How boards approach transactions
Over the last few years, global markets have experienced the effects of the Covid-19 pandemic, widespread economic and supply-chain upheavals and uncertainty, inflation and Russia’s invasion of Ukraine. Despite all this, governance professionals indicate that boards’ views on M&A strategy and risk in many cases have not been strongly swayed in any one direction.
Overall, 21 percent of respondents say their board has become slightly or much more risk-averse over the past 12 months, while 15 percent say their board has become slightly or much less risk-averse. A slim majority of 53 percent say their board’s views on M&A strategy have not changed.
Almost a third (31 percent) of respondents at mid-cap companies say their board has become slightly or much more risk-averse in the past year. This compares with 23 percent of those at small-cap companies, 18 percent of those at mega-caps and 14 percent of those at large-cap firms.
More than two thirds (67 percent) of respondents at large caps say their board’s view has not changed over the last 12 months. Eighteen percent of those at small and mid-caps say their board has become less risk-averse.
The patterns are broadly similar when taking into account view changes over the past three years.
Market conditions and changing practices and technology can all have an impact on how long companies devote to ensuring that an M&A transaction can and should go ahead.
Overall, a quarter of respondents say the length of time spent on due diligence for M&A deals their company has been involved in has increased over the past 12 months, with 9 percent saying their company has spent less time on this.
Twenty-nine percent of those at mid-caps say their company is spending much or slightly more time on due diligence. This compares with 28 percent of those at mega-caps, 26 percent of those at large caps and 16 percent of those at small-cap firms.
Almost a quarter (24 percent) of respondents in North America and Europe each say their company is spending much more or slightly more time on due diligence.
The tendency toward increased focus on due diligence is broadly similar when looking back three years.
Due diligence has traditionally been a labor-intensive process, but new tools offer opportunities for companies and their legal teams to avoid much of the manual work. Overall, the most commonly adopted technology tool for M&A due diligence is virtual data rooms, cited by 77 percent of respondents. This is followed by cloud-based tools, mentioned by 30 percent.
Artificial intelligence (AI) and machine learning are rapidly gaining in profile and use in many areas, but just 8 percent of respondents say their company has so far used them for M&A due diligence. Just 6 percent say their company uses Digital Intelligent Content Extraction (D-ICE).
The uptake of AI and machine learning is more pronounced at mega-caps, where almost three in 10 respondents (29 percent) say they have adopted such tools. That compares with just 3 percent of those at small-cap firms and 2 percent of those at large caps. Similarly, 19 percent of respondents at mega-caps say their company uses D-ICE tools, compared with 3 percent of those at small and mid-cap firms.
Nine in 10 respondents in Europe report that their company uses virtual data rooms, compared with 77 percent of those in North America. Those in Europe are also more likely (38 percent) to use cloud-based technology than those in North America (29 percent).
Companies and their boards of directors are increasingly taking ESG matters into consideration in their operations, executive compensation, public disclosures, investor engagement and other areas.
Half of the respondents say their board considers ESG factors as part of M&A strategy and target selection, while around a third (34 percent) say their board does not.
The pattern is particularly pronounced among respondents at large caps, where 61 percent say their board takes ESG into account when it comes to M&A. Only a quarter of those at mega-caps say their board does not consider ESG issues, although it should be noted that 30 percent don’t know.
Perhaps reflecting legislative and political variations, three quarters of respondents in Europe say their board takes ESG factors into account in terms of M&A, while just 39 percent of those in North America say likewise.
