Navigating the complexities of M&A reviews

Despite recent deal values and deal volumes being relatively low, companies have become much better with mergers and acquisitions overall. In fact, today, up to 70% of M&A transactions are successful. For comparison, twenty years ago, the M&A process was around 30%. How has this inorganic growth become so much more productive?

Several factors have contributed to this shift. Businesses have improved their processes, particularly M&A risk assessment, due diligence, and regulatory compliance. In this article, we explore this change, observing how modern companies approach the M&A review process and navigate the complexities of regulatory compliance in M&A deals.

M&A risk assessment: Identifying key risks

Mergers and acquisitions haven’t become less risky. In fact, companies face a multitude of M&A financial risks, regulatory issues, operational hiccups, cultural integration challenges, and market risks. Let’s list some common challenges.

Best practices for identifying risks in a mergers and acquisitions review

Leading organizations have adopted more sophisticated approaches to capture and manage M&A risks. Let’s explore some of the main practices.

Emphasizing antitrust risks

Carefully accessing antitrust and legal risks in M&A is often the cornerstone of thorough due diligence. However, certain regulatory risks and trends should be considered at the early stages of the M&A cycle.

One such risk is intensifying regulatory scrutiny that reaches not only larger deals but also transactions under federal Hart-Scott-Rodino (HSR) thresholds (see section below)..

Intensifying regulatory oversight indicates that companies pursuing “close-to-HSR-threshold” deals can begin evaluating antitrust risks during M&A planning rather than target-specific due diligence. Doing so can help companies proactively avoid antitrust risks rather than committing significant resources to deals which are destined to fail.

Successful acquirers have learned to avoid big mergers that pose a significant risk of regulatory stalemate, focusing on smaller and more frequent acquisitions, according to Bain & Company.

Prioritizing cross-functional approach

Drawing on our extensive experience facilitating M&A transactions, cross-functional risk assessments are more productive. Companies can better understand how to mitigate M&A financial risks, legal issues, or cultural clashes if they investigate how risks from various business functions amplify one another. For example:

• Integration delays, coupled with overpayment, can amplify financial risks, particularly in leveraged buyouts amidst high interest rates.
• Data privacy issues can cause reputational risks and turn off customers, undermining anticipated cross-selling revenues.
• Intellectual property disputes can disrupt business continuity post-merger, particularly when core products and services rely on proprietary technology.

Emphasizing cultural assessments

Corporate cultures may seem like something that can be managed later and in the background. The truth is that cultural alignment is as crucial as financial synergies, and cultural integration challenges in mergers and acquisitions shouldn’t be ignored. In Bain & Company’s M&A Practitioners’ 2023 Outlook Survey, nearly 50% of respondents said cultural issues were a primary reason for deal failure.

When addressing cultural assessments, the following aspects of both companies should be carefully analyzed:

• Leadership style
• Decision-making style
• Ability to change
• Willingness to go through difficulties of creating a new company
• Workplace dynamics (formal structures, informal relationships)
• Personal success beliefs
• Approach to work-life balance
• Degree of employee empowerment
• Role of collaboration and teamwork

Leveraging integrated risk assessments

Our findings indicate that M&A risk assessments can become more effective if integrated across functional departments, like financial and operational due diligence. Business departments can use centralized workspaces to collaborate on business transformation assessments, analyze risk-related data, and share insights on deal activity.

This approach can help a company review risks holistically without being limited by collaborative silos. Secure digital technology, like virtual data rooms, can significantly help companies to implement this approach:

• Centralize data management
• Automate data collection and analytics
• Facilitate cross-functional collaboration
• Safeguard collaborators from cybersecurity threats

Inspecting cybersecurity risks

Cybersecurity remains a relatively new stream of due diligence. It often receives much less attention than required by current market conditions. Considerable enough, data breach costs rise annually, while over 68% of private equity firms experience a rise in cybersecurity incidents after deal closures.

To make cybersecurity assessments more effective, companies can employ the following approaches:

• Hire trusted cybersecurity partners for expertise-drive assessments
• Scrutinize third-party risks (vendors, technology, suppliers)
• Investigate the target company’s practices of counteracting social engineering, password spraying, and credentials phishing — the most common attack vectors

Case study: Bristol-Myers Squibb and Celgene

A $74 billion acquisition of Celgene by Bristol-Myers Squibb (BMS) (completed in 2019) is an example of thorough M&A risk management strategies. Like many mega-mergers, BMS-Celgene faced challenges but it was successful both financially and from an integration standpoint. BMS planned integration, particularly its cultural aspects, very well.

Leadership teams thoroughly evaluated corporate cultures, surveyed employees, and developed structured steps to combine the best values of the two entities. These steps contributed to greater talent retention. For a better understanding, BMS’ number of employees increased from 30,000 in 2019 to 30,250 in 2020 and 32,200 in 2021.

This helped Bristol-Myers maintain business continuity, launch new products, and increase cash flows. From 2019 to 2020, its revenue spiked from $26.1 billion to $42.5 billion.

The Hart-Scott-Rodino Act and premerger notification process

In the United States, mergers and acquisitions exceeding a specified threshold must file premerger notifications under the Hart-Scott-Rodino Act, known as the HRS threshold. The Federal Trade Commission (FTC) adjusts premerger notification thresholds annually. For 2024, the threshold is $119.5 million.

The FTC provides an official premerger notification program with numerous guidelines to help deal parties navigate the process. To provide a concise summary, we have broken down the process into the following steps.

What premerger information should be submitted?

Premerger filing requirements under the HSR Act are quite extensive. For example, dealmakers must provide all studies, surveys, and analyses of anticipated synergies. A complete list of requirements is available on the FTC website.

Talent management in M&A: Post-merger talent integration and assessment

If managed poorly, talent often becomes the weakest link in the M&A chain, with some companies dealing with 55%-71% post-transactional employee attrition rates.

The biggest problem of talent attrition is that the most capable employees have the highest chances of leaving. That’s why M&A talent management should focus on retaining those employees. Below, we list common industry practices that help with M&A talent assessment and post-merger talent integration.

Tailoring talent assessments to M&A specifics

A talent and leadership assessment in M&A deals should consider the transaction’s nature, strategic goals, and size. 

For example, a global food retailer may successfully cut 10,000 non-essential jobs in a few years when optimizing production and reducing costs.

The same process can’t be applied to a mid-sized tech company with complex legacy systems. For an assessment to be effective, it requires a tailored approach to talent and leadership retention. The acquiring company should identify the following employees:

• Critical employees, to understand how employee attrition impacts business continuity.
• Team leaders, to understand how leadership changes impact employee performance during integration.
• Employees that are most valuable for near-term integration goals, to enhance operational continuity.

Categorizing critical talent

Some critical employees may be happy with their roles, while others wait for a better opportunity to leave. Some might be top performers, while others may exhibit strong future potential.

These individuals may have different departure risks, and it’s crucial to tailor retention strategies accordingly. For this, buyers should identify mission-critical employees in the following categories:

• Solid contributors
• High-potential employees
• Top performers
• Satisfied
• Considering departure
• Most-likely to depart

Consulting HR teams and executives from both companies is one of the best talent assessment strategies in mergers and acquisitions. That is often faster and less resource-intensive than bottom-up reviews.

Emphasizing total rewards

Financial incentives work well for short-term employee and leadership retention post-merger. However, companies often can’t afford to raise everyone’s salary. Moreover, raising pay selectively can backfire.

Bankrate has found that nearly 42% of Generation Z workers share compensation information with colleagues. Consequently, previously satisfied employees may consider leaving after discovering their coworkers have had a pay increase and they have not. 

Leaning disproportionately towards non-financial rewards, on the other hand, may increase the chances of departure of underpaid but solid performers. A more sustainable approach to talent retention in M&A deals would be offering “total rewards” — a mixture of financial and non-financial incentives that prioritize long-term employee value:

• Retention bonuses
• Stock vesting programs
• Health and welfare programs
• Retirement programs
• Recognition from leaders
• Training and development offerings

How iDeals VDR simplifies M&A due diligence and M&A assessment: An overview

iDeals virtual data room (VDR) provides powerful M&A review capabilities to 175,000 organizations. Our data room offers tailored features for streamlined M&A document management, regulatory compliance, and collaboration. Below, we present an actionable blueprint to improve M&A assessments and post-merger integration strategies using iDeals VDR for M&A deals.

Step 1: Set up a data room project

With iDeals, you can set up a VDR project in as little as 15 minutes. Our dedicated success manager will guide you through the process, which includes inputting project details, configuring security settings, and incorporating your brand identity. You can also define default settings for all new projects, reducing project setup time and making M&A assessments more streamlined from the start.

Step 2: Upload files and folders

Our customers can significantly reduce the effort and time spent on data migration. With iDeals, you don’t need to build an M&A virtual data room index from scratch. Instead, you can import an entire folder structure from a device, cloud storage, or an FTP client.

You don’t need to prepare files for download either. Uploaded files are automatically converted into secure PDFs for easy viewing, editing, and sharing. These features substantially reduce the effort required to prepare a workspace for M&A assessments.

Step 3: Assign permissions in user groups

iDeals VDR will enhance the clarity, accountability, and reportability of your M&A assessments. You can mimic your role structure in your VDR workspace by creating administrative and collaborative user groups.

When creating user groups, you can assign their document rights and permissions to selected files and folders. Our permission system supports eight roles: no access, fence view, view, encrypted download, PDF download, original download, upload, and manage.

By granting selective access to files and folders, you can ensure clarity, security, and structure of your M&A assessments. This approach reduces information overload in team members, reduces data search time, and improves data security.

Step 4: Establish Q&A workflows

Our advanced Q&A module substantially improves cross-functional collaboration and excludes all risks of communication silos. To support collaboration, you can establish five roles: question drafter, question submitter, answer coordinator, subject-matter expert, and answer approver.

You can also establish FAQ sections for quick referencing and clarity of the M&A reviews. This way, our automated Q&A workflows ensure a smooth flow of information between senior management, buy-side due diligence, and seller’s teams.

Step 5: Collaborate on M&A assessments

iDeals can be your best virtual data room for M&A regulatory compliance and M&A assessments. We offer several features that significantly simplify document reviews, information requests, collaboration, and regulatory compliance during M&A reviews:

• Optical character recognition (OCR) search enables quick retrieval of data from image formats
• Document labels ensure quick content referencing and navigation
• Secure external links simplify collaboration with vendors
• AI-redaction automates personally identifiable information (PII) removal during sell-side due diligence
• Color-coded activity reports ensure insightful progress tracking
• GDPR, CCPA, LGPD, PCI DSS, HIPAA, FedRAMP, US/EU Privacy Shield, US-EU DPF, ISO 27001, and SOC 1/2/3 certifications ensure compliance across many sectors

Case study: StoneX Group Inc.

StoneX Group Inc., an American financial services firm, has used iDeals virtual data rooms for multiple mergers and acquisitions since 2018. StoneX Group has completed over 30 projects with iDeals, acting on the buy-side and offering advisory services to M&A participants.

iDeals has successfully solved StoneX’s main challenge — low efficiency of due diligence. StoneX greatly benefits from iDeals Q&A workflows, automated document management, and real-time activity monitoring.

Key takeaways

• The best practices for managing M&A risks are to research antitrust issues in advance, prioritize cross-functional collaboration, emphasize cultural assessments, use virtual data rooms, and review cybersecurity risks.
• The best way to manage talent in mergers and acquisitions is to tailor talent assessments to M&A goals, meet the needs of critical employees, and emphasize long-term total employee value (both financial and non-financial)
• Companies can substantially improve M&A assessments when working in virtual data rooms. iDeals VDR facilitates M&A reviews and due diligence with premium support, process automation, Q&A workflows, and convenient project management.