M&A due diligence is so backed up consultants like EY are turning away new business and reprioritizing what they assess on deals: ‘You no longer have time to turn over every single rock.’

• Firms like EY provide diligence services on M&A transactions, vetting targets’ financials.
• But, amid a surging deals market, these diligence providers are facing backlogs.
• Short-staffing and heightened deal loads are straining providers, EY’s Brian Salsberg said.

The consulting and accounting firms tasked with running diligence on deals are struggling to keep pace with the robust mergers-and-acquisitions market.

Brian Salsberg, EY’s global buy and integrate leader who leads the Big 4 firm’s merger-management services, told Insider that EY has been inundated by inbounds from existing and prospective clients, some of whom it’s had to decline.

“We get calls now all the time from people asking for help,” he said. “We’ll say: ‘We can’t do it right now. We just don’t have the people.'”

“We are turning away a lot of work and we’ve never really done that on this scale before ever in our history,” he added. “That’s how crazy it is.”

Companies like EY assess merger targets’ financials and identify weaknesses that could cause deals to fall apart.

The shortage of available diligence professionals — coupled with a fast-moving environment — means firms are more selective when assessing a deal.

“The pace has increased and the timeline decreased so the ‘big rocks’ need to be prioritized,” Salsberg said. “You no longer have time to turn over every single rock, but we are sure to turn over the big ones.”

A recent industrials deal for which EY provided diligence fell apart after the diligence process unearthed what Salsberg called “a showstopper” — an environmental liability that had the potential to “have swung both the valuation and the risk of the deal.”

Salsberg did not provide further details about the aborted transaction.

The diligence backlog first became apparent around the beginning of the year, Salsberg said. While he doubts the current situation is permanent, he added: “I don’t think it’s slowing down, certainly not in 2021.”

Wall Street was caught off-guard by a surging deals market

In 2020, there were just over 20,000 deals done globally, amounting to about $1.6 trillion worth of activity, according to Dealogic. This year has already seen nearly as many deals, with the value of the transactions exceeding $3.8 trillion.

To meet demand, EY has turned down some engagements altogether, pulled in reinforcements by hiring from Big 4 competitors, and leaned on adjacent business lines for additional support.

Among those reinforcements are some of EY’s corporate finance professionals or people from its investment-banking business, Salsberg said. “We’re doing that on steroids,” he added.

“Our practitioners are well-rounded and well-versed in finance, accounting, and transactions,” he added. “Therefore we are able to rotate them to where demand is most needed.”

Its hiring strategy has been aggressive too, with the firm tapping talent — including partners — from Big 4 competitors, he said. He did not specify who those partners are or how many EY has hired.

But ultimately, some business still has to be turned away. In turn, larger clients or companies that have a history of working with EY “are the ones that obviously we prioritize,” he said.

Bankers have taken notice of the situation

The stress of short staffing has hit Wall Street hard, forcing a number of investment banks large and small to decline some new business, Insider previously reported.

In a July interview with Insider, Brent Gledhill and Matthew Zimmer, two senior executives at Chicago-based investment bank William Blair, noted the strain that external due-diligence providers have faced.

“They’re now scheduling three, four weeks out,” Gledhill, the firm’s president, said of diligence providers.

“What they’re saying right now is: ‘Look, we’re maxed out. We need a few weeks before we can start,'” Zimmer, the firm’s global head of investment banking, added. “Sometimes it’s four, sometimes it’s less, but that’s creating a bit of a bottleneck in M&A processes.”