AI’s Role in Mergers and Acquisitions
Merger and Acquisition deals have reached a global value of over $2.5 trillion and are an imperative part of corporate, financial and commercial law.
M&A deals can range from local transactions between boutique businesses to large international take-overs of companies in all industries. With the growing value of M&A deals and the expanding development of technology, it seems like it’s time to ask the question, how one can help the other in producing more accurate and more efficient work for all sides involved?
AI is already used in areas such as due diligence and drafting of smart contracts, but how can law firms use it to its full potential when it comes to the complex closing of M&A deals? Experts say that the use of artificial intelligence can accelerate the entire process of an M&A deal, especially in the area of accounts receivable, real-time data collection, and more in-depth research of business targets.
There are two general types of Artificial Intelligence; Narrow AI and General AI. Narrow AI refers to the ability of a machine to carry out narrowly defined task through very limited artificial cognitive function. Siri is an example of Narrow AI as it is responsible for speech recognition and internet searching in order to sift through all the data possibilities. General AI has the ability to carry out more sophisticated reasoning processes through their ability to predict conclusions and courses of actions that are different from the possibilities which have been initially programmed into their database. This type of AI engages in higher-order thinking, creativity, innovation and improvisation.
Currently most of the AI which is being developed is still far from exhibiting the characteristics of a sophisticated General AI, however, Narrow AI still has the ability to completely shift the way that M&A deals are handled. There are various areas in which the utilisation of AI would make faster and more accurate.
1. Market Data Extraction
AI could be able to extract economic and sector data in real time, allowing firms to obtain a much more nuanced view of the business reality within the area they are operating in. This could lead to identifying acquisition opportunities that will likely offer a better ROI or risk-adjusted returns due to the lack of diverging market perceptions and biases.
2. Due Diligence
The incorporation of AI in the due diligence process of an M&A deal will allow for a more detailed and extensive analysis of the work that advisors such as lawyers, bankers and consultants provide. These machine learning algorithms could be potentially able to detect discrepancies between target narratives of past or future realities and can provide a new basis for further due diligence clarification and analysis.
3. Business Valuation
Another area in which AI would assist M&A deals is in the area of valuation. Through the market method of valuation, different types of multiples such as EBITDA, are taken from the market and applied to the financial performance of the company under target in order to derive a company valuation. In this way, AI could be used to extract real time EBITDA and public share price data to create a live EBITDA database. AI could also be used to create individualised valuation adjustment formulas that would be based on specific criteria for the company (size, sector etc.).
Furthermore, a DFC analysis approach could be better examined through an AI which would gather information of discount factors and risks to a company’s cash flows.
4. Company Selection
Algorithms can establish a more efficient method of identifying and tracking potential M&A targets. Having real-time tracking of targets will provide a multi-dimensional view for acquirers and allow for better understanding in how these targets react to surrounding business and economic conditions.
5. Exit Strategies
Most M&A strategies will include an exit strategy clause. AI has the ability to monitor company performance, competitor performance and the bigger picture of market conditions and can subsequently help companies plan better post-acquisition steps.
The ability for companies to analyse economies and markets while gathering and processing information which would assist in different types of M&A decisions. These can include, making core business processes faster, more efficient and more accurate. These possibilities and opportunities rely on the continuous development and expanding complexity of AI and its subsequent evolution from Narrow AI to General AI. Through its technological development, it will become increasingly valuable in business processes.
Ellie Nikolova