The M&A Due Diligence Reset Has Begun

For dealmakers, conducting comprehensive industry-specific due diligence — the mission-critical process of validating a target’s financial position, determining potential risks and threats, and identifying potential synergies between a buyer and seller — is an essential part of mergers and acquisitions (M&A). Overlook something and the ramifications could be harsh.

Whether an acquisition, carve-out, integration or divestiture, obtaining a 360-degree view of a firm — financial, operational, tax, IT, human resources, cybersecurity, compliance and regulatory — is crucial.

Not too long ago when the M&A market was operating at historic levels and competition for assets was fierce, buy-side deal teams had to work with compressed diligence periods to stay competitive in the bid process.

As the global economy enters a downturn and valuations come down to earth, we’re seeing due diligence periods are becoming longer.

Six-month outlook

As discussed in the newly published SS&C Intralinks Deal Flow Predictor for Q3 2022, M&A is still healthy despite experiencing a cooling off from its historic heights of last year. “Dealmakers are fully cognizant of the surgical speedbumps for the foreseeable quarters,” wrote Intralinks’ Brian Hwang in this edition.

From our vantage point of tracking global M&A deals reaching the due diligence phase prior to public announcement, we’re seeing pockets of opportunities and deal activity in Biopharma, Healthcare and Renewables.

The M&A market is moving forward amid headwinds, including Russia’s invasion of Ukraine, supply-chain challenges, geopolitical tensions, energy and food scarcity, China’s closure due to its zero-COVID-19 policy, rising interest rates and inflation.

Overall, we’re seeing less frenzy with deals in every region. Corporates are being more cautious when looking at assets. We’re seeing deals taking more time, and most aren’t being rushed compared to last year.

ESG, technology and private equity

Due diligence’s reset comes as environmental, social and corporate governance (ESG) is playing an increasingly prominent role in dealmaking. While ESG’s importance is evolving differently around the world, many deal teams are under pressure to obtain and review massive amounts of information to perform their duties. Highly sensitive data needs to be secured in virtual data rooms (VDRs).

Competition from private equity (PE) will continue to keep dealmaking interesting. Will PE finally deploy its more than USD 2.3 trillion in estimated record dry powder? That continues to be the question on everyone’s minds.

Technology will play an increasingly important role in the analysis of ESG data during due diligence, from reviewing sensitive personal information in a secure environment during diligence to the application of AI to analyze troves of environmental or workplace data. 

With many transactions now being scrutinized through the ESG lens, digital platforms for deal management will be a critical factor for the successful embrace of ESG as M&A professionals work to identify key value drivers and risk factors associated with a deal. For the first time in years, however, time will be on deal teams’ side.