Dealmakers are learning to be patient. Since 2020, the time it takes to close an M&A deal has increased by 30%, according to new research from Ideals VDR.
While there are a number of issues causing deals to take longer, Sabine Schilg, VP of Customer Success at Ideals, believes that interest rates are the critical factor.
The high cost of borrowing has made it tougher to access the necessary capital, and the process of securing funds at a reasonable price often slows deals down. This, coupled with the volatility of global markets, has made it more important to assess the financial stability of potential deals, leading to extended M&A timelines.
To find out more, we spoke to Sabine about why the high cost of money and the increased complexity of the regulatory environment might be slowing deals down.
Q: In H1 2024, it took on average 258 days to complete a deal, up from 195 days in H1 2020. Why do you think that might be?
A: Due diligence always takes longer when money is expensive. When there’s a lot of cheap money, the process is easier. But right now, money is more expensive, and post-COVID, businesses often have less financially strong backgrounds.
Companies are much more careful in the decision process, focusing on whether there’s a viable business case. They really take the time to find the showstoppers – but they also spend longer considering whether they want to go through with the deal.
When financial resources are limited, companies spend much more time carefully determining whether they know everything they need to know and whether the acquisition is the right fit.
When I worked at IBM, the focus was always on growth – just growth. At Carbonite, it was different, as the growth was more about go-to-market and expanding reach rather than technology. But in both cases, the approach was similar: they knew they wanted certain teams or technology, so they focused on identifying potential showstoppers that could derail the deal, such as issues that could either kill the company or result in unforeseen costs.
On the flip side, when financial resources are limited, companies spend much more time carefully determining whether they know everything they need to know and whether the acquisition is the right fit. This results in a much longer and more cautious decision-making process when it comes to making a purchase.
Q: What role do regulations and compliance play in slowing deals down – for example, in relation to data protection or ESG?
A: When GDPR was introduced, everyone expected it to cause a complete halt in activities. And for about a year, it was very difficult to sell cloud services, execute cloud projects or acquire cloud companies. This uncertainty was especially pronounced when the GDPR framework was first released, with its looming threat of hefty fines for non-compliance. A few large companies ended up paying exorbitant, exemplary fines.
But from my experience at IBM, due diligence was all about identifying potential showstoppers, and compliance was certainly one of them. The concern was, what if you buy a company and then can’t utilize it globally because of regulatory issues? So, due diligence at IBM was always thorough, involving a close examination of contracts with vendors, customers, and suppliers, as well as ensuring compliance with regulatory requirements.
Small companies might not get all the necessary regulatory approvals – but this wouldn’t work for IBM. We often faced delays between making a purchase decision and closing the deal. Even after finalizing due diligence, regulatory compliance could delay a deal by over a year until all approvals were obtained. This was the reality for a large company like IBM, which had the financial capacity to pay fines but could not afford to violate compliance regulations.
At IBM, due diligence was all about identifying potential showstoppers, and compliance was certainly one of them. The concern was, what if you buy a company and then can’t utilize it globally because of regulatory issues?
For example, one of the companies I acquired was Trusteer, a cybersecurity platform for online and mobile banking threat protection. Ensuring financial compliance with US regulations was a major challenge. IBM conducted self-compliance checks annually to ensure the application met these standards. This compliance effort consumed at least half of my time, with the other half focused on growing the business from $10 million to $100 million. The growth was much easier than achieving that compliance.
Compliance has always been a critical issue, and I don’t see that changing. Different compliance regulations exist at any given time, and large companies typically prioritize identifying potential deal-breakers through the diligence process. This process is essential to justify why you want to acquire a company, a decision made before entering due diligence.
If the company being acquired is publicly traded, there’s usually some reassurance that they already have these compliance measures in place. Acquiring smaller, non-regulated companies can be much more time and resource-intensive because they haven’t gone through the same regulatory processes as large companies that are SEC-regulated, for example.
Q: In your experience, what are the most common M&A deal showstoppers?
A: At IBM, showstoppers mainly included anything that was illegal. Compliance was one of them. But there were others, such as financial “black holes” or contractual obligations that we couldn’t honor.
For example, when we acquired SPSS, a company known for its statistical software, we hit a contractual challenge. SPSS had exclusive contracts with 47 business partners around the world, each owning specific territories. Although these agreements were legal, they posed a problem for IBM because our sales systems aren’t designed to restrict sales by territory. We couldn’t ensure that an IBM salesperson wouldn’t sell the product in a region where an exclusive contract existed.
Another major showstopper was the risk of losing key talent after an acquisition. Even if a company had the right technology and potential for growth, if we couldn’t retain their talent, the deal could fall apart.
The main reason for acquiring SPSS wasn’t for their stat licenses, but to use their technology as the foundation for predictive analytics, which would be integrated into our AI models. We had to carefully determine whether using this technology to build new predictive tools would violate existing contracts. We concluded that we would be in breach, and if all 47 partners sued us, the costs could exceed the value of the company itself.
Another major showstopper was the risk of losing key talent after an acquisition. Even if a company had the right technology and potential for growth, if we couldn’t retain their talent, the deal could fall apart. In some cases, seemingly minor issues such as safety concerns could become deal-breakers.
We once had to delay acquiring a company because the building where their team worked didn’t have a second exit, violating IBM’s strict employee safety rules. The company had to either build a new set of stairs or relocate before we could proceed with the acquisition. It may have seemed trivial to them, but it was non-negotiable for us because of our compliance standards. And they did it; they built a second staircase before closing.
Some of these issues might appear insignificant from a business perspective – but they were crucial for maintaining compliance and safety standards.
Methodology
The figures referenced in this article are based on anonymized data collected from Ideals Virtual Data Room customers on the sell and buy sides of M&A deals. We calculated the deal duration as the time between the first non-admin invited and the closure of the room. We also measured the number of hours spent working on documents within the room.
