onefourzero CEO Fleur Hicks discusses how the UK market has changed in the face of stiff macroeconomic challenges - and what this means for commercial, digital and technical due diligence.

2022 has been a year of both highs and lows for M&A deals. UK mid-market activity in the first quarter was above historic levels, and TMT and business services assets dominated the mid-market, comprising over 60% of deal flow. Interestingly, bolt-ons accounted for over 60% of all mid-market deals, the highest half-yearly proportion ever recorded.

However, the second half of 2022 has been a different story. Significant macroeconomic headwinds have taken a toll on the M&A market. Activity has fallen across North America and Europe, and global M&A deal volume has seen a 26%  decline from the previous quarter. But, despite the drop in deal volume, mega deals in some sectors are historically high.

TMT and business services dominate

Despite a drop in TMT deal values, the sector dominated in 2022. Three technology deals stole the show this year: Microsoft’s acquisition of Activision Blizzard, Broadcom’s acquisition of VMware, and Elon Musk’s Twitter takeover—deals worth almost $190bn combined.

The business and financial services sectors are also thriving compared to other areas. Several key trends are being observed, including traditional financial services partnering with fintech firms to create tailored customer experiences without having to develop specialised technology in-house.

Overall, and despite mounting headwinds, 2022 has been a relatively strong year for M&A. But in order for investors to keep the momentum going without excessive risk, implementing an effective diligence process is a must.

The role of commercial, digital and technical due diligence

In short, M&A needs robust, reliable data more importantly than ever. While a ‘seize the opportunity’ attitude - sometimes driven by habit - has the potential to yield impressive returns, it also massively heightens the risk associated with an acquisition. This is something many investors are keen to avoid at this moment in time. Instead, they are trading a ‘seize the opportunity’ attitude for a more careful approach that prioritises thorough but fast due diligence underpinned by robust data. But analysing and interpreting data is a challenge without the right tools and expertise.

Third-party due diligence providers help their clients in numerous ways. They have many years of experience providing diligence, value creation and monitoring services for clients. Plus, they are not just consumer-orientated: third-party due diligence providers work with a range of sectors, including but not limited to TMT, business services, healthcare and industrial companies.

In the current economic climate, robust and reliable data is non-negotiable. Third-party due diligence teams provide companies in a wide range of sectors with robust, up-to-the-minute data. In turn, businesses use this reliable data to make informed decisions with confidence. Plus, the scale and granularity of datasets allow the due diligence provider to take micro or macro views affecting a given asset. Applying robust and reliable data to businesses across a range of industries enables the due diligence provider to answer vital commercial questions for their clients.

More firms are looking to take a big data approach to M&A, value creation and asset monitoring but do not have the capacity to do this in-house. Third-party due diligence providers, on the other hand, are experienced in handling and interpreting data by cross-referencing and triangulating data sets to ensure data integrity.

Finally, gone are the days when due diligence would take many months. During this period of economic uncertainty, firms need a partner they can turn to for their diligence, data and value creation needs. Ben Martin, managing director of onefourzero, explains the importance of agility in the M&A process: “In many cases, we are being asked to deliver diligence and value creation reports in less than a month, containing as much relevant data as possible. Firms are keen to move quickly with acquisitions as long as they have access to robust, reliable data. There is a careful balance to be attained between seizing an unmissable opportunity and taking several months to dissect every element of an asset.”

What does the future hold for the UK market?

Rising inflation, geopolitical uncertainty, climbing interest rates, and low economic growth expectations for the next two years all point to an uncertain future for businesses across the globe. Deals are slowing down, but it is important to note that they are not stopping—plenty of dry powder remains. Currently, companies are using M&A to accelerate their digital and ESG agendas, particularly in high-growth sectors that are less affected by the economic downturn, including TMT, business services and healthcare. This is likely to continue into 2023. In this economic climate, investors are understandably being extra careful about where they invest their funds.

Consequently, data has an important place in the future of M&A. Through analysing and utilising data to its full potential, organisations can determine which assets they should acquire by gauging consumer sentiment, monitoring competitor performance and operational effectiveness, revealing available white space and modelling headroom expansion.