dealing with complexities

74% of leaders say that increasing regulation is making M&A activity much more challenging. A buyer-seller mismatch is also hampering deal-making, with regulatory compliance a top focus for buyers but not a core strength of all sellers. Navigating complexity and overcoming this misalignment will be key to driving deals forward.

The appetite for M&A is strong. Keen to make the most of improving market conditions, business leaders are optimistic about the potential for M&A to expand their geographic footprint, increase their supply chain resilience, and enhance their tech capabilities. The long-awaited surge in deals looks imminent.

However, some important barriers stand in the way. Almost 6 in 10 leaders of US and European businesses (58%) say that complexity is slowing down their organization's M&A strategy, and that the key drivers of this complexity are stricter regulatory environments, increased cybersecurity risk, and volatile market conditions.

Some of these drivers, such as heightened cybersecurity risks, have considerably increased compared to a decade ago, posing new challenges for businesses and raising questions about what factors may emerge in another 5, 10, or even 15 years. In addition to these factors, operating in a highly risk-averse society often causes business leaders to introduce unnecessary complexity themselves, driven by their own fear of potential risks and their desire to mitigate them.

High-profile examples of governments and regulators blocking M&A transactions – such as the previous US administration’s opposition to the proposed acquisition of US Steel by Japan-based Nippon Steel, and the EU’s opposition to several planned tech deals, including Amazon’s attempted acquisition of iRobot – have heightened concerns around government intervention.

“Growing regulatory scrutiny has focused minds on this aspect of transactions and the risks it presents. This has resulted in greater sophistication amongst law firms and advisors as they seek to navigate these requirements, leading to more in-depth diligence exercises and complex and heavily negotiated transaction documentation. The growth of warranty and indemnity (W&I) insurance has also been identified as another aspect of transactions that has resulted in further complexity as diligence becomes focused on supporting insurance cover rather than key areas of risk. This has resulted in more active legal engagement, longer timelines and ultimately higher cost.”

Tom Bacon, Partner (London)

“In Germany, regulatory complexity could come through the need to clear foreign direct investment approvals, which relies on the speed of the governmental authorities. Regulatory experts need to carefully assess exactly what is required to move forward; requirements have deepened substantially in recent years as regulatory focus has increased. Business leaders understandably want to move forward swiftly, but their legal advisors need to ensure they are balancing pace with caution.”

Tonio Sadoni, Partner (London)

These heightened concerns and additional layers of checks are slowing deals and making them more difficult to navigate: 74% of leaders say that increasing regulation is making M&A activity much more challenging. This can be seen through the ever more detailed and comprehensive due diligence processes, together with specialist advice, that business leaders now require to feel confident in pursuing an M&A transaction.
 
Could this complexity be enough to prevent an M&A uptick? Many business leaders believe so: More than half of European business leaders (52%) and 64% of US business leaders argue that the anticipated upsurge in M&A activity will not happen because of increased complexity and regulation. Business leaders expect these issues to intensify: Over the next year, leaders forecast even greater complexity, longer timelines, and the need for more intensive legal support.