Insights

AI and Machine Learning’s Impact on the M&A Process 
POSTED 8.18.20 M&A

Artificial intelligence and machine learning have radically changed the way business is done in countless industries. And the M&A world is no different.

This cutting-edge technology has the potential to cut the average time to get an M&A deal done by 66% – if not more – within the next five years.

It’s the biggest advancement going on right now in M&A, with the greatest impact felt in the due diligence process, which will be cut from three months to one month or less when AI and machine learning are used to review and analyze the data in virtual data rooms.

In this report from Datasite (formerly Merrill Corp.), The New State of M&A 2020 – 2025, M&A practitioners from around the globe were surveyed on this issue.

48% felt that due diligence could be enhanced by technology the most; so there is clear demand for its implementation.

35% said that combining that technology with virtual data rooms would help accelerate due diligence the most.

30% believed that AI and machine learning will have the most transformational impact on M&A in the next five years.

Faster due diligence means more deals getting done because this element is the most important success factor in M&A and also the most time consuming – the Datasite report notes that 66% of those surveyed felt due diligence was the most time-intensive part of an M&A deal.

AI and machine learning will make due diligence more secure, more complete, faster, and more cost-effective.

And contrary to popular belief, technology will enhance the process, not replace the people.

Software can’t replace deal-makers or those guiding investment and acquisition strategy. We will always need people to negotiate prices and terms, and we will always rely on experience and expertise. And, not even due diligence can be automated completely.

How It Works

During the typical due diligence process, there are hundreds and thousands of pages of disclosures, financial statements, contracts, and other data about the target company. It’s all electronic these days, placed in various “folders.”

It’s organized. But trying to locate a specific piece of information among all those documents is very difficult and time consuming, requiring Buyers to read through pages and pages to get the data they need. Hence the usual delays to the process.

When you upload the documents to a virtual data room and have AI and machine learning software scan all of them, you now have a very effective search tool to help you pinpoint, accurately and quickly, the specific document you need to get the answers you’re looking for.

Importantly, machine learning and AI can also search documents, identifying important sections and highlighting potential risks based on parameters set by the person conducting the diligence, helping them better assess the opportunity.

It’s an appealing picture. And it must be why 65% of those surveyed by Datasite said that “new technologies should enable greater analytical capability in the due diligence process.”

Barriers to Adoption

As with any change in the way things are done, you might expect some resistance to the widespread adoption of using AI and machine learning to essentially create a searchable virtual data room. In fact, only 26% of M&A practitioners surveyed for the Datasite report believe this technology will help accelerate due diligence.

Some of their concerns? The financial constraints and data security and privacy issues.

But, I think that the benefits sell themselves, and more people will come around as the technology progresses and costs come down. Savvy Buyers and Sellers know that the quicker the due diligence process is over… the quicker the deal gets done.

According to the Datasite report, 56% of those in M&A believe due diligence time will be cut to a month or less in five years’ time – so there is clearly confidence this technology will progress to where it needs to be for widespread adoption by then.

And besides, with the pandemic, everybody has become more comfortable with technology like Zoom… and that will translate to being more open to tech like AI and machine learning.

It’s like when years ago, the idea of the paperless office started floating around. It was slow going at first. But once there were effective digital scanning and storage solutions, like cloud storage, and the costs came down, the paperless office became a reality.

Or, think about virtual data rooms themselves. Twenty years ago they didn’t exist. Today, you can’t do a deal without one.

Another example: Representations and Warranty (R&W) insurance.

For years, many felt it was only for big deals or too cost prohibitive. But as more insurers have started offering this product and more Buyers and Sellers are insisting on this coverage, the price has come down. Plus, deal sizes of under $20 million are now routinely accepted.

Implementing AI and machine learning into the due diligence process for your next deal may not be feasible yet. But you can still enjoy the protection of R&W insurance coverage.

As a broker with years of hands-on experience with this unique product, I’m standing by to answer your questions. You can contact me, Patrick Stroth, at pstroth@rubiconins.com.