Leakage Versus Permitted Leakage: What's The Difference?

08 January 2024
There's no denying that Mergers and acquisitions (M&A) is a fast-paced world. Companies always seek opportunities to grow and expand their market presence. But also enhance their competitive advantage.
close up of two people shaking hands to close a deal
But here’s the thing:

The negotiation process in M&A deals is often filled with complexities. For example; the challenge of managing information disclosure, also known as leakage and permitted leakage.

Leakage is the unauthorized release of confidential or sensitive information about a potential deal. This information gets released before its official announcement. Permitted leakage, or "controlled leakage," occurs when certain confidential information is intentionally disclosed.

Leakage and permitted leakage are key concepts that arise during negotiations. And they play a crucial role in influencing the success or failure of an M&A transaction.

Let's cover the basics of leakage versus permitted leakage.

What Counts As Leakage?

Leaked information includes the following and can occur through various means:

  • Financial details
  • Strategic plans
  • The fact that negotiations are taking place
This information can be shared by employees, executives, or advisors involved in the deal. Whether intentional or not, they all count as leakage.

Let's take a look at an example. Company X is in talks to buy Company Y. An employee from Company Y shares the potential deal information with a friend. Who, in turn, spreads the news on social media. This is leakage.

Impact of Leakage

Here’s the kicker. Leakage can have significant repercussions on the M&A process:

Market Speculation

When sensitive information leaks, it can trigger market speculation. This can cause the stock prices of the companies involved to fluctuate. Investors may react based on incomplete or inaccurate information.

If news of a potential acquisition leaks, investors may start buying or selling shares without understanding the full implications. This can lead to market volatility.

Competitive Disadvantage

Rival companies can exploit leaked information and create counter-strategies, launch competing bids, or hinder the deal's success.

For example, Company C learns about Company D's M&A plans. They may then look to increase their bid for Company D or launch a hostile takeover bid.

Legal and Regulatory Issues

Leakage of insider information can lead to legal challenges and regulatory scrutiny. Companies and individuals involved may be punished for breaching confidentiality and securities regulations. They could receive a lawsuit or a fine.

For example, confidential information about a potential merger between Company A and Company B leaks. Both companies may be subject to regulatory investigations and penalties.

Loss of Trust

The leaking of sensitive information can erode trust between the parties engaged in the M&A deal. This can lead to deal breakdowns and a breakdown in future business relationships.

For example, Company A discovers that Company B leaked confidential information during negotiations. They may lose confidence in Company B's integrity and stop the deal.

Understanding Permitted Leakage in M&A

Permitted leakage is a different animal. It is usually part of the negotiation strategy.

Why is this important?

It helps to gain the support or approvals required for the deal's success.

For example, during negotiations between Company A and Company B, Company A may choose to disclose specific financial projections to its board members and potential investors. This in turn helps to gain their support for the acquisition.

The Rationale for Permitted Leakage

Permitted leakage is an approach used in M&A negotiations for various reasons. Here’s why:

Regulatory Approval

Regulatory authorities may need the disclosure of specific information. This is used for assessing the deal's impact on the market, competition, or consumer welfare.

Take the financial services industry. Regulatory bodies may mandate the disclosure of certain information about an M&A deal to ensure compliance with antitrust laws and protect consumers' interests.

Stakeholder Support

Companies may leak information to key stakeholders, such as shareholders, lenders, or customers. This is to gain their support or approval for the transaction.

For example: if Company K plans to merge with Company L, they may share limited details with major shareholders. This cements their support and prevents any opposition during the shareholder vote.

Counterparty Due Diligence

In a mutually beneficial M&A deal, companies may share specific non-sensitive information during the due diligence phase.

One company may disclose some financial data for due diligence purposes to assess the potential synergies of the merger.

But that’s not all.

Here are a few more things that need to be considered.

What Other Aspects Of Leakage Should You Be Aware Of?

Information Asymmetry

Information asymmetry is a common issue in advanced M&A negotiations. This is where one party possesses more or better information than the other, giving them a negotiating advantage. Leakage and permitted leakage can exacerbate this problem. This makes it challenging to reach a fair and successful deal.

For example, if Company O leaks sensitive information about its financial distress to Company P during negotiations, Company P may use this knowledge to negotiate a lower acquisition price.

Managing Confidentiality

To prevent unauthorized leakage, parties involved in M&A negotiations should use robust measures. The use of legal Non-Disclosure Agreements (NDAs) can bind parties from disclosing sensitive information to third parties.

Controlled Disclosure

In contrast, permitted leakage involves controlled disclosure of information to specific parties. The challenge lies in determining shared information, and with whom.

Transparency and Trust

Transparency and trust are crucial elements in M&A negotiations. Parties must be open about their intentions, concerns, and expectations. This fosters an environment of trust during negotiations.

If a company identifies a potential risk in its target's operations during due diligence, it should share its findings.

What Else Is There To Know About Negotiating Issues Surrounding M&A?

Understanding the difference between leakage and permitted leakage is a key part of the M&A process.

Leakage can lead to adverse consequences, while permitted leakage can gain support and approvals for a deal's success. Knowing the distinctions between these concepts and implementing them are two different things.

Our selection of Mergers and Acquisitions courses covers this topic in greater detail. So you can avoid the major pitfalls of M&A!


What Is Locked Box Mechanism In Regards To Permitted Leakage?

The locked box mechanism is a method used in mergers and acquisitions to determine the buying price of a target company. Instead of adjusting the price based on the target company's actual financial position at closing, the price is "locked". Which is based on the specific financial situation of the target company.
Eager to learn more about permitted leakage and the M&A Process? Click below to find out more about Redcliffe Training’s Mergers & Acquisitions Courses:

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