Technology powering the M&A process of the future

M&A

Blockchain, smart contracts and digital due diligence

10.December 2022

Written by Monica Duyen Tang

There aren't many constants in the business world, but change is certainly one of them. The last decade has seen enormous social and economic transitions. Still, the technological developments, many of which have only been around since the 2000s, have fundamentally changed how we live and do business.

In this post, we take a closer look at how the evolution of technology has impacted mergers and acquisitions (M&A). We consider how digital transformation has influenced the way businesses are scrutinised and the emergence of digital due diligence. We also round up some predictions, such as how blockchain, smart contracts and data analytics can potentially evolve the M&A process for the future.

M&As in a digital world

Digitisation and automation are the themes of our era, and with good reason. Automation helps companies adapt to economic trends such as labour shortages, geographically diverse workforces or rising operational costs. Companies have access to an extensive suite of digital tools designed to streamline workflows and save time and expense in getting a product or service to market.

Inevitably, the modern M&A process has adapted, too, taking full advantage of the opportunities tech has created to support the deal lifecycle, accelerate due diligence, and contribute to post-deal integration.

In predicting how the M&A process will change in the near future, Osborne Clarke points to several trends, including:¹

A riskier business climate that requires more intensive due diligence with a broader remit that extends far beyond financial metrics
Deals taking longer to close due to economic and political uncertainty
Increasing digitisation of tasks and processes, including the use of artificial intelligence (AI), cryptocurrency payments and smart contracts

It's a challenging backdrop for dealmakers, but they are not the only hurdles or opportunities. Regulatory scrutiny is intensifying across Europe and the US, particularly concerning technology sector deals. In addition, commitments to sustainability are driving regulatory bodies to examine M&As more closely too. Plus, the European Green Deal and the EU's review of antitrust and merger policies² are also impacting M&A activity across the continent.

From an M&A technology perspective, it means consolidating the use of existing tools and continuing to explore new ones. Building and refining a foundation of tech that can flex and adapt to changing needs is critical. Then, there's the essential virtual data room (VDR) from which to manage due diligence and the deal lifecycle. There are also considerable benefits from the greater use of AI tech to automate tasks and speed up processes.

With newer technologies, including blockchain and cryptocurrency payments emerging in the M&A space, more opportunities exist to explore. Although yet to really take hold, Osborne Clarke reports a doubling of cryptocurrency-funded deals since 2020, for example³. Therefore, with the breadth of due diligence expanding and market fluctuations creating a fast-moving and volatile landscape, M&A tools have a more significant role to play in fine-tuning deal management and maximising the chances of short and long-term success.

From an M&A technology perspective, it means consolidating the use of existing tools and continuing to explore new ones. Building and refining a foundation of tech that can flex and adapt to changing needs is critical.

Streamlining the M&A process

For every stage of the process, whether a deal closes or is abandoned, a VDR is the backbone of communication, collaboration and secure document sharing during an M&A. VDRs streamline workflows to increase efficiency; they create time and resource savings and use advanced encryption and security measures to protect sensitive information at the highest level.

While VDRs have been around for some time, many now incorporate AI functionality that automates time-consuming and manual tasks.

AI technology has opened up new ways to reduce resources and save time and costs by automating the review of hundreds or thousands of documents during due diligence. There are different types of AI, but all are built on the concept of machine learning, either using an algorithm to find information based on existing patterns and learnings or through unsupervised learning to find new patterns in data.⁴

While the technical aspects may seem complex, on the surface, the outcome is more straightforward; greater speed and efficiency. Low-level tasks such as finding specific terms or phrases in lengthy contracts can be taken care of by the AI-enabled VDR, freeing up legal and other professional advisors to focus on the bigger picture better. However, longer term, AI also helps to understand and plan for risk so that dealmakers can make more informed decisions.

New AI technology, however, shifts the prior balance between limited time and the desire to plan and understand (and then mitigate) risk. The new technology enables a more comprehensive view in the same—if not a shorter—time period, enabling analysis to go beyond just review and into helping plan next steps.

Deloitte ⁵

While the scope of AI and machine learning in the M&A space is still emerging, most agree that its influence and capabilities will grow. Research and advisory firm, Forrester, predicts AI will quickly become indispensable to businesses and organisations of all types and sizes.

"Artificial intelligence is transforming global markets and enterprises of all sizes. Over the next year, this transformation will become a quiet revolution. Rapid progress in fundamental AI research, novel applications of existing models, the adoption of AI governance and ethics frameworks and reporting, and many more developments will make AI an intrinsic part of what makes a successful enterprise." Forrester ⁶

Technology shaping M&As for the future

In the modern M&A era, data and information is stored, shared and examined within the secure environment of a VDR. As the use of M&A tools has matured, emerging technologies such as blockchain and smart contracts demonstrate how they can create further efficiencies and benefits.

Blockchain

IBM defines blockchain as 'a shared, immutable ledger for recording transactions, tracking assets and building trust.' ⁷ Assets can be anything from an object to cash, and the ledger is shared via a protected network to provide a single source of truth that cannot be changed.

Blockchain has several potential advantages within the M&A space, particularly for the due diligence process:

Data stored in the ledger creates a permanent and transparent record of information, increasing trust between the parties involved
Both sides of a deal can see data in real-time to inform quicker and better decisions
Transactions need recording only once, minimising duplication, and cannot be altered or tampered with afterwards
The ledger sits within a distributed network, and access is controlled through bank-grade permission protocols

While the adoption of blockchain technology is still relatively new, its ability to enhance transparency and engender greater trust between the parties of an M&A shows great potential. In fact, some say its development is as significant as the invention of the internet.

'Blockchain, in many ways, appears to signify the dawn of a new era as it relates to how we store and exchange value. In fact, it can be considered one of the biggest technological breakthroughs in recent history, similar to the advent of the internet in the early 1990s.' International Journal of Research and Scientific Innovation ⁸

Smart contracts

Another benefit of blockchain technology is the development of smart contracts. Investopedia defines them as 'a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code.' ⁹

From an M&A perspective, this means a contract between two parties can be managed digitally. As soon as the conditions set out in the agreement are fulfilled, that contract is executed without the need for additional intervention by legal counsel.

Advantages of smart contracts for dealmakers include:

Reduction in manual contract management
Improved verification and traceability of declarations of intent
Digital monitoring, including automatic payments when closing a deal
Enhanced protection against data leaks and cyberattacks that could compromise the deal
Automated earn-out payments can be managed more efficiently

Both blockchain and smart contracts have the potential to build on the efficiencies already offered by VDRs, AI technology and other commonly used M&A tools. Although uptake is in its early stages, the advantages of blockchain technology are promising. It’s potential to increase automation of time-consuming tasks means it’s a case of ‘watch this space’

Blockchain, in many ways, appears to signify the dawn of a new era as it relates to how we store and exchange value. In fact, it can be considered one of the most significant technological breakthroughs in recent history, similar to the advent of the internet in the early 1990s

Data analytics

Analysing data to create business intelligence is nothing new. For example, marketing teams pore over web traffic and social media engagement metrics daily, finance teams use statistical models for budgeting and detecting fraud, and sales and operations teams will use data for demand forecasting.

However, data analytics goes one step further than measuring key performance indicators (KPIs). Instead, it takes advantage of algorithms designed to find hidden patterns in data sets that may be missed by human review.

From an M&A perspective, by delving deeper and using predictive forecasting, data analytics can reveal insights during the due diligence period which would otherwise be missed. There may be unexpected synergies to take advantage of or learnings that change a negotiation stance. Post-deal integration can be better informed too, especially when managing talent retention and acquisition, highlighting trends and gaps that can affect deal value over the longer term.

Despite these potential benefits, McKinsey has found many deal teams aren't using data analytics in the M&A process.¹⁰ Undoubtedly, it requires investment - most notably the cost and time involved in bringing in the right resource, plus the expertise needed to understand where an algorithm can add value.

However, McKinsey believes it will pay back, and dealmakers who recognise and utilise the learnings data analytics can generate should be adding it to their suite of M&A tools to help create greater deal value.

'While advanced analytics may require some up-front investment, they will ultimately increase deal value. They will also reduce stress for everyone involved in integration by deepening insights, increasing transparency, and accelerating timelines—and that gives advanced analytics a value that goes far beyond the bottom line.' McKinsey & Company ¹⁰

Companies have access to more data about their business performance than ever before. While relatively limited internal data is usually shared during due diligence for an M&A transaction, data analytics can harness this data to create a deeper understanding that enhances visibility, uncovers anomalies and evaluates a target more effectively.

From an M&A perspective, by delving deeper and using predictive forecasting, data analytics can reveal insights during the due diligence period which would otherwise be missed

Due diligence is evolving too

As digital transformation continues, the technology, media and telecommunications (TMT) sector has seen robust activity across the EMEA region. According to PwC¹¹, deal volume mainly comes from software, which is unsurprising given its role in driving digital transformation. However, they also highlight increased activity in digital marketplaces and advertising technology, plus interest from private equity buyers keen to invest in 5G innovation.

"We expect investor interest in TMT deals to remain strong due to the demand for digital transformation, technology, cloud computing and data-driven capabilities, which are integral to the success of companies growth strategies." PwC ¹¹

Against this backdrop, dealmakers are emphasising a target company's digital presence and, in particular, their approach to e-commerce. Understanding the target's structure and commercial process within the context of a digital ecosystem requires a nuanced approach that the traditional pillars of due diligence may not provide.

It is why, according to digital advisors, Palladium, digital due diligence now fills the gap between commercial and technical due diligence.¹²

7 need-to-know essentials of digital due diligence

With a digital presence being a prerequisite for every business and with the growth of deals in the TMT sector, it is crucial to take stock of how digital routes to market are performing. Evaluating online performance uses different KPIs and considerations compared to its offline counterpart, and applying a specific and focussed digital lens offers more profound insights than technical or commercial due diligence alone.

Digital due diligence is built on assessing a company's approach and attitude towards data-led decision-making and is increasingly core to the modern M&A process.

Factors to review include:

How sustainable is the digital business model?

Digital and e-commerce are subject to high levels of disruption, innovation and emerging trends - is the target company well-placed to respond and grow?

How is the brand perceived digitally?

What story does the data tell in terms of customer satisfaction and goodwill?

How does data inform growth opportunities?

Are data and the insights it generates appropriately used to formulate growth strategies and systematically challenge assumptions?

How is data used to identify emerging opportunities?

Is there evidence of exploiting past opportunities and a responsive framework in place?

What insights can be gleaned from digital KPIs?

Evaluate customer acquisition and retention strategies across online channels, including search engine optimisation (SEO), website traffic, social media engagement and email marketing.

Is customer data maintained and interrogated appropriately?

Check compliance with relevant privacy and data regulations such as GDPR.

How does the IT infrastructure enable digital competitiveness?

Review the investment made to date and its impact, and identify gaps for the future and its budgetary implications.

These factors form the basis for digital due diligence, but depending on the circumstances and the nature of the transaction, some aspects will carry more weight than others. Ultimately, as customers increasingly demand an efficient online experience, evaluating a target company's digital performance and attitudes is set to increase in importance in all M&A transactions.

As Palladium highlights, while due diligence can often seem like a process of uncovering hidden problems, digital due diligence should be more about finding hidden opportunities and identifying a data-informed approach to exploit them.¹²

While due diligence can often seem like a process of uncovering hidden problems, digital due diligence should be more about finding hidden opportunities and identifying a data-informed approach to exploit them.¹²

In summary

While digital adoption and transformation are a constant for companies everywhere, the ebb and flow of the geopolitical and economic landscape and evolving customer demands mean dealmakers must be prepared for new and sometimes unfamiliar opportunities.

M&A technology is a dealmaker's adaptable, always-on partner that unites the complex management of an M&A, from the initial staging phase through to post-deal integration. And for deals that don't make it over the finish line, gathering and securely storing insight on the structure and performance of both sides of the deal still brings substantial benefits that support future planning.

M&A tools are negotiation and management tools that sit at the heart of this process, with virtual data rooms forming their essential foundation. New AI technology has brought additional benefits by automating and speeding up critical operations, and now dealmakers are beginning to explore how emerging technologies such as blockchain can move automation further forward.

The continued focus on technology and media deals and the growth in digital business models mean the fundamentals of due diligence are also adapting. As a result, using digital due diligence to analyse a company's digital presence and data-informed business model is increasingly important as part of the broader due diligence process.

While some technologies and processes may significantly impact more than others, as dealmakers' needs change, M&A tools will constantly evolve. In turn, the dealmakers that adopt a mindset of curiosity and responsiveness will be best placed to uncover efficiencies, new ways of delivering value, and ultimately competitive advantage.

Sources

Technology powering the M&A process of the future

M&As in a digital world

Streamlining the M&A process

Technology shaping M&As for the future

Due diligence is evolving too

In summary

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