Article

The Three Most Important Steps in M&A Due Diligence

Great diligence is the foundation for every successful deal.

Benjamin Farmer, Amy Wall, Emmanuel Coque, and Matthew McKenna

First published on сентября 05, 2024
min read


At a Glance An early, thesis-driven look at assets can help a company avoid chasing deals that are a poor fit. Acquirers gain competitive advantage through proprietary insights from faster, deeper, and more focused diligence than their competitors—often using generative AI. Top acquirers consider integration implications (timeline, costs, stakeholders) during diligence, not after. History shows that winning companies don't wait on the M&A sidelines; they make deals. However, confidence in your acquisitions is critical. The best way to succeed is to come armed with proprietary insights from diligence that are faster, deeper, and more focused than your competitors. Superior diligence allows you to be bold where others hesitate. Need some evidence? Consider the situation of a global manufacturing company that typically used its historical experience to estimate cost synergies for a potential acquisition. But competing for a deal, it realized it needed deeper insights and conducted an outside-in diligence, utilizing additional benchmarks, primary research, and external data scraping. This extra effort proved to be invaluable. It uncovered more than twice the original estimate of cost synergies, enabling the company to make a winning offer. The combined company eventually surpassed the synergies estimated in diligence, making the deal a clear success for shareholders. Then there’s the lesson learned from a Fortune 500 technology company. Its investment thesis for a potential acquisition relied on the capabilities of the target’s talent base. The acquirer used outside-in mapping of the talent base (more than 10,000 employees) to understand the technical skills and training of the target’s employees. The analysis uncovered that the talent base was missing many of the technical skills that they were looking to acquire. It was a key factor in convincing the company to walk away from the deal. The best companies focus on three key steps. 1. Be proactive: Initiate diligence early. Market leaders don’t wait for M&A opportunities to come to them; they proactively execute outside-in due diligence on priority targets even before an M&A process begins. By developing a clear deal thesis and aligning it with strategic priorities early, companies can move proactively, and with confidence. Regularly refreshing sector screens and maintaining a list of priority targets helps avoid distraction by unsuitable deals and ensures leadership is aligned and ready to move quickly on the right opportunity. A leading life sciences company reflects best practices. The highly acquisitive company maintains a running list of its top 15 to 20 targets. Using outside-in diligence, it systematically creates a deal thesis and detailed financial model for each potential deal, updating that view as market conditions change. The company regularly refreshes its short list, looking at more than a hundred targets a year to understand the market and assess its priorities. Similarly, a market-leading beverage company uses a data-driven view of its market to stay focused on core targets. This includes understanding competitive positioning and whitespace by geography and maintaining a view of potential synergies, cost to achieve, and speed bumps (regulatory review, capital availability, management bandwidth). The disciplined process ensures that resources are focused on the deals the company wants to make happen without wasting time on deals that don’t move the ball forward on strategic priorities. 2. Amplify value through proprietary insights. It’s crucial to go beyond high-level benchmarks and historical examples. Leading companies use advanced analytics, external data scraping, and primary research to uncover proprietary insights. M&A leaders have found some of the strongest use cases for generative AI in diligence: They use tools to accelerate and amplify insights from vast amounts of data. This deeper analysis allows them to identify hidden sources of value, confidently underwrite deal value, and make informed decisions. For example, in-depth market research and expert interviews can provide clarity on potential future growth areas and untapped market segments. A global consumer goods company explored the potential for expanding into the alternative milk space. Lacking visibility into the out-of-home market, however, which represented more than half of the target’s business, it conducted in-person barista interviews and observations at coffee shops in major metro areas. Within a week, the company was able to unlock insights that allowed it to measure a statistically significant share of alternative milk offerings in the coffee shop channel and truly understand the market opportunity. A medical diagnostic company considered walking away from a deal when it couldn’t agree with the target on price. When it decided to conduct additional diligence on pipeline products not yet in the market using extensive expert and customer interviews, it was able to build enough confidence in the potential future value to put forward a sweetened offer and sign the deal. 3. Plan for successful integration during diligence. Successful acquirers consider integration implications during the due diligence phase, not afterward. Unfortunately, integration planning is frequently the most underdeveloped aspect of due diligence. The best companies identify the critical issues that underpin the value and build an early integration thesis that accurately estimates costs, timelines, and necessary resources for a successful transition. Key elements include engaging experienced leaders and prioritizing cultural considerations. This proactive approach anticipates and addresses integration challenges, boosting the chances of realizing synergies and achieving post-deal success. As a result, leadership can hit the ground running. In a diligence, a global alcoholic beverage company focused primarily on the market fundamentals, brand health, and synergies. However, it became apparent during the process that the target had a very different culture and ways of working (see “How to Avoid the Fault Lines Sending Tremors through Cultural Integration in M&A” from Global M&A Report 2023). The company quickly focused resources on culture integration considerations and change management requirements in order to address friction points during integration. These insights were then connected back to synergy values based on which areas of the business would or would not be combined. For example, to better integrate the cultures, a foundational decision was to bring together leadership from different regions into a single headquarters. By adhering to these three key principles, companies can enhance their due diligence processes, make more informed decisions, and ultimately achieve greater success in their M&A activities. As market conditions evolve over time, these three principles still hold the power to guide companies to the best deals and the best results.

At a Glance

An early, thesis-driven look at assets can help a company avoid chasing deals that are a poor fit.
Acquirers gain competitive advantage through proprietary insights from faster, deeper, and more focused diligence than their competitors—often using generative AI.
Top acquirers consider integration implications (timeline, costs, stakeholders) during diligence, not after.

History shows that winning companies don't wait on the M&A sidelines; they make deals. However, confidence in your acquisitions is critical. The best way to succeed is to come armed with proprietary insights from diligence that are faster, deeper, and more focused than your competitors. Superior diligence allows you to be bold where others hesitate.

Need some evidence? Consider the situation of a global manufacturing company that typically used its historical experience to estimate cost synergies for a potential acquisition. But competing for a deal, it realized it needed deeper insights and conducted an outside-in diligence, utilizing additional benchmarks, primary research, and external data scraping. This extra effort proved to be invaluable. It uncovered more than twice the original estimate of cost synergies, enabling the company to make a winning offer. The combined company eventually surpassed the synergies estimated in diligence, making the deal a clear success for shareholders.

Then there’s the lesson learned from a Fortune 500 technology company. Its investment thesis for a potential acquisition relied on the capabilities of the target’s talent base. The acquirer used outside-in mapping of the talent base (more than 10,000 employees) to understand the technical skills and training of the target’s employees. The analysis uncovered that the talent base was missing many of the technical skills that they were looking to acquire. It was a key factor in convincing the company to walk away from the deal.

The best companies focus on three key steps.

1. Be proactive: Initiate diligence early. Market leaders don’t wait for M&A opportunities to come to them; they proactively execute outside-in due diligence on priority targets even before an M&A process begins. By developing a clear deal thesis and aligning it with strategic priorities early, companies can move proactively, and with confidence. Regularly refreshing sector screens and maintaining a list of priority targets helps avoid distraction by unsuitable deals and ensures leadership is aligned and ready to move quickly on the right opportunity.

A leading life sciences company reflects best practices. The highly acquisitive company maintains a running list of its top 15 to 20 targets. Using outside-in diligence, it systematically creates a deal thesis and detailed financial model for each potential deal, updating that view as market conditions change. The company regularly refreshes its short list, looking at more than a hundred targets a year to understand the market and assess its priorities.

Similarly, a market-leading beverage company uses a data-driven view of its market to stay focused on core targets. This includes understanding competitive positioning and whitespace by geography and maintaining a view of potential synergies, cost to achieve, and speed bumps (regulatory review, capital availability, management bandwidth). The disciplined process ensures that resources are focused on the deals the company wants to make happen without wasting time on deals that don’t move the ball forward on strategic priorities.

2. Amplify value through proprietary insights. It’s crucial to go beyond high-level benchmarks and historical examples. Leading companies use advanced analytics, external data scraping, and primary research to uncover proprietary insights. M&A leaders have found some of the strongest use cases for generative AI in diligence: They use tools to accelerate and amplify insights from vast amounts of data. This deeper analysis allows them to identify hidden sources of value, confidently underwrite deal value, and make informed decisions. For example, in-depth market research and expert interviews can provide clarity on potential future growth areas and untapped market segments.

A global consumer goods company explored the potential for expanding into the alternative milk space. Lacking visibility into the out-of-home market, however, which represented more than half of the target’s business, it conducted in-person barista interviews and observations at coffee shops in major metro areas. Within a week, the company was able to unlock insights that allowed it to measure a statistically significant share of alternative milk offerings in the coffee shop channel and truly understand the market opportunity.

A medical diagnostic company considered walking away from a deal when it couldn’t agree with the target on price. When it decided to conduct additional diligence on pipeline products not yet in the market using extensive expert and customer interviews, it was able to build enough confidence in the potential future value to put forward a sweetened offer and sign the deal.

3. Plan for successful integration during diligence. Successful acquirers consider integration implications during the due diligence phase, not afterward. Unfortunately, integration planning is frequently the most underdeveloped aspect of due diligence.

The best companies identify the critical issues that underpin the value and build an early integration thesis that accurately estimates costs, timelines, and necessary resources for a successful transition. Key elements include engaging experienced leaders and prioritizing cultural considerations. This proactive approach anticipates and addresses integration challenges, boosting the chances of realizing synergies and achieving post-deal success. As a result, leadership can hit the ground running.

In a diligence, a global alcoholic beverage company focused primarily on the market fundamentals, brand health, and synergies. However, it became apparent during the process that the target had a very different culture and ways of working (see “How to Avoid the Fault Lines Sending Tremors through Cultural Integration in M&A” from Global M&A Report 2023). The company quickly focused resources on culture integration considerations and change management requirements in order to address friction points during integration. These insights were then connected back to synergy values based on which areas of the business would or would not be combined. For example, to better integrate the cultures, a foundational decision was to bring together leadership from different regions into a single headquarters.

By adhering to these three key principles, companies can enhance their due diligence processes, make more informed decisions, and ultimately achieve greater success in their M&A activities. As market conditions evolve over time, these three principles still hold the power to guide companies to the best deals and the best results.