With changes in the business world favoring quick deal closings, M&A teams have less time to do careful due diligence.
Mergers and acquisitions were once primarily a strategy for companies to extend their global footprint or grow their workforce. They typically took time to conduct careful due diligence. Yet more recently the focus of M&A has shifted to quick deals to expedite growth that otherwise is not possible organically or other objectives that must be achieved quickly, making careful due diligence challenging.
For example, CEOs are now using acquisitions to address:
Bidders that move quickly can gain a competitive advantage, but speed can also be a double-edged sword. The faster you move, the more likely both seller and buyer will miss critical deal considerations. Aggressive timelines mean less time and opportunity to conduct the careful due diligence necessary to submit a prudent bid, even if money is saved in the short term.
Historically, strategic buyers have held an edge in a competitive M&A environment, with their insider knowledge and industry expertise, synergistic opportunities and willingness to pay more. But the current economic uncertainty favors swift dealmaking. Buyers that can close deals quickly hold a competitive advantage.
Quick deal completion has recently become part of a wider global trend, particularly when market volatility has encouraged companies to reach agreements quickly. But what are the consequences when dealmakers face pressure to wrap up M&A deals at speed? And how can they ensure the levels of due diligence essential to ensuring a smooth transition are not affected by tighter timelines?
Equally, ensuring the right people are integrated post-merger has always been one of the biggest contributors to deal success. Gaining access to highly skilled employees is often the primary reason for an acquisition. However, in today’s altered landscape, where many industries face talent shortages, performing the necessary due diligence pre-close to assess attrition risks and employee engagement becomes even more essential. After all, an organization is only as good as its people and their skills.
For a deal to succeed and generate a healthy return, today’s buyers must navigate the accelerated due diligence process without mismanaging talent issues or sacrificing their comfort level regarding other key risks. Even when you compress due diligence, you must delve deeply into a business’s operations, policies, financials and risks.
Instead of striving for due diligence perfection, which will never be a realistic prospect in any M&A transaction, companies are increasingly setting their bars at a more realistic level and aiming for “good enough.” What separates the best from the rest when adopting this approach is the buyer having a clear understanding from day one of what “good enough” looks like, providing a realistic milestone to aim toward and a laser-like focus on the key things that really matter.
In this scenario, buyers will often undertake “sprint” diligence to determine in the first two to three weeks whether the target is either a go or no-go. Only if the green light is given to proceed and while negotiations are ongoing, will the acquirer take a deeper dive on the due diligence.
When transactions are fast-paced, deals are closed with less information than is ideal and the risks are higher. A buyer still needs to be able to verify value, identify risks and confirm there is a foundation for long-term deal success.
The scope of due diligence has also widened considerably, creating additional hurdles and complexity. While a check of the financial and legal documentation was once considered a thorough job, due diligence now routinely covers HR, IT, environmental, compliance and intellectual property issues.
Each department within an acquirer’s organization – including HR, legal and finance – will typically produce its own set of questions. However, handling thousands of questions is an overwhelming task for most companies – especially for smaller targets – and unrealistic when timelines are compressed. Instead, we increasingly see acquirers streamlining their due diligence questions across teams, highlighting a ranked short list of the most critical items and tailoring this according to the size of the company being acquired.
Crucially, this means having a clear understanding of the specific nature of a target’s operation and the risks involved. For example, if you are buying a portion of a large German multinational, the risk of a significant compliance issue is probably low. In contrast, small does not always mean beautiful. Start-ups can grow quickly, taking shortcuts on the way, presenting possible legal and compliance issues for a buyer. However, a start-up won’t have defined benefit pension obligations, so complex pensions-focused questionnaires are unnecessary. Understanding the target makes it much easier to pinpoint issues.
The more you know about what to expect, the better able you will be to move at market pace and to prepare a fast, yet confident bid capable of delivering long-term, profitable growth.