M&A is an industry in constant transformation, seeking to increase the efficiency of its processes and adapt to technological innovation as well as to new client demands and market trends.
In this article, we discuss some crucial areas where there's still a long way to go in optimizing how deals are approached, prepared, and executed.
What's more, in the current context — where abundant liquidity and existing opportunities make M&A a very attractive inorganic growth strategy for companies and an interesting option for investors — it's extremely important to keep all these aspects in mind.
Broadly speaking, these are the main challenges facing the M&A industry:
1. Greater transparency and better communication
Investment banking and the business sales industry are still very opaque today, especially in the SME segment, and greater transparency is needed, since information — or a significant part of it — is often unavailable to companies and to many potential investors, advisors, or partners, which makes it harder to originate opportunities and complete transactions.
Likewise, within a deal, this issue is very important when it comes to defining objectives, communicating each party's expectations, setting the scope of the deal, and conducting a successful negotiation in order to put together the most suitable structures for the transaction.
That's why, both before and after negotiations begin, transparency is a key factor in the success of an M&A deal, so that the parties can reach an agreement that benefits both sides and maximizes the value created.
In this regard, transparent access to all the information is essential to build trust, speed up the steps of a deal, and avoid unpleasant surprises that can prevent a transaction from closing. Transparency also allows the parties to form reasonable expectations and bring their positions closer together, increasing the likelihood of reaching an agreement and speeding up the process of getting there.
2. Wider adoption of technology solutions
Despite the arrival of new technologies in recent decades, the investment banking industry remains very traditional and hasn't modernized or kept up to date at the same pace as other areas of financial services.
Sticking with highly manual methodologies, which require the involvement of a large number of specialized professionals, leads to delays in the deal and high fees, which can be a barrier for many companies considering a corporate transaction.
That's why the lack of development and adoption of technology solutions across the different stages of a deal, and in the way advisors and intermediaries organize their processes and work, results in inefficiencies that can make it impossible to close viable deals and that needlessly increase the costs, time, and effort of the parties involved.
Technology makes it possible to reduce costs and optimize the process at every stage, from deal origination and the search for potential partners to information sharing and due diligence — traditionally a long, tedious process where, with the right use of technology, there's plenty of room for improvement.
New tools have also been developed recently, such as the use of artificial intelligence for contract review, which could make the industry much more efficient, cut costs drastically, and deliver better, faster service.
3. The growing importance of impact investing
In recent years, we've seen steady growth in the relevance of ESG criteria (Environmental, Social and Governance) to the point where they're becoming increasingly widespread across different investor profiles and investment strategies.
This means we need to take into account the environmental impact of the company's activities, its social impact, and how its corporate governance works when carrying out an acquisition, merger, or investment, with certain standards being required more and more rigorously.
This approach involves looking beyond the profitability of a company's business (without that criterion losing its central role when analyzing a potential investment) to address issues that are also relevant from a broader perspective, taking into account the company's position in its environment, its impact on that environment, and its overall results, rather than being limited to traditional financial and commercial analysis.
The challenges posed by this new trend and its rapid rise include the need to measure variables that are harder to quantify than financial parameters, such as energy sustainability or transparency and good corporate practices.
ESG criteria must also be reconciled with the pursuit of profitability, with these different aspects properly weighed, since this type of investment doesn't mean giving up on financial returns, which are the main objective and motivation behind any investment.
In short, the goal is to meet the demand of an industry that's at record highs in terms of transaction volume, and to make the process more efficient. To do that, transparency and technology are essential as levers that help the parties reach an agreement sooner, better meet their needs, and increase the deal's chances of success.
