As we move into 2025, signs of a long-awaited resurgence in the M&A market are becoming clearer. While 2024 predictions of a significant uptick in deal activity were largely unfulfilled, momentum has been building steadily, driven by a confluence of factors. The resulting competition and pressure on valuations and timelines make comprehensive M&A due diligence even more critical in navigating the emerging risks and opportunities of this dynamic landscape.
Resurgent M&A activity, coupled with geopolitical, economic and technology considerations, means that buyers and sellers alike must be prepared to tackle greater complexity, from regulatory and tax policy shifts to cybersecurity. As competition for high-quality assets heats up, effective due diligence will be the foundation of a successful transaction.
What’s Driving the M&A Market Resurgence?
Multiple factors are converging to create a more favorable and active M&A environment. The U.S. election, while highly contentious and the source of considerable uncertainty, concluded quickly and peacefully, providing greater stability, reducing market volatility and giving investors and dealmakers a renewed sense of confidence. Regardless of one’s political preferences, the uncontested election outcome offered reassurance about the transition of power, providing a boost to Wall Street and to prospects for increased M&A activity. Perceptions that the new administration is likely to be more merger-friendly in terms of tax policies and regulatory scrutiny have added to confidence in an M&A market rebound.
Another significant driver is the large volume of undeployed private equity capital, or “dry powder”, accumulated during the prolonged slowdown in deal activity. Many private equity funds are now under pressure to divest longstanding portfolio holdings, some of which have exceeded typical hold periods of three to five years, and return capital to investors. Similarly, many corporates are strategically refocusing on their core businesses, spurring moves to divest non-core assets. Together, these factors are expected to drive significant deal activity into 2025, even as the cost of capital remains relatively high and the pace of anticipated Federal Reserve interest rate cuts may slow.
Due Diligence in a Competitive M&A Market
The result of this anticipated uptick in M&A activity is going to be increased competition for deals as private equity and corporates chase the same pool of quality assets. That’s likely to put upward pressure on valuation multiples and downward pressure on timelines as competition intensifies. Increased competition for assets and compressed deal timelines both underscore the importance of effective, comprehensive due diligence and impact the due diligence process in a number of ways:
- More pre-LOI due diligence: In a more competitive environment, buyers seeking an advantage will start their due diligence earlier, before letters of intent (LOIs). By making that investment and engaging advisors earlier in the process, buyers can gather crucial insights to sharpen their bids and reduce post-LOI adjustments. This proactive approach enables more accurate valuations and better-informed decision-making within a reduced timeline.
- Sell-side preparation: The trend of increasing sell-side due diligence in advance of planned divestitures is likely to accelerate. Sellers wanting to get a jump on competing deals will work with their advisors to prepare financial results in advance, ensuring that buyers are presented with fully vetted analyses (i.e., quality-of-earnings, tax, technology, etc.) and allowing them to accelerate their own due diligence processes. As timelines compress, sell-side preparation is no longer a “nice to have” but a “need to have” for a successful transaction.
- Integrated services: The demand for faster execution and the proliferation of more complex transactions are leading to a preference for consolidated advisory services. Carve outs, for example, can be more complicated than a full acquisition because of the need to evaluate standalone costs and allocations that have historically been reflected in consolidated financial statements. Instead of engaging multiple service providers, buyers and sellers are turning to firms, including Kroll which offer a comprehensive suite of due diligence services, from background checks and accounting and tax diligence to cybersecurity and operational assessments, an integrated approach streamlines the process and reduces inefficiencies.
Emerging Risks and Due Diligence
While a resurgent M&A market presents opportunities, it also introduces risks that require careful evaluation and consideration. The change in U.S. administration, a volatile global geopolitical environment, intensifying cybersecurity threats and the emergence of AI add to the complexity and breadth of due diligence needed in a rapidly changing landscape. The second Trump administration may bring changes in tax and regulatory policies as well as the prospect of new tariffs, which, if enacted, necessitate conducting sensitivity analyses of their impact on target businesses and forecasts.
Transactions with any kind of cross-border element bring their own set of challenges, including the need to navigate local regulatory environments and geopolitical uncertainties. Having boots on the ground in key jurisdictions is essential to understanding and managing these complexities and ensuring that due diligence accounts for all relevant risks.
Cybersecurity continues to grow as a critical area of focus in deal due diligence. Buyers need to assess targets’ IT infrastructure and ensure there are no unresolved cyber incidents or vulnerabilities that could pose risks post-close. Additionally, understanding a target company’s ability to scale, integrate and securely use emerging technologies is increasingly essential.
In a competitive market, we can expect sellers to be more aggressive with pro forma adjustments to maximize valuations. Buyers need to carefully scrutinize such adjustments to ensure they are aligned with the target company’s actual performance.
Preparing for What’s Ahead
The M&A market is poised for a buoyant 2025. Success will favor those who are prepared. For buyers, this may mean initiating due diligence earlier and using those insights to make competitive well-informed bids. For sellers, it means presenting assets in a credible manner through comprehensive sell-side due diligence.
In a highly competitive, time-constrained environment, the role of due diligence is critical. From emerging cyber threats to changing tax and regulatory policies, the risk landscape continues to evolve. The coming year offers immense opportunities for dealmakers ready to act. With effective due diligence, buyers and sellers can confidently capitalize on this resurgent market and achieve successful outcomes.
