2022 is set to be a record year for global mergers and acquisitions.
Despite the onset of inflation, rising interest rates, and an enduring global pandemic, transactions continue apace.
Conservative estimates say the year will finish at above $4.1 trillion, topping the 2007 record (and we all know what happened after that).
More optimistic projections say it could be the first year that M&A passes the $5 trillion threshold.
Of this phenomenon, Bloomberg says:
“The business of buying and selling companies traditionally depends on a belief that things are, if not entirely rosy,, at least predictably benign. And yet companies seem to be prepared to swagger through the uncertainty… The changing reaction to mergers and acquisitions is part of the wider investment appetite for companies that can sell stories about their growth and transformation, whether or not they are currently pumping out earnings.”
This enthusiasm has tended to push up the value of deals.
There is a direct correlation between the size and complexity of a deal, and the importance of thorough due diligence.
On this basis, by definition, due diligence is more important than ever.
We, at DealRoom, help dozens on companies organize their M&A process and in this article we'll highlight due diligence trends vital for 2022.
Effective M&A due diligence will be vital in 2023
Due diligence is a vital and, since the Securities Act of 1933, a necessary aspect of M&A transactions.
This process can consume as many as several months of high-pressure analysis and data collection, but ideally provides two companies with valuable market share, expanded equity and increased profits.
However, if due diligence is done poorly it can lead to cultural clashes, litigation and a massive loss in profits.
As global M&A and transaction values boom, the industry must be poised to handle the increasing significance of due diligence, meanwhile analyzing larger amounts of data than ever before.
What is data due diligence?
With the emergence of ‘Big Data’ over the past decade, a new mindset has emerged around data analytics during M&A. Essentially every company, to a greater or lesser extent, is a data company.
It follows that when undertaking an M&A transaction, participants have to pay attention to the data being acquired.
- Does it add value?
- Has it been properly used until now?
- Is it being stored safely?
These are just some of the questions that a data due diligence process will pose, as it seeks to investigate the data components of the target company.
The data due diligence process
As a relatively new addition to the wider field of due diligence, the data due diligence process is still evolving. New tools bring new ways of analyzing.
But for now, in most cases the data due diligence process looks something like the following.
- Confirm analysis criteria with the target company, ensuring the integrity of the data being viewed in advance (Buyer is ultimately a third party, potentially creating legal complications for the target company if they disclose private data).
- The target company provides access to all data sources available to the buyer. The buyer may generate a list in advance, from which the target company can work from.
- The buyer conducts its analysis of all the operational data generated by the target company, assessing the data by its own criteria.
- The buyer creates a model that allows it to properly assess the data that it has obtained and whether/how its acquisition would add value to its own operations.
Technology can ease due diligence pressure
With growing market pressure and increased amounts of data, due diligence is becoming more sophisticated and more significant to the M&A process.
Dealmakers who realize this and create a streamlined and efficient M&A diligence process will become competitive and stand out to potential clients.
However, if dealmakers continue attacking due diligence with outmoded procedures, they will fall behind as the task becomes increasingly daunting and time consuming.
Digitizing and modernizing the M&A due diligence process will allow banks to access tools which provide increased security, centralized project management, improved data storage, and important analytics.
However comfortable the old way may seem, relying on disorganized email chains, large Excel files and information silos will only add to the pressure of conducting diligence in today’s global marketplace.
Deals require analysis of large amounts of data in a short period of time.
Technology such as virtual data rooms (VDRs) and project management software can help improve efficiency by centralizing documents, allowing for less email correspondence and encouraging multi-party collaboration on one outlet.
By using this type of technology, with machine learning capabilities, data can be gathered and analyzed in a fraction of the time.
Embracing technology and software into the M&A process will also allow dealmakers to move away from repetitive, laborious tasks so that they can focus on more valuable projects.
Innovating the M&A due diligence process has been slow moving. However, technology trends are evolving and creating deals that are more secure, successful and efficient.