The future of Merger and Acquisition processes involves leveraging AI

In recent years AI has evolved from a ‘future possibility’ to an essential, workable tool across multiple industries, including aerospace, legal, advertising, and biotech. The field of Mergers and Acquisitions (M&A), a speciality within management consulting and finance, is no different. This article describes the often complex, murky, and time consuming lifecycle of an M&A deal. Notably, a high percentage of M&A transactions do not close, or are deemed a failure for their poor outcomes post-deal closure. Moreover, they are a huge drain on resources, often taking 4 - 6 months of highly specialised work and negotiation, with no guaranteed outcomes. Through 3 key value adds - smart insight, automation, and predictions - AI is set to revolutionise the M&A industry, enabling both target and buyer companies to make faster, better, safer and more compliant decisions

CONTENTS

1. Mergers and Acquisitions (M&A) explained

2. The M&A umbrella

   • Mergers

   • Acquisitions

   • Consolidations

   • Tender Offers

   • Acquisition of Assets

   • Management Acquisitions

3. What are the motivations behind an M&A?

4. Failures in M&A deals

5. The rise of Artificial Intelligence in workflows

6. The 3 core value propositions of AI

   • Insights

   • Automation

   • Predictions

7. How AI can improve the efficacy of M&A processes?

   • Due diligence

   • Online data room

   • Intellectual property concerns

   • Possible outcomes 

MERGERS AND ACQUISITIONS (M&A) EXPLAINED

M&A is an umbrella term that refers to the consolidation of companies or assets. This process involves multidisciplinary concerns, including legal, business, human resources, intellectual property, and financial resources. M&A also refers to the desks at financial institutions that oversee these consolidations.

This is a very profitable venture for financial institutions, and the field of work involved is highly complex and specialised. Typically, an M&A deal can take anything from 4-7months to complete, and is heavy on resources. It is particularly challenging if the target company (seller) is privately held and may not have hitherto been under the same level of scrutiny as a public company is.

All too often the words ‘mergers’ and ‘acquisitions’ are used interchangeably, or applied together to refer to a range of quite distinct types of consolidations. Let’s understand the differences better.

THE M&A UMBRELLA

These are the most common transactions that fall under the M&A umbrella:

Mergers

A merger is when two firms of a similar size join forces to develop into a new single brand and legal entity. This is commonly known as a ‘merger of equals’. An example is DaimlerChrysler - a company created through the merging of two similar sized competitors, Daimler-Benz and Chrysler. Both companies’ stock was suspended, and a new set of stocks were issued instead.

Acquisitions

There are different forms of acquisitions, but the most straightforward example is when the acquiring company obtains a majority stake in the target firm, that is then not required to change its brand, or organisational structure. There are, however, unfriendly or hostile takeovers, where the target companies are forced into being purchased and certain conditions on the takeover can be applied.

Consolidations

A consolidation refers to when a new company is formed through synthesising core businesses and jettisoning old corporate structures. Essential to this process is the buy-in of stockholders of both companies, who must vote for the consolidation, and given this, take receipt of common equity shares in the newly created firm. A classic big scale example of this is Citigroup - a consolidation of Citicorp and Travelers Insurance Group in 1998.

Tender Offers

A tender offer occurs when the buyer company offers to purchase the outstanding stock of a target company at a set/agreed upon price that differs from the market price. The crucial detail in this is that the buyer communicates the offer to the target company’s shareholders, and not their board of directors. It is most often the case that tender offers result in differing forms of mergers.

Acquisition of Assets

An acquisition of assets deal commonly occurs during bankruptcy proceedings, as the assets of a target company are acquired by another company. Shareholder approval must be gained. It is often the case that after assets have been purchased the target company is liquidated.

Management Acquisitions

This type of acquisition is also known as a management-led buyout (MBO). It’s an internal takeover of sorts, as executives of a company purchase a controlling stake in a company, rendering it a private entity. The executive that initiates the acquisition will often partner with a financier to help fund the transaction. A famous example is the 2013 Dell Corporation acquisition by its former founder, Michael Dell.

WHAT ARE THE MOTIVATIONS BEHIND AN M&A?

M&A deals are closed for a number of differing reasons. Most of these reasons can be categorised under improvements in financial performances, or reducing risk. Small to ‘mega’ companies are involved in M&A transactions. In recent times deals aimed at acquiring intellectual property have become more common than ever. This is because innovative intellectual property has become one of the core competences for companies. It has been shown that successful knowledge transfer and integration of new technologies gained after a merger or acquisition can bring about significant improvements in a company’s capability and performance.

FAILURES IN M&A DEALS

Numerous empirical studies, including that of Thomas Straub’s “Reasons for frequent failure in Mergers and Acquisitions” (2007), indicate that the failure rate of M&A deals is high. The main reasons for this are employee turnover; lack of planning and organisation; and insufficient due diligence.

The turnover rate of employees in target companies post-M&A is roughly double that of competitors who have not gone through an M&A. Smaller businesses with strongly defined and distinctive work culture are shown to be particularly problematic in this regard, as their cultural specificities are rarely carried over into the new phase.

A study on M&A failures done between 1988-2002 proposed that successful acquisitions occur when there is minimal uncertainty over the usefulness of the product and the viability of demand for it. In comparison, failures as defined by return on investment and time to market, are caused by “hasty purchases where information platforms between companies were incompatible and the product was not yet tested for release”. This is not all that surprising, and it is linked with the third main reason for failures, lack of due diligence.

Giant of all things M&A, Deloitte, has written a paper arguing that most buyer companies do not do adequate due diligence in determining whether a target company is the right fit. They propose that the main reasons for this are: timing; cost; knowledge of the industry; undervaluing due diligence. Due diligence, as we are to discuss in more detail below, is research which up until the introduction of AI, took a great deal of time and money. Moreover, the insights gained for due diligence might produce ‘inconvenient truths’ that confident, instinct-driven CEO’s may not want to hear.

THE RISE OF AI IN WORKFLOWS

In recent years, AI as a field of technology has surged from a ‘future possibility’ to a ‘practically used tool now’. Contemporarily, it is an essential technology, at use in a huge variety of industries, including biotech, advertising, legal, and aerospace. AI companies raised a record of $33 billion in equity funding in 2020.

For a broad stroke definition: AI is the science and engineering of making intelligent machines that mimic human cognitive processes, although AI is not always confined to methods that are biologically observable.

THE 3 CORE VALUE PROPOSITIONS OF AI

In the context of a workplace, AI makes the following contributions:

Insights

AI can assist in complex decision-making by analysing any volume of data in a remarkably quick timeframe. AI technology, such as Machine Learning (ML)-powered semantic searches, allow us to sift through huge data sets in a short space of time, picking out likened and relevant information. What would have taken a team of researchers months to wade through, armed with highlighters, takes an AI search a matter of weeks. Building upon this, AI allows us to dig deeper and provide layered analysis and representation. Multiple sources of correlated data can be combined and analysed to distinguish patterns and trends. This all happens a lot faster than a human brain.

Automation

The power of AI automation is that laborious, time-heavy tasks are no longer a drain on resources. Once patterns and trends have been unearthed, automation processes allow one to reproduce occurrences across a broad spectrum. This in turn presents its own insights to bolster our understanding and improve decision-making. An example in this regard would be the construction of a chronology of data over a set span of time. Once the relevant information is isolated, AI can do the ‘sweat hours’ of distinguishing temporal contingency, and can arrange this in a digestible fashion.

Prediction

Leveraging ML, possible outcomes can be mapped to assist decision-making in the present, and prepare for the future. ML-powered predictions compute historical trends, and then interweave these with future probabilities and certainties, to make highly complex possible scenarios. These can help to inform the present, and isolate unseen speed bumps in the future. Prediction analysis can also be used to help us to gain some insight into how a particular project may be shaping up, when human eyes and cognitive ability cannot gain a full ‘view’ of large scale or complex contexts.

HOW AI CAN IMPROVE THE EFFICACY OF M&A PROCESSES

For the purposes of this article, four main areas that can be improved through leveraging AI have been chosen, but this list is not exhaustive. 

Due diligence

Recent research hypotheses that AI will decrease the time it takes to perform due diligence to less than a month in 2025 from six months in 2020. This is a staggering possibility, set to save firms significant time and money, reduce human error, and ensure greater regulatory compliance. Apart from market fit research, product-viability, financial health, and IP-concerns (discussed in detail below), due diligence involves carefully combing through voluminous company records to pick out any of the following:

• Contracts not signed by both parties

• Contracts amended by without amendment terms signed

• Missing or unsigned board of directors minutes and/or resolutions

• Missing or unsigned stockholder minutes and/or resolutions

• Minutes and/or resolutions missing referenced exhibits

• Incomplete/unsigned employee-related documents

• Change in control clauses (contracts that dictate that a third party could terminate a contract should a change in control occur).

Building on this, AI capabilities in determining patterns across data sets, is particularly useful for acquiring companies to be able to distinguish both positive and negative trends over the history of a target company’s development.

Online data rooms

The seller, or target company, is required to put all key contracts, corporate records, financials, and patents in an online data room early on in the deal cycle. This is a secure electronic warehouse of key company documents. For a public company, this is not such a big leap from standard business operations, as records have to be made available to all shareholders in any case. But for a private company, the filling of a data room is often a fraught process. Setting up a data room for both types of companies takes time and resources. Furthermore, the more ‘user-friendly’, transparent and navigable the room is, the quicker the buyer company can conduct its’ due diligence. 

AI document management tools now enable us to speed up the filing, sorting and tracking processes involved in organising big data sets. Intuitive filing and sorting is matched with auto-backlinks to source files, and best of all, the cleaning up and updating of folders and files happens without expending human sweat-hours. AI also allows target companies to track buyers’ activity in the data room, revealing insights as to their level and area of interest.

Intellectual property (IP) concerns

IP is an increasingly important issue in M&A deals, and the selling company is required to present all IP related documentation. Buyers are on the lookout for a few ‘red-flags’ in this documentation:

• The degree to which employees and consultants involved in developing the seller’s technology have signed invention assignment agreements in favour of the seller.

• Contemporarily, open source software can be used and developed upon to create IP. This can lead to ownership, licensing, and compliance issues for the buyer.

• IP representations and warranties - if these are untrue or incomplete when drafted, or become untrue over time, the buyer may not be required to consummate the acquisition.

• Any infringement, misappropriation or violation of other parties IP rights, and any infringement, misappropriation or violation of the target companies IP rights by other parties.

These red-flags can derail a M&A deal, and they are crucial because IP is often the raison d'etre for an acquisition or merger in the first place. Semantic search functionality powered by AI is an imperative tool in finding the needle in the haystack of IP documentation. Moreover, AI search tools can cross-reference IP patents/rights against that of competitors in the field.

Possible outcomes

What are the likely outcomes and projections after an M&A lifecycle? What does the synthesising of the two organisational structures look like? What are the patterns in financials once 2 becomes 1 over the next 10 years? The answers to questions like these can be a critical tool in landing on an informed decision for both a target and buying company. ML-powered future mapping is a tool; it is not a perfect science. It does not give accurate fortune tales, but it can ‘map’ a range of possibilities, thus empowering decision-makers to make better, safer, more insightful, more compliant decisions, which is better for everyone.

For more information about how DocInsights can assist the M&A industry, get in touch with the Doc Insights team and book a demo. Doc Insights offers subscription solutions and custom enterprise solutions.