Merlin Piscitelli, Chief Revenue Officer for EMEA, Datasite, explores how the tech transition is transforming M&A due diligence.
The Covid-19 pandemic has caused unprecedented economic disruption and has accelerated digitization within business in ways that no one could have predicted. Across countries, businesses have advanced their online offering by an average of seven years, and the mergers and acquisition (M&A) world has benefitted greatly. Global M&A activity has achieved a new high in the first half of 2021, reaching US$2.6trn in deal activity.
Within the first six months of 2021, EMEA markets were the main drivers of outbound and inbound transactions, pushing deals worth £578 billion, a 15% rise on the second half of 2020. We have seen new EMEA projects on our M&A platform increase by 37% between January and September in comparison to last year. We can therefore hope to see this drive carry on well into the second half of the year, providing a promising post-pandemic recovery outlook.
Nevertheless, to reduce risks concerning financial fines or reductions in target companies’ deal value, M&A management needs to be air-tight and reliable, especially in an age where deals are carried out in a hybrid way with a mix of virtual and on-site work as well as the use of digital collaborative tools. Dealmakers, therefore, need to embrace technological advances to make sure they are maximizing compliance requirements, and minimizing risk and privacy issues during the due diligence process.
Virtual data rooms and advanced analytic capabilities
These days, due diligence must target more areas of a business than ever before if it is to be done correctly. The process is more thorough – encompassing everything from ESG policies to the technology used by the business. It is no longer enough to only investigate financial and legal documentation.
To deal with the huge amount of information that needs to be assessed in the due diligence process, the technology used must be powerful and secure. Thankfully, virtual data rooms (VDRs) have continued to evolve with the due diligence requirements and can now handle an infinite amount of information with speed and security, making it straightforward for dealmakers.
VDRs are now capable of supporting multiple workflows, in-platform messaging, and advanced access control as well as redacting or blacklining. Confidential information can be shared in the most secure way with editing abilities far better than ever before, improving overall efficiency within the whole process whilst keeping everything in one place for analysis.
Artificial intelligence and machine learning
This era of technology has seen most processes becoming automated to save time, and whilst the due diligence process is one of the most important in M&A, it is also one of the most time-consuming. Results show that the process of verifying and reviewing documents was the main reason for delays. Optimizing this process to decrease the time it takes would prove very valuable in high-value deals where time is of the essence.
With lawyers and dealmakers busier than ever, integrating artificial intelligence (AI) and machine learning into VDRs is a surefire way to speed up long and arduous processes. This means automating repetitive tasks which would otherwise take multiple people many hours. AI and machine learning is already being used for everything from automated document reviews and multilingual search capabilities, to contract analysis. AI can improve the accuracy of workflows and solve organizational challenges; with 64% of EMEA dealmakers agreeing that the length of the average due diligence process will be reduced to less than month, compared to the three it takes today, by 2025 through new technologies being introduced.
The time this technology saves allows for dealmakers to focus on less administrative and time-consuming tasks and ensure regulatory compliance. Failing regulatory obligations in an ever changing deal environment can result in fines; for example, failure to comply with The European Union’s General Data Privacy Regulation (GDPR) policies, can result in fines of up to 4% of global annual revenue, or €20 million. The ability for these technologies to search and bulk redact sensitive information, such as for GDPR, within seconds will become essential for the M&A industry going forward. Around 69% of EMEA practitioners expect data privacy regulations to become a key consideration within M&A due diligence in five years’ time.
In a recent survey targeting M&A dealmakers across the EMEA region, 55% of respondents said they had worked on M&A deals that had failed due to concerns around a target company’s adherence to privacy regulations and data protection policies, showing that the widespread issue surrounding data security plays a key part in M&A deal failure.
Thankfully, today’s technology allows for a more streamlined and thorough approach to cybersecurity. Machine learning and data analytics provide critical insights during the research and analysis aspect of due diligence by providing an extensive assessment, which offers dealmakers critical business intelligence as well as a better assessment of a target’s security strategies. In the end, this ensures more efficiency within the overall process.
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Dealmakers are required to manage across the entire life cycle of an M&A deal. The challenge that comes from having to prepare an asset, conduct efficient asset marketing, and launch an effective and secure due diligence phase, all while managing a hybrid deal team is immense. Add to that the increased activity currently taking place in the industry and you can quickly see why dealmakers need a helping hand. Fortunately, this help comes in the form of technology as a catalyst and enabler of change. Taking advantage of everything from state-of-the-art VDRs to advanced machine learning capabilities and AI will enable the M&A deal cycle to become more efficient and reducing the overall stress and pressure felt in the industry. Those who fail to take heed and adapt to this developing environment may find themselves losing out on major deals to agile and tech-savvy competitors.