SEC crackdown on deal leaks may be yielding results

Deal leaks in the U.S. in dropped 2.8 percent in 2016 from 2015, due at least in part to enforcement of Securities and Exchange Commission regulations, finds a report conducted by Intralinks and the Cass Business School.

The 2017 Intralinks Annual M&A Leaks Report shows that 9.8 percent of deals involving publicly traded companies in the U.S. in 2016 were leaked, down from 12.6 percent in 2015. Meanwhile, the SEC brought a record number of total standalone or independent enforcement actions in 2016—548, up from 307 in 2015 and 413 in 2014. The report defines deal leaks based on “statistically significantly different” returns in the 40 days prior to the public announcement of a deal.

While the cause-effect isn’t definitive, the report calls the drop in U.S. leaks “potentially a result of the SEC’s enforcement strategy.” The SEC’s stepped-up enforcement activity against market fraud in general has steadily applied pressure in the past few years that may have finally reversed the trend for U.S. leaks, which rose every year from 2012 through 2015, says Philip Whitchelo, an Intralinks vice president and an author of the report. But whether the 2016 drop in leaks is the start of a new downward trend or a one-time blip won’t be known until 2017.

What is definitive from the report’s analysis is that M&A targets receive a clear economic benefit from deal leaks: higher target takeover premiums and higher valuations, Whitchelo says. This seems to be the primary cause of deal leaks, although insider trading—trading on non-public information—can be the motivation in some cases. The SEC charged 78 parties with insider trading in 2016, compared to 87 in 2015 and 52 in 2014. The report’s analysis also shows the economic benefit for leaking deals is shrinking, reflected both in the median takeover premium numbers and rate of rival bids for leaked versus non-leaked deals.