Navigating a new era of mergers and acquisitions

While trust, relationship building, and effective due diligence remain the pillars of success in any M&A (mergers and acquisitions) market, the way companies approach dealmaking will need to evolve. As the deal market opens up and competition for attractive businesses increases, firms will need to be more agile, especially as buyers and sellers face more pressure to work faster and smarter through every stage of the process. Continued use of more analytics and, eventually, artificial intelligence (AI) will also accelerate deal execution, increasing the need for speed on a deal. A value creation focus by dealmakers will be even more critical considering a higher cost of capital environment, where analytics and AI will also have a key role before and after a deal.

Recently, deal activity has increased as buyers become more acclimatized to a higher interest rate environment and as more assets come to market. Transaction velocity will also continue to increase as central banks ease monetary policies and bid-ask spreads between buyers and sellers narrow. Private capital, holding US$3.9 trillion of dry powder, will also become more active, further driving the growth in deal activity.¹

As new targets and investment opportunities enter the market, dealmakers must resist the urge to make a deal for the sake of making one. With interest rates likely to stay higher for longer, it will be even more important to focus on knowing what you want and build conviction around that idea, before an opportunity arises.

Jumping quickly on an attractive opportunity is important, but speed shouldn’t come at the expense of conviction and due diligence. With markets moving faster, the efficiency of deal execution will play an even greater role than it currently does, raising the stakes for those who feel the pressure to deploy capital without the safety net of multiple expansion.

Focusing on value creation as part of effective deal-making will be key. More specifically, identifying opportunities to improve operational performance before the transaction and also under new ownership. The use of data and analytics, boosted with AI, is set to become crucial in due diligence and understanding value creation opportunities. Businesses are actively seeking new ways to harness the power of their own data and augment it with relevant external information to make more informed and timely decisions. These tools are helping unlock opportunities to do more with less and impact potential value-creation areas, including identifying synergies. Understanding the threats and opportunities of AI to the revenue and operating models of a potential acquisition target will only become more critical.

Additionally, we anticipate an increased emphasis on value creation through digital maturity. For sellers, tapping into digital value creation opportunities can make them more desirable targets. For buyers, having the right tools, platforms, and processes in place can facilitate access to critical information for optimal business decision-making, as well as drive EBITDA upsides through innovation. It's also important for the business to have the skilled talent required to harness company data effectively, which can influence the value of a deal.

Environmental, social, and governance (ESG) factors, such as climate change and sustainability, are gaining greater significance in deal-making. As companies adopt sustainable practices to meet the demands of key stakeholders and increased regulatory requirements, there will be more impact on their financial results in the short and long term. Decisions related to areas such as procurement, capital expenditures, product design, and pricing could mean prospective results will differ from historical performance. The financial impact from climate change on areas such as insurance premiums and related costs will also need to be considered. More time may be needed when considering a deal to understand the impact on sustainable financial performance post transaction.

More broadly, assessing the talent you could potentially acquire through a deal is another area that can’t be overlooked. That’s particularly important if the business has in-house expertise, which would be difficult and expensive to replicate on your own. As the saying goes, a company is only as good as its people, which means keeping the employees that made your target successful is often a wise move. It’s also much less expensive to bring already talented people into your business than starting from scratch.

Going forward, the M&A space is expected to become much more active and competitive. If you want to win the businesses you are targeting, you must act both faster and smarter. Having a keen understanding of why you’re doing a deal and how you plan to execute it will enable you to move more quickly and effectively through the process.

To prepare for the next wave of deal activity, dealmakers should consider increasing their focus and expanding their deal execution toolkits in the following areas:

Businesses must analyze data to better understand value creation opportunities. That includes studying external data sets that are relevant to their company, but also ingesting benchmark-related information to better understand relative peer performance. It is increasingly critical for targets to use their own proprietary data to differentiate themselves, in conjunction with the power of dashboards and insight platforms to optimize their business performance.

Given the rapid pace of dealmaking, AI, including generative AI, can significantly enhance efficiencies, allowing teams to reallocate resources to other pivotal elements of a deal. By leveraging large language models (LLMs) that can swiftly process vast amounts of data, for example contracts and human resources documents, businesses can uncover a greater number of opportunities for value creation.

Investments in digital tools, platforms, and processes can help drive significant return on investment, before or after the deal. With the changing deal environment, companies with high digital maturity are getting better valuations. For sellers, this means ensuring the right data insights are available to improve performance and the right tools are in place to automate employee tasks and customer experience. For buyers, this means prioritizing a rapid digital maturity assessment as part of the due diligence to quantify the impact on value.

The core of a company lies with its people, making it crucial to assess their digital maturity, whether they've embraced new technologies or require further upskilling and change management to enable new ways of working. Equally important is the team’s appetite for innovation, a quality that is often key to driving deal value.

Keeping up with ever-evolving ESG rules and regulations can be challenging, particularly when operating across various jurisdictions and if the organization doesn’t have the experience to track and measure this space. Expertise in ESG will be crucial in future deal-making to enable asking the right questions and putting the right systems in place around issues like how climate change could affect a target’s operational capabilities, financial results and defining the steps needed to decarbonize operations to meet ESG goals.

Creating value in mergers and acquisitions involves a keen understanding of potential tax considerations, such as the implications of various structures and financing arrangements. With global tax laws and regulations constantly evolving, even well-prepared organizations can face risks that may hinder a deal from achieving its anticipated value. Proactively addressing tax implications early in the M&A process can prevent costly and complex issues down the line. Thoughtful tax planning pre-sale can also maximize proceeds upon an exit.

There’s always been pressure to get things right in the deal market, the difference now is that businesses face a greater risk if things go wrong. As the pace of the market accelerates and with more ground to cover, dealmakers need to modernize their approach to the market.

With more use of data and a digitally enabled team, you can help accelerate the deal process and create a richer discussion when considering a transaction. It’s becoming increasingly important to move quickly through the deal process, and this requires enhanced due diligence, focusing on value preservation and creation levers with a broader aperture, to avoid missing on great deal opportunities.

KPMG's Deal Advisory team offers comprehensive transaction to transformation services. Backed by deep sector knowledge and data-driven strategies, we can help you create more value through all phases of M&A transactions and beyond, enabling performance transformations that deliver tangible financial impact.

^{1. The private capital industry’s ‘dry powder’ has hit $4tn, Financial Times, Dec 12, 2023.}