Why an integrated due diligence strategy is key to M&A success

Inflation is persisting longer than initially anticipated and core input prices remain sticky, driven by structural changes. As the basis for due diligence is historical data, relying on past performance alone may not be indicative of the future. This calls for increased vigilance around expense trends and more objectivity around potential synergies.
With ongoing inflationary pressure, interest rates are also likely to remain elevated longer. While we anticipate interest rates will decrease in the coming months, we don’t expect the ultra-low levels previously experienced. As a result, financing costs will remain elevated and the margin of error on potential transactions will be lower.

Higher interest rates also result in increased opportunity costs. As capital becomes more expensive, the consequences of poor investment decisions are more pronounced. Investors and lenders need to weigh their decisions more thoroughly, giving consideration not only to a potential acquisition or investment but also to alternative investment options.

Economic uncertainty remains a key concern in the transaction space, including structurally induced inflationary pressures, less accommodative monetary policies, and looming growth and recession risks. Geopolitical conflicts add a further element of uncertainty. Investors and lenders need to carefully consider these macro trends and their impact on business-specific risks.

As technological advances continue to accelerate, digital transformation warrants careful consideration from investors and lenders. It’s important to evaluate not just the need for additional investment in technology and training but, more critically, the impact technological change can have on competitiveness. Increasingly, investors and lenders will need to consider a company’s ability to successfully navigate the coming technological wave and maintain its strategic advantage.

Stakeholders, including lenders and other capital providers, are scrutinizing investment decisions more closely and tolerating less risk. This amplifies the trends discussed above as stakeholders expect better risk mitigation and investment performance while key decision-makers face greater uncertainty. As a result, investors and lenders need to reduce information gaps to optimize decision-making.
A well-executed approach to due diligence considers these trends to gain valuable information, helping to support a fair purchase price and ensure appropriate indemnities and representations are included in the purchase agreement.