M&A Due Diligence Becomes More Complex
The due diligence process for M&A deals in the US is becoming more rigorous and protracted, adding risk and cost to transactions, according to a survey of senior bankers. Concurrently, cash-and-stock deal structures are gaining popularity as a way to navigate valuation gaps in volatile markets. This combination of longer diligence timelines and more complex deal structures requires a deeper understanding of practical deal execution challenges.
- Stricter regulatory environments are a primary driver of M&A complexity, with 57% of US and European dealmakers citing it as a major factor. This increased scrutiny from bodies like the Department of Justice (DOJ) and Federal Trade Commission (FTC) can extend the pre-close period for a deal from a standard three months to as long as two years. - Consequently, deal timelines are lengthening, with half of investment banking executives reporting that it takes at least six months to complete a transaction. For deals experiencing these extended timelines, 59% of bankers say that one to three months have been added to the process. - There has been a significant shift in due diligence priorities away from environmental, social, and governance (ESG) factors and towards a greater focus on technology and cybersecurity risks. Technology reviews are now considered the most costly and onerous part of M&A due diligence by 45% of dealmakers. - To manage the growing volume of data, dealmakers are increasingly turning to Artificial Intelligence. AI-powered due diligence can accelerate contract review timelines by 70-80% and surface three to five times more material issues than traditional manual approaches. - Higher interest rates have made debt financing more expensive, increasing the prevalence of all-stock or cash-and-stock deals as buyers seek to preserve capital. A notable example was the proposed $88.4 billion cash-and-stock merger between railway operators Union Pacific Corp and Norfolk Southern Corp. - The current M&A market has been described as "K-shaped," characterized by a surge in large, strategic "megadeals" (transactions over $5 billion) while activity in the mid-market remains more constrained due to valuation gaps and financing costs. The number of megadeals globally jumped from 63 in 2024 to 111 in 2025. - The deeper dives during due diligence have led to a higher rate of aborted transactions. In 2024, many potential deals were terminated after buyers uncovered issues related to risk appetite, operational problems, or integration challenges.
