What are the key factors that can sink M&A?
2021 saw booming markets and the release of capital from investors that had built up during the pandemic. It was a record-breaking year for mergers and acquisitions (M&A) activity.
This year, circumstances are quite different. Economies are now dealing with geopolitical issues like the Russia-Ukraine war, rising inflation and interest rates, and declining company valuations, particularly in the technology, media, and telecommunications (TMT) sector. Companies are also facing growing regulatory scrutiny and shareholder activism related to environmental, social, and governance issues, including diversity, equity, and inclusion (DE&I).
Yet, these issues aren’t dampening deal making. UK M&A professionals are actually bullish about activity over the next 12 months, with 71% of 100 dealmakers anticipating an increase in deals.
With such optimism about future activity, how can companies and M&A professionals ensure their deals remain on track? By planning and mitigating for these five risk factors, which can sink deals.
Inflation and the rising cost of capital
Interest rates are rising to tame growing post-pandemic inflation, which in the UK is expected to peak at 13.3% in October and remain at elevated levels throughout much of 2023.
This means capital borrowing costs are also rising, which can impact both company valuations and the desire to sell. This is also why 19% of 100 UK dealmakers surveyed by Datasite said that inflation and capital costs are leading risks to completing deals this year.
DE&I-related risks
More than a fifth (23%) of 150 UK M&A professionals who were surveyed said they have seen deals fall apart because of DE&I-related issues, including concerns related to culture and a company’s hiring, advancement and retention policies. DE&I still isn’t viewed as great a threat as other risks, such as environmental issues like climate change, but it shows how a company’s culture can affect its performance and value.
ESG issues
Investors continue to prioritize an organization’s commitment to and proof of ESG credentials, especially when it comes to investment and long-term value creation, purchasing decisions, and disclosures. Furthermore, this focus, including the time and cost of compliance, is expected only to increase in the next five years.
To stay ahead of any potential post-transaction value destruction, investors and dealmakers need to evaluate and assess the risks of significant ESG exposure during due diligence. Here, technology can help. While there are no standard operating procedures to follow when assessing climate-change diligence risks, there are tools within virtual data rooms (VDRs) that include robust optical character recognition (OCR) search functionality that help dealmakers and advisers hunt for key ESG words, such as climate change. And with search alerts, they need search only once for a term and set an alert for when any new documents with that term are added. This way, no ESG-related documents or assets can be missed.
Not using (enough) technology to manage the deal process
Successful M&A professionals are increasingly turning to technology, such as artificial intelligence-powered, secure, virtual data rooms (VDR), to help them improve their productivity, reduce human error and ensure greater regulatory compliance throughout the entire deal process.
Today’s VDRs can also provide dealmakers with insights on how the entire deal process is progressing, including activities such as who is looking at documents, when and how often, and which documents they are viewing. These insights can then help deal teams better target potential buyers. In fact, there are new applications currently being tested to help deal teams automate lists of targets. This provides a huge time savings and gives dealmakers time back to focus on other areas of a deal.
M&A can lead to tremendous growth opportunities. It can also come with substantial risks.
Tempering or mitigating these risks through due diligence processes, supported by technology, can keep deals moving forward effectively and efficiently.