Advanced M&A Diligence Strategies: Elevating Your Framework

Welcome to SS&C Intralinks' new podcast, The Dealist, created exclusively for corporate and private equity mergers and acquisitions (M&A) dealmakers. In our first season, we're diving deep into due diligence, unpacking how to master the diligence process and drive smarter deals. 

For our first episode, "Advanced M&A Diligence Strategies: Elevating Your Framework," we're joined by Valeriya Vitkova and Scott Moeller, of the M&A Research Centre (MARC) at Bayes Business School, City, University of London, who discuss: 

• Advanced diligence methodologies and frameworks
• Real-world case studies of complex diligence challenges
• How experience, intuition and data-driven analytics combine for better outcomes
• Plus, don’t miss an M&A war story you have to hear to believe

Host: Catherine Ford
Further reading: The Dynamics of Due Diligence

Transcript

00:09

Welcome to The Dealist, your insider's guide to navigating the complex world of M &A. My name is Catherine Ford, and today I've been joined by Valeria Vitkova and Scott Moeller, both of Bayes Business School, who are going to help me discuss how we can elevate your framework when it comes to due diligence. Welcome to both of you. Thank you so much for joining me today. Let's get stuck straight into what we're going to be talking about today.

00:36

And I would like to spend some time at the beginning talking about how over the last decade, that framework that we're talking about when it comes to due diligence has been elevated. Val, maybe you can kick us off with that topic. Yeah. So, the due diligence process has changed significantly over the last decade. It has become more complex and it has become also more important than ever before. And this was the focus of the recent report published by SSNC Interlinks where 

01:05

we analyzed key dimensions of the diligence process, such as the length of diligence period before the announcement, the amount of information that is shared, and the number of people involved. And it's important to note that we have identified long-term trends because we can see the changes over the last decade using a large data set. So first, focusing on how long it takes to complete the diligence process,

01:35

This has gone up by 64 % over the last decade. It now takes well over six months on average, whereas a decade ago it used to take about four months. Can you pinpoint why that is? Because that's quite a significant sort of increase in the amount of time that's being dedicated on that. I mean, is this something where it has something to do with the sheer amount of data that we're actually working through?

02:01

Is it the number of people that are actually involved in the process? Is it the kind of risks that we're looking at? Yeah, so I think it's actually both. It's more people being involved in the due diligence process. So the number of people involved has also gone up by 64 percent, approximately. So used to be on average 152 participants in the VDR a decade ago, whereas now it's 250 

02:30

And the amount of information that is shared has also gone up. It's approximately 7,500 files that are shared through the VDR now. And so all of these factors have contributed to the longer time that it takes for the due diligence process to complete.

02:56

Scott, I'd like to bring you in because you've obviously done due diligence over the years in different ways. And if I can say, you did do some due diligence when it was all still paper-based, when we went into a room and actually looked at the data. Can you share some of the experiences that you had doing that and sort of just from your gut, how things have changed over the years? Yes, and great question following on what Val was just talking about because

03:24

That was comparing what was happening 10 years ago in VDRs versus what's happening now today. But if you go back even further, and thank you for asking the question which requires somebody with some gray hairs to answer. Back when I was originally doing due diligence, you would literally go into a data room where there would be somebody, typically a paralegal from the law firm that was representing whoever

03:53

owned the data room, who would be sitting there with file boxes, taking notes as to which box you opened, how long you looked at pages of paper. But you also had to find which box it was. Now, when Val talks about 7,500 sources of information that may be there in the data room and pages up there,

04:17

Obviously, within a data room that you go into with physical boxes, you could never have that many pages there. So there was a lot less, but it was also much, much more difficult in order to be able to find where it is. And you were only given a certain slot. If it happened to be a competitive bid and different people needed access to the data room, you were told that you had a two-hour slot on Tuesday. And that was when you went in then to the data room to try to find the information that you were looking for. 

04:46

not as easy as it is today. Val also spoke about the number of people. And I mean, she made the comparison between it being 150 versus 250 people now. I mean, how can you even schedule 150 people to go into a room and make sort of sense of what they're seeing in there? So I presume the number has also significantly increased in that time. Oh, massively. Again, Val was comparing two different periods when it was VDR and VDR.

05:15

But if you went back to those physical data rooms, you would have at most a handful of people who would be there in the room. And as I said, if it was a particularly competitive bid where people had to be given time to be in there, would have a very limited number of people who were there. And people would be collecting data for other people. So I might have somebody else on the deal team say, Scott, when you're in the data room, could you look for this piece of information that we're interested in? 

05:44

Today, they can go in themselves. So can you summarize for us how you think using VDRs has fundamentally changed the diligence process? Oh, yes. mean, and this even with the changes taking place within VDR rooms being much more sophisticated. First off, you have almost unlimited data. Whereas before, you ahead of time said we're looking for this data, they would try to find it.

06:14

It would be in paper. You would look through it. Now you have unlimited data, almost unlimited data at at, at, it's searchable. You can put in the search engine in the data room, what you're looking for, and it will find it for you. You will have to necessarily be going through doing it manually. And I mean manually. They can track much more easily who's seeing what pieces of information and 

06:42

and how long they spend with that information. It's easily updatable. Once you had a data room before, you tended to put the data in the data room at a point in time and it stayed that way and it was difficult to be able to update. And therefore, everything now is much more current, much more fungible, much easier to be able to access. Okay, thank you very much.

07:08

Val, I'd like to bring you back into the conversation, spend some time talking about risk. Where do you think the focus now is when it comes to data rooms, particularly against the backdrop of evolving risks? What do you think are the areas that we spend more time looking at? And are there any areas that have sort of fallen by the wayside, which seems ridiculous to even suggest that considering the amount of data that clearly is being put into those data rooms. But are there some areas that have actually fallen by the wayside? 

07:37

So I think that's a really good question. I mean, I would say I don't think there are any areas that have fallen out, but I think there are two aspects of increased focus, which are worth pointing out here. And this is regulation and deal leaks. So in terms of regulation, one area of focus has been on antitrust policies. these have been tightened globally, and now we have stricter criteria and thresholds used by the regulators.

08:05

to identify transactions that need to be reviewed. So what this means is that a higher number of deals are likely to be reviewed. New factors are being considered when evaluating a given M &A deal, such as, for example, impacts on labor markets and the company's history of acquisitiveness. Another area of focus in terms of regulation has been on protectionism. And many E.U. countries have adopted foreign direct investment regimes.

08:34

The scope of these regimes is increasing with higher number of triggering factors and expanding lists of sensitive sectors. Cybersecurity is also an important focus area where companies need to have strong cybersecurity protection. Some recent studies in this area show that the quality of cybersecurity protection 

09:00

can impact the valuation of targets. And this can have important implications for the negotiation process during the diligence phase. ESG is another focus area, particularly in the EU, where we have seen, for example, the corporate sustainability due diligence directive, which requires companies to have plans in place to prevent and also bring to an end.

09:26

negative human rights impacts and environmental impacts. In terms of the leaks, there's been an increased focus as well, because now the opportunities to leak information prior to the announcement have increased. Factors that have contributed to this include, for example, the more complex due diligence process, the higher number of stakeholders that need to be involved. There's increased flows of information.

09:55

And with the advances of social media, it has made it easier to share information anonymously. So over the last couple of years, we have spoken with a number of regulators globally to talk about trends in M&A leaks and measures that can be taken to prevent leaks. What this means for dealmakers is that regulators have heightened their expectations.

10:22

They expect from advisors such as auditors and lawyers to help them when it comes to identifying leaks. And there's also stricter requirements for companies to have the appropriate systems in place that prevent leaks. And I think what one of our studies show in terms of leaks is that it's not the opening of the VDR that is more likely to result in leaks, but

10:49

it's later closer to the announcement period that is likely to result in due leaks. And I think we should refer anyone who's interested to learn more about this topic to the special reports published by Interlinks on these issues. Well, in fact, if there is anyone listening out there that's particularly interested in leaks, we're going to dedicate an entire podcast in this series to leaks in the due diligence process. Thanks, Val, for that.

11:16

Quickly, can you talk to me about any areas that have fallen to the wayside in a due diligence process, or is it a case of by now, whatever we want to look at, it's all in that nothing has fallen away? I think you need to consider everything and if anything, there's new dimensions that have been added. Val, can you just round us off on the question of data as well? What's the importance of data in this context? So I think data is...

11:44

increasingly important, particularly with the opportunities to use technology and AI tools. And so with the prevalence and with the increasing ability of companies to use AI tools, data will be very, very important. And so for example, companies will be able to use data to forecast more accurately the outcomes of different M &A transactions.

12:11

they will be able to use data to update various models such as valuation models in real time. And so large data and being able to use AI models as well to utilize these data more effectively will be incredibly important going forward. We're going to take a quick break there. And when we come back, we're going to talk about the human element in a due diligence process.

12:43

I promised you we talk about the human aspect of a due diligence process. And Scott, I'd like to come to you and talk to you a little bit about gut feelings, because obviously all these deals that we talk about, they are conducted by humans and we all have.

13:10

sometimes that gut feeling in our tummy that tells us this is something that I should be looking at or this is something that I should walk away from. How much when you were doing deals, did you rely on that gut feeling and how much was it your head rather than your heart that told you what to do? It's really, I must say, Catherine, a combination of the two and it's the head fighting the heart because I think we're all just human.

13:38

It's interesting to go back and think about how things changed when we had the pandemic because we couldn't see people eyeball to eyeball. We couldn't go visit locations. We had to rely on drones or we had to rely on somebody who might be on site and pass this information. It's, I think, most interesting to note that while that was taking place, people were saying the due diligence process has changed. It hasn't.

14:08

We've reverted back to you do need to see somebody face to face. You do need to get that gut feeling. Remember when a company is investing in another company, they are buying the people in most cases. It's not just an asset sale or an asset purchase. And it's very important to understand those people and therefore going with some of that gut. So I think it's really a balance of what might be the rational data driven.

14:36

which is what Val's talked about just before the break, know, versus that emotional and personal, because it is gonna have to be balanced, the two of those. And we are back to a world where we are doing both.

14:50

So if we can stay, Scott, with a personal side, can you share some of the anecdotes and challenges that you possibly encountered during a diligence process and how you overcame them? Are there any things that really stick in your mind where you go like, good grief, I never thought that was something that I was gonna run into, but here I am, and this is how I overcame it? Yeah, I will say, mean, first of all, how much time do we have? And I know it's not enough for me to give you all the war stories, but one sticks in mind,

15:19

as I think about it right now, Catherine, and that is I was asked once when I was quite junior to go check out a manufacturing plant that happened to be making chips and electronic equipment in Dallas, in the Dallas-Fort Worth area, and another guy and I flew there. Now, this was a deal that hadn't been announced. It was a very hush-hush deal. There was a very small, there were a very small number of people who were part of the deal.

15:49

And nobody wanted because of the fear of leaks or the deal getting out of hand, wanted more people to be on the DOT. I'm a finance guy. The other guy who I flew to Dallas Fort Worth was a finance guy. The two of us were asked to walk around a plant. I will tell you, Katherine, the plant looked spotless. Everything was humming correctly. They showed us through the plant. They explained everything.

16:19

Was I the right person to be there? No, because maybe the machinery that was humming should have been pinged, or maybe there should have been grease all over the floor because it meant that they were running at full capacity. I didn't know. I have to admit, I was very impressed. coming back, I remember sitting on the airplane with David and the two of us going, what did we just see, even though we had to put together a report for people even more senior than us in the deal.

16:48

about what it is that we ended up seeing on that. The right people didn't go do with that due diligence. And that has stuck with me. You can't have finance people reviewing, for example, contracts. You need to have people from HR reviewing contracts. You should have finance people reviewing finance things.

17:12

That's, I think, the message I'd like to leave with about the face-to-face and the personal aspect is you've got to get the right people into the due diligence process to review the information and even to put that information together. And that's where the VDRs have come in to be so much better because you don't have, as I said earlier before the break, just a team of four five people going into a data room, which is a physical data room. You can now have 25,

17:42

different people looking at it. Somebody from HR, somebody from tech, somebody from sales, somebody from finance, somebody from the strategy team. You could have somebody from different locations. You could have somebody from Paris, but somebody also from Singapore looking at the data as well. And that is how it's improved. And I think it's a far cry from two finance guys flying to Texas in order to be able to do what should have been an operational tech

18:12

due diligence process. Scott, thank you so much for sharing that story. That's such a tangible example of how things can go wrong and what could be done differently. By the way, deal did not go wrong. It went through. sometimes it's better to be lucky than smart, right? That's a very nice summary. Val, let's look a little bit into the future and talk about how you see diligence evolving in the next 10 to 20 years.

18:42

How much will technology change what we are doing now and how we're doing it and why we're doing it? So I think in general, data will be a really important aspect of this. So deal makers will be able to have better insights and make better decisions with the advancements of technology and AI tools. And this is primarily due to the ability to see through vast amounts of data. So, yeah.

19:10

One key factor of increased relevance will be the likely role of unstructured data, such as text, video, and voice. And I think that this type of data is likely to give deeper insights to dealmakers. Analysis of this type of data will allow dealmakers to identify hidden risks, such as political, economic, technological, and environmental risks.

19:40

And in the context of this, I think, for example, natural language processing models are likely to become very important. These will help the makers to quantify risks associated with regulatory factors and macroeconomic uncertainty, for example.

19:59

We're almost out of time, but I'd like to ask each of you to give me sort of the top three things that you consider to be most important for us to keep in mind as we go through a due diligence process. Val, do you want to take that first and then Scott can wrap us up? Yeah. So I would say number one would be be prepared to deal with uncertainty and unexpected developments. And deal makers can do this by stress testing and performing sensitivity analysis around key value drivers.

20:28

So the question that you need to always be prepared to answer is whether the deal will add value if you experience setbacks. Number two, I would say, is clear communication. With the longer due diligence time that we mentioned, so it takes longer for deal makers to complete the due diligence process, I think that communication has become more important than ever before. And it's important to share

20:57

a clear vision about the combined company after you complete the transaction. Finally, would say start planning for integration during the due diligence phase, but also make sure that you're well-prepared for the eventuality that the deal may not go through. Start planning about how you may capitalize on expected synergies from the deal, start preparing.

21:23

the data that management will need in order to make quick decisions. But at the same time, be very clear about what are the conditions under which the transaction is no longer going to create value. And if you find yourself in this situation, then you need to be prepared to walk away. Scott, what would you like to add to that? What are your top three things to be considered? Well, I would take

21:50

two of what Val said and I'll add one of mine so that in combo will have four because I too think and following on what I said before that the people side is very important and therefore you know that's getting the right people doing the analysis doing the the review you know of the due diligence material is critical. I

22:19

would agree with Val that planning is key. To the degree you have the luxury of time, and therefore I guess time and planning would go together, but that you have the luxury of time, you should be planning your time very carefully because you cannot look at everything. You need to therefore prioritize what you are going to be asking to look at and then what you are going to look at, then what you will be analyzing and looking at.

22:49

And then I would come back to the other point that Val said, which is on communication. And that is that deals are very, very complex. So I could say the C for communication might be complex as well. And making sure that there's a conversation taking place with the people who may be affected by the due diligence in the ultimate integration of the two organizations, that's very important. Or if it's an IPO, what's going to happen post-deal?

23:18

is indeed critical. So those are my three, but that makes it four in total. That's all that we have time for in today's episode of The Dealist. I'd like to say a huge thank you to Val and Scott for sharing their candid insights, anecdotes, and experiences. If you found this valuable, please subscribe wherever you get your podcast from and do share it with any colleagues that you have that might find this interesting as well. Join us for the next podcast, and until then,

23:47

Thank you very much for listening and goodbye.