Amid the rising complexity of M&A, the simple adage of ‘failing to prepare, then preparing to fail’ is as true today, as it always has been. That is because due diligence, the time and resource intensive preparation process, can ultimately define the success
or failure of any M&A deal, which is why great importance is assigned to the meticulous practices and processes involved.
Thankfully, due diligence has evolved and improved, in large part, due to advances in technology and digitisation. Where before the process was frustrated by physical data rooms and huge volumes of paper documents, due diligence has rapidly moved into sophisticated,
intelligent virtual data rooms, replete with digital content libraries and access to automated analytic reporting. This has led to greater speed, simplicity and security across the entire process, enabling practitioners to withdraw from and close deals faster.
But, if due diligence is more advanced and efficient than it has been in the past, how much more advanced and efficient could the process become in the future? Can technology and digitisation truly transform due diligence? And what are the main challenges
that existing and new technologies could potentially provide a solution for in M&A due diligence?
To help answer those key questions, my team and I surveyed global M&A practitioners on all sides of a deal – from corporate and private equity firm executives, to their investment banking, legal and accounting advisers. When we asked how they viewed the
future of due diligence, the findings were interesting, to say the least.
Due Diligence is key
According to our survey, almost two-thirds (65%) of respondents across EMEA indicated that each stage from preliminary, detailed, to final, due diligence is considered the single most important success factor in M&A. This is followed by planning and executing
the integration process (49%); and identifying, screening and prioritising targets (35%).
Success, of course, can mean two different outcomes.
“We talk about successful M&A being when the deal is done, but success can also mean finding issues in the financial, legal or market due diligence that weren’t previously obvious, which can mean the client decides the deal isn’t right for them,” says Matt
Henderson, transaction services partner at Deloitte.
Importantly, differences in views and opinions on success factors do emerge. Perhaps most striking is the greater importance that Europe and Nordic based respondents assign to understanding and addressing cultural issues, compared to their Middle East and
Africa based peers.
Swift Execution: The Need for Speed
Speed is crucial in M&A due diligence. The longer the process runs, the higher the risk the deal goes cold and potentially unravels. Over the course of the past decade due diligence has accelerated, but just how swift can the process be in the future, as
we move into 2019?
The results of our survey were clear. Most respondents (64%) said that due diligence – from sourcing a deal to deal completion – takes on average less than three months for a single successful transaction. Tellingly that percentage is higher among Europe
(72%) and Nordic based respondents (78%), compared to their peers in the Middle East (48%) and Africa (38%), where the process takes longer, due to the greater difficulty of conducting due diligence in developing economies. Indeed, the top five countries in
EMEA, where due diligence on companies is most challenging and time-intensive are Iraq, Israel, Nigeria, Turkey and South Africa.
In the future, our respondents do expect due diligence duration to accelerate, with a higher percentage of respondents overall (78%) believing that the process will take less than three months on average in five years’ time. This expectation for acceleration
is most evident in developing economies, as more than two-thirds of respondents in the Middle East (71%) and Africa (66%) believe the process will take less than three months come 2022.
Looking deeper into the survey data, results show some differences between the views of corporate and private equity executives (M&A clients), compared to executives from investment banks, law and accounting firms (M&A advisors).
For instance, a higher percentage of advisers compared to clients believe due diligence today takes longer than three months. Though most advisers expect the process to accelerate to less than three months, they are not quite as bullish about this prediction
as their corporate and private equity clients.
What’s more, when asked how satisfied they are with the speed of their due diligence process, respondents overall are overwhelmingly (94%) satisfied. However, there is plenty of room for improvement, as only 6% of corporate and private equity executives
are completely satisfied.
It’s not all about speed, says Alexander Becker, director of M&A at SCHOTT, an international specialty glass and technical ceramic materials manufacturer: “In a competitive M&A process, there is always time pressure to complete due diligence and draft contracts.
In a one-to-one situation, you can take more time, but if the process drags on too long, you can’t keep your team focused and motivated. There is always a balance between due diligence scope and timing.”
Managing Complexity: Technology’s Role
Over the past two decades the scope of due diligence has widened considerably. Where once a check of the financial and legal documentation was considered a thorough job, diligence today takes on a much broader scope. In practice, due diligence now routinely
covers human resources, information technology, environmental impacts, regulatory and compliance issues, commercial (or market) concerns, tax, insurance, property, intellectual property, customers and operations.
This information explosion has created its own challenges and created more potential hurdles to speedy due diligence. When asked what factor slows the due diligence process down the most, the standout response, among respondents across EMEA, was accessing,
gathering, verifying and reviewing all the documents, information and data related to a transaction. The lack of strategy, planning and communication between all parties involved in the process is another key factor that complicates diligence timelines.
The advance of technology and digitisation has naturally enabled practitioners to better manage and speed up this increasingly complex operation. The hope is that new technologies – from AI and machine learning to data analytics and more – can help solve
some of the challenges around the organisation and sharing of vast stores of information, reducing the challenges of increasing deal complexity and potentially transforming the operation entirely.
Asked what the biggest challenges in due diligence that technology could provide a solution for were, a resounding 70% of respondents said reviewing and analysing contract text. This was followed by running multiple scenario analyses or financial modelling
(52%), and visualising financial performance data (41%).
“Technology is everywhere, and you use it for every question, but there’s also a lot of legwork. You have to get the right request in, get the right information out and then use technologies to drive insight,” says J Neely, managing director, global M&A
lead, Accenture Strategy.