November 18, 2021

Technology – A Critical Driver of M&A Due Diligence

Merlin Piscitelli, Chief Revenue Officer for EMEA, Datasite, explores how the tech transition is transforming M&A due diligence.

With the pandemic still creating waves of uncertainty, the way in which we conduct business has irrevocably changed. Organizations embraced digital adoption at both the organizational and industry levels. In the wake of the permanent operational changes brought on by the pandemic, technology has firmly established itself as an enabler of innovation and efficiency.

Global M&A activity continues to soar to new heights in 3Q21 and with it – the value of due diligence.

A company may seem great on paper but there could be hidden financial, operational and legal risks underneath. Some may not yet even be known. This is where due diligence comes in. Due diligence can determine the success and failure of mergers and acquisitions. For dealmakers, the due diligence process enables them to identify unknown risks and make crucial financial considerations for deal and value assessment; confirm the assumptions that support the deal and gather information to plan post-deal integration.

New global diligence projects on Datasite’s platform are up 74% compared to the same period a year ago. This surge in activity is the result of favourable interest rates, ready access to capital with private equity and venture capital groups deploying hefty war chests and organisations turning to technology to identify and pursue opportunities.

In a world of heighted competition and risk, conducting effective, value-focused due diligence is critical.Technology can help to maximise compliance and minimise risk during the due diligence process.

As we embrace hybrid working models, communication and collaboration have become an additional challenge, alongside managing an ever-growing workload. Bespoke technologies are now in dire need to improve process efficiencies, extend dealmakers’ bandwidth and retain talent. Doing so ensures dealmakers can focus on executing deals, rather than being caught up in endless streams of data.

Virtual data rooms and advanced analytic capabilities

The due diligence landscape has transformed at a rapid pace. Gone are the days where an analysis of the financial and legal documentation was considered rigorous enough. Now the scope has expanded to include areas such as human resources, intellectual property, proof of environmental, social and governance policies, and tax considerations.

The sheer volume of data that is now assessed has created significant challenges within the due diligence process. However, virtual data rooms (VDRs) have drastically improved both the speed and security of transactions over the past decade by providing dealmakers with direct access to the information needed to conclusively determine whether they should continue to pursue a deal.

Now, equipped with advanced analytic capabilities, VDRs are once again transforming M&A activity by supporting several workflows that make the due diligence process far more efficient. From in-platform messaging and advanced access control to redacting or blacklining, VDRs enable involved parties to exchange confidential information in a structured and transparent way, improving operational flow. Additional applications, including two-factor authentication, further enhance VDRs and ensure that security breaches are minimised during the due diligence process.

Artficial intelligence and machine learning

Whilst the due diligence process is one of the most important aspects of the M&A lifecycle, it is also one of the most time consuming. Understandably, a recent survey found that verifying and reviewing all the documents related to a transaction was the leading cause for delays during this process. However, in a high-value deal, there is often limited time to complete the due diligence process due to pressure from other prospective buyers.

Artificial Intelligence (AI) and machine learning capabilities within the VDR can significantly speed up the process by automating repetitive tasks and supporting an effective and secure legal workflow so that lawyers can capitalise on opportunities despite being busier than ever. In fact, 64% of EMEA dealmakers believe that the due diligence process will take less than one month by 2025, from the one to three months it takes today, because of new technologies.

From automated document reviews and multilingual search capabilities to contract analysis and risk and compliance reviews, AI and machine learning capabilities improve the accuracy of workflows and help to solve some of the organisational challenges which typically hinder the due diligence process. Moreover, by automatically sorting, assessing and classifying thousands of documents in minutes, and allocating these into appropriate folders to review, AI technologies are transforming the due diligence process into a more proactive and data driven operation. This not only allows dealmakers to move away from the more administrative, time-consuming tasks and concentrate their time and energy on other parts of the deal, but also helps ensure regulatory compliance in an increasingly complex landscape.

For example, The European Union’s General Data Privacy Regulation (GDPR), introduced in 2018, requires businesses to bolster their data protection processes. Failure to comply to the comprehensive policies can result in fines of up to 4% of global annual revenue, or €20 million.

When it comes to M&A, the added complexity has been particularly apparent, especially as it has slowed due diligence and even caused some deals to falter. For example, in 2018 a multinational hotel chain received a £99 million GDPR penalty fine from the UK Information Commissioner’s Office after its M&A due diligence process failed to highlight that that the company it was acquiring had a severe cybersecurity breach four years previously.

Whilst this evolving regulatory landscape will continue to complicate some stages of the M&A lifecycle, AI and machine learning capabilities can help dealmakers to navigate this challenge during the due diligence process. In fact, with 69% of EMEA practitioners expecting data privacy regulations, like GDPR, to be a key consideration on M&A due diligence in five years’ time, the ability to search and bulk redact sensitive information within seconds will only become more pivotal to improving deal efficiency.

Cybersecurity considerations

Cyber risk is an increasingly prevalent threat for businesses and, following an increase in data breaches across the globe, it has started to play a more important role in M&A activity over the past few years. In fact, a recent survey of M&A dealmakers across the EMEA region found that 55% of respondents had worked on M&A deals that failed to progress due to concerns around a target company’s data protection policies and adherence to privacy regulations.

Amid this backdrop, cybersecurity audits and evaluations have become a vital component of the M&A due diligence process, and today’s technologies offer far more efficient and comprehensive approaches. From categorising contracts and indexing their content for searching to dynamic reporting on the security protocols of a company, machine learning and data analytics can help provide critical insights during the research and analysis aspect of due diligence.

By providing a more in-depth assessment, these advanced technologies provide dealmakers with crucial business intelligence and a more comprehensive assessment of a target’s security strategies. Ultimately, this information will only better equip leaders to make proactive decisions during the M&A process and speed up the timely due diligence process.

Looking ahead

The tech transition is shifting the dynamics of M&A deal activity. Once considered a differentiating advantage, digitisation is now vital to the M&A lifecycle. From VDRs and advanced analytic capabilities to AI and machine learning programs, these technologies can support dealmakers and ensure greater speed, accuracy, and security is achieved across the M&A due diligence process.

As we head into 2022, we should expect to see a competitive bidding landscape emerge with new market players pushing valuations higher. As a result, companies will need to escalate their digital capabilities to prevent deals falling through.

An added pressure in the deal making process is undoubtedly foreseeing and managing climate change and ESG risks.

In our Climate Change survey, 64% of all UK and US dealmakers expect more deals to fall apart because of climate-change related due diligence over the next two years.

Although, this evolving regulatory landscape is likely to delay and extend the due diligence process, effective diligence, evaluation and management of climate change risk and ESG considerations will be a critical driver of M&A activity over the foreseeable future.

Merlin Piscitelli is Datasite’s Chief Revenue Officer for EMEA. Datasite a leading SaaS provider for the M&A industry, empowering dealmakers around the world with the tools they need to succeed across the entire deal lifecycle.

This article was originally published by Acquisitions Daily.

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Marta Carraro

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