Surging M&A proves the value of multidisciplinary due diligence

08 November 2021 5 min. read
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In the M&A frenzy taking place around the world amid an uncertain environment, conducting a thorough due diligence is one of the key factors for deal success, writes Michael Sonego, a partner at Pitcher Partners and the global head of Corporate Finance for Baker Tilly International.

Global deals in the first half of 2021 accounted for more than 60% of the total volume in 2020, and 84% of the total value. Global valuations have hit their highest level in 10 years.

Cashed-up private equity and venture capital groups are more active than they have been in years, with hefty war chests that are being used to pick off targets, at prices often above pre-deal valuation.

Global M&A

It’s a climate of heightened competition, but also heightened risk. The pandemic is still creating waves of uncertainty, border restrictions continue to limit travel to some jurisdictions and economic recovery is subject to diverse forces that range from supply chain issues to labour shortages to the success of vaccine rollouts.

Then there is the complexity of identifying true business value when every jurisdiction is operating under different rules, with different government stimulus arrangements, changing trading environments, and local logistical challenges.

The value of due diligence

It’s this environment that has prompted a global rethink of the value of due diligence, which has surged in importance over the past year even as dealmakers move to put the Covid-19 pandemic behind them.

Our recent M&A Outlook report, produced in conjunction with M&A intelligence firm Mergermarket, finds complex due diligence is now considered the single biggest challenge or risk to successful deals, up from fourth place before the pandemic.

What deal challenges/risks do you expect to face in the aftermath of COVID-19?

In fact, dealmakers now rank due diligence as a greater risk than lapsed deals or the challenging economic environment, while 94% say it is significantly or moderately more important than it was pre-pandemic.

The finding is good news for the M&A advisory sector, which has at times struggled to make the case for the in-depth due diligence that underpins successful deals – only to see unhappy buyers and targets if the deal falls over or fails to meet expectations.

As an example, immediately prior to the pandemic, we asked dealmakers two slightly different questions about their due diligence behaviour: what areas they investigated, and how useful had that experience been. We also asked whether there were any areas where, in retrospect, they wished they had spent more time.

Unsurprisingly, legal, tax, financial and strategic advice tended to rank well as services dealmakers actually engaged, although pre-pandemic many were underwhelmed by what they saw as the effectiveness of that due diligence.

How important is due diligence today compared to before the pandemic began?

But nearly two-thirds wished they had invested more time in environmental due diligence, with a similar proportion wishing they had dug deeper into tax. More than half (56%) lamented a lack of time and resources spent researching corporate compliance and business ethics, and 42% wished they had done more due diligence on political risk.

Now, with the pandemic only one of the many issues on the risk register – a list that includes climate change, ESG investor expectations, heightened protectionism, social movements such as #MeToo, modern slavery requirements, and legacy corporate misbehaviour – the value of investing in good advice before a deal is inked has become clearer.

We are finding dealmakers have a strong appetite for deals, but are acutely aware that market risks are being exacerbated by factors previously off the radar. They want far more detail about the broader economic and social context of targets, from local policies to corporate reputation to supply chain security.

Identifying attractive targets in foreign markets is challenging even when borders are open and movement unrestricted, but with ongoing uncertainty it has become more critical to get expert eyes and ears on the ground.

Which of the following did you use as part of your due diligence efforts within the past year that you normally would not use? Which will you continue to use in the future?

Nearly half of dealmakers (46%) say they consulted advisors for due diligence during the pandemic, and 63% will continue to do so in the future.

For those who are feeling the pressure to move quickly on assets, given increasing competition – and bidders who are ramping up their programmatic M&A strategies – that translates to solid cross-border teams with diverse skills.

We are seeing the value of teams with past experience working together: teams who can be assembled swiftly and deployed to conduct the due diligence required, and who bring multi-disciplinary depth and expertise, particularly for non-financial due diligence. The better the team, and the better the regional coverage, the faster that due diligence can be completed without compromising on the thoroughness of investigations.

Will this appetite for due diligence remain once the world settles? Perhaps not – perhaps bidders will again decide they can bet on a successful outcome without the underpinning research. But as the world rebalances after Covid-19, smart buyers will be using due diligence to see the true picture of a business, through the maze of adjustments, stimulus impacts and extraordinary trading conditions.

While the global M&A market is this hot, and the global uncertainty is this high, having the right due diligence advisory team in your corner can make all the difference to deal success.