Cautious M&A investors taking extra care with due diligence

New research from Bayes Business School suggests that investors are spending more time on due diligence before possible mergers and acquisitions as they grapple with political uncertainty and the rise of ESG.

The study found the due diligence process typically took 64 per cent longer over the last decade than for deals in a similar analysis published in 2013. The average due diligence processing time rose from 124 days to 203 days.

The M&A Research Centre at Bayes Business School (formerly Cass) analysed more than 900 global M&A transactions announced between 2013 and 2023, drawing on data from SS&C Intralinks' proprietary database.

Market players interviewed by Mergermarket for this study said due diligence is now more complex than a decade ago. They pointed to a new regulatory environment (such as the GDPR), the heightened importance of ESG, political uncertainty (such as Brexit, the Russian invasion of Ukraine and rising US – China tensions) and increased digitisation.

The researchers defined the due diligence period as the time between a virtual data room (VDR) opening and the public announcement of a deal.

The Goldilocks effect

The new study, which was conducted for SS&C Intralinks, also revealed:

• Possible deals with 'medium length' due diligence processes were more likely to complete and had shorter completion times than those where the process was shorter or longer.
• Such deals also typically completed with a lower average premium (22 per cent) on the value of the shares the day before the deal announcement – compared to an average of 30 per cent and 33 per cent, respectively, for short and long due diligence periods.
• These medium-length "Goldilocks" deals are also associated with a long-lasting benefit for shareholders, delivering a 4 per cent higher return relative to the main market index over 12 months. By comparison, deals completed after long and short due diligence processes had negative returns of 3 per cent and 2 per cent, respectively.

The trend towards longer due diligence, the report says, appears to be accelerating – although the researchers acknowledge the COVID pandemic may be a factor in that result. Due diligence typically took 189 days in deals conducted between 2013 and 2020, compared to 247 days in the following two years.

The study concludes: "That effect may partly reflect the impact of the pandemic, which forced dealmakers to adapt to different ways of working. However, it is undoubtedly a significant shift – not least because it started before the pandemic."

The Mergermarket interviews included 30 M&A professionals (ten lawyers, ten accountants and ten corporate executives) who were asked to provide commentary on the results of the study and how due diligence affects the dealmaking process and the issues driving the trend towards longer due diligence.

Professor Scott Moeller, the Director of the Bayes Mergers & Acquisitions Research Centre, said: "These medium-length due diligence processes appear to be hitting a sweet spot that ensures the deal proceeds smoothly, with buyers securing the data and insight they need, while avoiding unnecessary complexity and delay."

The principal author of the study, Dr Valeriya Vitkova, a lecturer in corporate finance at Bayes, said: "It is striking that the professionals contacted for the study highlighted new regulatory requirements and the rise of ESG. That wider scope means bringing in professionals with additional skills and expertise and providing additional management oversight of those functions."

However, buyers also face delays for more traditional reasons – notably, waiting for sellers to provide documentation and respond to queries.

While some participants suggest technology has added to the complexity, they recognise Virtual Deal Rooms (DLRs) are already speeding up the due diligence process – even against this more complex background.

Tech providing new tools for scrutiny

SS&C Intralinks's Co-Head Ken Bisconti said: "Many dealmakers are now devoting significant additional resources to this work — both to cope with the increasing volume of data and information, and to test the deal's merits. The ubiquity of VDRs and the evolution of other technologies give dealmakers new tools for conducting more robust due diligence exercises without creating unnecessary delays – particularly if both buyer and seller are prepared to be open and collaborative."

One of the interviewees for the study, a partner at a Japanese law firm, told researchers: "Technology has been very effective in helping us manage our due diligence processes more efficiently."

Using proprietary deal data from SS&C Intralinks, the 2013 analysis was the first to explore the time taken for pre-announcement due diligence and how the timeframe affected the outcome. The research also explored how a deal's size, type and geography affected the due diligence process and the extent to which dealmakers were using technology and, in particular, virtual data rooms. The study published this week used a similar process.

Professor Moeller said: "In the intervening decade, no one else has studied the subject, so we repeated the exercise. The results suggest the M&A world has changed significantly in that time."