with 30 M&A practitioners
10 lawyers, 10 accountants and 10 corporate development executives. Provide behavioural context to the data analysis results.
4
1. Longer due diligence equals… …higher return for the acquirer. Median long term (12 mo.) acquirer total shareholder return vs. local market equity index 10.0%
7.7%
5.0%
Long due diligence Medium due diligence Short due diligence
0.0% -5.0% -10.0% Copyright © Intralinks 2014 All rights reserved
-3.8% -6.8%
7
2. Longer due diligence equals… …lower takeover premium for the target. Median announcement day target premium vs. target share price ADay -40/-50* 50%
41%
40% 30%
25%
20%
35% Long due diligence Medium due diligence Short due diligence
10% 0% *(Offer price / Share price average from day -50 to day -40 (trading days) prior to the announcement of the deal)-1, displayed as %
Copyright © Intralinks 2014 All rights reserved
8
Example of impact on target/seller and advisor …for a target with a $1bn standalone value, the seller gains $130m of value and the advisor gains an extra $3m in fees, or 10%, by avoiding a long due diligence period.
Value ($m) 1500 1000
+10% 25 250
28 380
30 25 20 15
500
1000
1000
10 5
0
Long due diligence
Copyright © Intralinks 2014 All rights reserved
Short/medium due diligence
Takeover premium Standalone value Advisor fee
0
9
3. Public targets equal… …shorter due diligence period. Median due diligence period until public announcement 120
107
100 80 Days 60 40
75 Public target Private target
20 0 Copyright © Intralinks 2014 All rights reserved
10
4. Larger targets equal… …shorter due diligence period. Median due diligence period until public announcement vs. transaction value 140 120 100 80 Days 60 40 20 0
132
101
114 88
79
67
60
50
41
28
21
Transaction value ($m) Copyright © Intralinks 2014 All rights reserved
11
5. M&A deal leaks are deliberate… …not driven by VDR opening, but related to day of announcement.
Copyright © Intralinks 2014 All rights reserved
12
Leaked deals deliver… …higher takeover premium for the target. Median bid premium over target undisturbed share price* 60%
54%
50%
43%
40% 30%
25%
43%
40%
22%
23%
27%
No leak Leak
20% 10% 0%
Global
APAC
EMEA
N. AMERICA
*Data taken from “M&A Confidential: what happens when deals leak”, a research report by Cass Business School and Intralinks Copyright © Intralinks 2014 All rights reserved
13
Since 2010, leaked deals are less likely to close… …higher risk for the target/seller. Percentage of deals completed* 90% 88% 86%
88%
88%
86%
85%
84% 82% 80%
79%
80%
No Leak Leak
78% 76% 74%
2004-2007
2008-2009
2010-2012
*Data taken from “M&A Confidential: what happens when deals leak”, a research report by Cass Business School and Intralinks Copyright © Intralinks 2014 All rights reserved
14
Reputational risk from leaking deals is rising… …increased regulatory enforcement against leaking, as well as insider trading.
Copyright © Intralinks 2014 All rights reserved
15
Significant recent decline in European leaks… …but still above US levels.. Percentage of deals displaying pre-announcement leak* 25% 20%
22% 19%
18%
15%
13%
10%
7%
8%
8%
UK 9%
DACH 7%
US
5% 0%
2004-2007
2008-2009
2010-2012
*Data taken from “M&A Confidential: what happens when deals leak”, a research report by Cass Business School and Intralinks Copyright © Intralinks 2014 All rights reserved
16
What factors were not significant for due diligence • Cross-border vs. domestic deals • Geography (although some indication that North America and US deals had shorter due diligence than EMEA and UK deals, and that there were more pages of information in North America and US deals than EMEA and UK deals) • Number of users of the VDR • Top tier advisor • Industry relatedness of buyer and seller • Number of bidders • Year of completion
Copyright © Intralinks 2014 All rights reserved
17
Conclusions Buyers use increased due diligence to reduce price Sellers need to allow reasonable but not overly lengthy due diligence Sellers can increase competitive tension – better buyer research Sellers can shorten due diligence - be well prepared and organised M&A deal leaks can be used to influence deal negotiations – but high risk Copyright © Intralinks 2014 All rights reserved
18
Questions Philip Whitchelo VP Strategy & Product Marketing Tel: +44 207 5495207 E-mail: [email protected].
Copyright © Intralinks 2014 All rights reserved
19
