The investigation by the US Securities and Exchange Commission (SEC) is focused on two increases in Schering’s share price in the days before the deal with Merck, according to the Wall Street Journal.
In afternoon trading on March 6, the Friday before the deal was announced, Schering’s share price jumped by eight per cent; other pharmas rose by three to four per cent.
Furthermore, the volume of Schering shares traded also increased dramatically to 34.1m, more than double the average of the previous 20 days. Another spike occurred the previous Friday.
SEC, Madoff & Stanford
Similar spikes in trading have occurred before numerous deals over the past decade but in general these have passed without the SEC launching an investigation.
However, the SEC has become more active in recent years, filing more insider-trading related lawsuits since 2006 than it did throughout the 1990s.
In addition the environment facing the SEC has recently shifted, with the regulator’s failure to identify the Madoff and Stanford financial scandals putting it under increased scrutiny.
The relatively low volume of M&A activity across all industries may have also played a role in the decision to pursue the Schering case by freeing up the SEC to launch thorough investigations into suspicious activity.
Containing leaks
The complexity of big deals, which can require M&A advisers, legal advisers, financing banks, in-house executives and accountants, can hinder efforts to ensure that no information leaks.
However, Merck appears to have taken steps to limit the number of people who are aware of the deal. This was achieved by using its own funds and loans from its M&A advisor, instead seeking a widely syndicated bridge loan or financing in the markets, which could have increased the number of people aware of the deal.