M&A Due Diligence 2023: Five Trends Shaping the Process (2024)

Numbers do not tell the entire story. In 2023, the M&A due diligence process is more nuanced than ever before. Of course, an all-encompassing due diligence process is vital to a successful deal—but anyone who has been involved in this space long enough knows that this has not always been the case.

Traditionally focused on financial and legal assessments, due diligence now encompasses operational, cultural, technological, environmental and reputational reviews. This holistic approach sensibly ensures all stakeholders thoroughly understand all aspects of a target asset. With a more comprehensive due diligence process helping to identify potential risks, it also uncovers hidden value that buyers can unlock post-acquisition.

As the due diligence landscape continues to evolve, it’s crucial to keep your finger on the pulse of due diligence methodologies and trends. In this article, we explore five trends shaping M&A due diligence in 2023.

Delays, prolonged negotiations and extended due diligence can harm a potential deal’s success. In 2021, which was dubbed “the year of M&A,” the race was on to complete due diligence as swiftly as possible. However, M&A due diligence in 2023 has seen a shift toward longer preparation times, with slower due diligence more likely to report a successful outcome. By allowing more time for in-depth assessments, firms can ensure they aren’t simply ticking boxes but truly understanding the nuances of potential acquisitions.

Artificial intelligence is one of the most promising developments for private equity firms in 2023. One survey revealed that between 60 and 75 per cent of limited partners think using AI will become significant in private equity investment processes in the next five years. This year, AI and machine learning already have the potential to reshape the due diligence process.

Using natural language processing (NLP), AI systems can swiftly interpret contracts and identify potential risks and liabilities, allowing employees to spend more on tasks that require human input. AI also wields incredible predictive power, as systems can forecast M&A outcomes by analysing past transactions and market trends. Leveraging AI and machine learning during the due diligence process will allow firms to obtain in-depth knowledge about a target asset, helping them to determine the true value of an asset.

Investors and regulators are increasingly turning their attention to sustainability. As a result, many companies are integrating ESG considerations into their M&A strategies. The reasoning is two-fold: taking ESG factors into account is the right and responsible thing to do, but they also drive value. Generally speaking, ESG factors drive value in numerous ways:

Positive reputation

Companies that take ESG factors into account in their operations and strategies tend to benefit from better reputations with stakeholders and consumers.

Long-term financial performance

There is also a growing body of evidence that suggests companies with robust ESG practices often financially outperform their competitors in the long run.

Regulatory compliance

Governments across the globe continue to tighten regulations around the environment, social responsibility and corporate governance. Companies focusing on integrating ESG are more likely to remain compliant, reducing the risk of legal challenges post-acquisition.

The continued emphasis on ESG factors in the M&A world reflects the changing priorities of investors, regulators and consumers. Companies that proactively integrate ESG considerations into their strategies are not only leaning into ethical responsibility but also position themselves for more robust long-term financial performance and regulatory compliance and are more likely to be perceived positively.

In 2023, the due diligence process is holistic in nature. While financial assessments used to be the name of the due diligence game, companies now employ a holistic approach that recognises the multifaceted nature of target companies. This means considering a company’s culture, reputation, operational processes and digital footprint. A comprehensive view allows for a more accurate evaluation of potential opportunities and risks, ensuring stakeholders have a complete picture of an asset before deciding to invest or look elsewhere.

Holistic due diligence approaches allow for better risk mitigation, as potential risks—which may be viewed as deal breakers or deal changers—can be identified pre-acquisition. This all-encompassing due diligence approach also ensures the target company is strategically aligned with the buyer regarding cultural fit and long-term integration.

Cybersecurity used to be an afterthought. Today, private investors and their portfolio companies are making cybersecurity a priority. As cyber threats become more frequent and sophisticated, some firms undergo cyber due diligence to unearth potential issues that may require a change in deal terms.

Failure to shore up cyber defences is incredibly costly for businesses. But the damage extends beyond regulatory fines, the cost of rectifying breaches and reputational damage—it can result in lower M&A valuations. For example, in 2017, Verizon lowered its offer to buy Yahoo by $350 million after Yahoo disclosed that two data breaches had occurred. In 2023, within the framework of the holistic due diligence approach, firms are delving deeper into target assets’ cybersecurity infrastructure to protect the integrity of the acquisition and guarantee enduring resilience post-acquisition.

M&A Due Diligence in 2023: Championing the Multifaceted Approach

The 2023 due diligence landscape demands a multifaceted approach. While 2021 saw due diligence completed at record speed, the M&A market slowdown has facilitated a due diligence process slowdown. This shift toward a more deliberate pace has allowed firms to take a much deeper dive into potential acquisitions while utilising transformative technologies like AI to ensure every detail is taken into account.