2021 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 2022
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.
More so than ever, dealmakers are employing analytics to provide themselves with accurate and fast information that is vital during the due diligence process.
Strong analytics deliver high-valued data that drive insight and improve strategic decision making. These analytics greatly save time by providing necessary information in a way that is easily consumed and visualized.
Actions are taken quicker and with more confidence, while giving dealmakers clear next steps and executions.
During diligence, instead of bulk downloading all documents to view offline, deal teams are now able to run the process through one platform with analytic capabilities, generating information that may otherwise be lost such as buyer engagement, preferred documents and details important for integration.
2. Artificial Intelligence
Artificial intelligence (AI) and machine learning is finally making its way to the finance industry.
AI has the ability to solve real problems with precision and speed, and also make suggestions to dealmakers based on data analytics and foresight.
Many financial technology and software companies are already beginning to roll out features which use AI and machine learning, launching M&A due diligence into the 21st century.
For example, AI advancements like the ‘recall’ feature automatically suggest files that previously answered similar questions or requests. This helps eliminate duplicate work and significantly saves time.
3. Cybersecurity and Data Privacy
Data breaches, cybersecurity and data privacy risks are extremely important issues that face due diligence and overall M&A transactions.
A data breach can easily kill a deal or lower it’s value by millions, as seen rather publicly during Verizon’s acquisition of Yahoo.
Secure virtual data rooms and document sharing technology is available and must be utilized by all parties during and after the M&A process, to keep important and sensitive information safe.
4. Project Management Software
M&A transactions and due diligence processes require large teams of hardworking analysts and associates.
Organizing their collaborative efforts and directing their work can be challenging as well as inefficient. Many times, directors rely on long and disorganized email chains to communicate and delegate work.
Project management tools allow for a more efficient way to manage deal teams.
These due diligence software development platforms centralize communication, delegate workflows, track progress, and provide clarity as well as accountability.
Begin utilizing technological advancements
Dealmakers face a variety of challenges during M&A transactions, especially while conducting due diligence.
Thousands of documents are requested, shared and analyzed to ensure an equitable outcome. Technology is constantly evolving and emerging to help dealmakers handle all aspects of due diligence.
In order to complete deals more securely, efficiently and successfully, the industry must utilize and adapt to these developments and trends in financial technology, creating sophisticated due diligence processes that will launch M&A into the modern era.