Machine learning and AI: the future of dealmaking?

May 2023 | FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

May 2023 Issue

Artificial intelligence (AI) and machine learning (ML) are having an impact on the dealmaking space, with major technological advances permanently changing the way transactions are carried out.

Acquirers are expanding their use of AI and related technologies, deploying everything from ML, augmented intelligence and natural language processing (NLP) to advanced analytics. AI and ML offer acquirers a number of advantages across the deal spectrum, including greater insights into target selection, valuation, integration and synergy realisation.

The M&A industry has proven itself to be both flexible and willing to evolve. The coronavirus (COVID-19) pandemic accelerated dealmakers’ adoption of technology, including using AI and ML to increase productivity. Digital tools are still being employed to communicate and collaborate remotely throughout the transaction process, for example.

AI and ML are now considered integral to certain aspects of M&A. AI technology, for instance, is widely used in the due diligence phase. According to a Datasite survey, more than two thirds of respondents saw due diligence as the most important success factor, yet also the most time-consuming phase, of the M&A process. But AI has the potential to dramatically speed up this process. Indeed, 61 percent of the private equity (PE) professionals who responded to the survey expect AI to shorten the average time to complete due diligence to one month or less by 2025 compared to the one to three months it currently takes.

“AI and ML will help simplify and speed up the transaction process, and reduce risk in an increasingly challenging business landscape.”

Due diligence is an intrinsically labour-intensive process, requiring vast quantities of data to be gathered, analysed and verified. When this is done manually, it can lead to gaps and opens the door to human error. It is also slow, tying up valuable resources when they are already scarce.

AI is more efficient, accurate and increases people’s productivity by freeing them up for higher value work. Virtual data rooms (VDRs), where dealmakers can share information for conducting due diligence, when powered by AI and ML can automatically categorise thousands of documents in minutes, massively accelerating the process.

AI is also capable of learning, which can benefit serial acquirers. AI algorithms can improve their accuracy with every interaction. They get more effective and more powerful each time they are used. At the same time, they help the acquirer maintain compliance with regulation such as the EU’s General Data Protection Regulation (GDPR), among others, and thus reduce some of the risks inherent in M&A.

A drawback, however, is that these types of VDRs are not often integrated with software generally used for M&A due diligence, which is a major obstacle to adoption.

According to Rusty Wiley, chief executive of Datasite: “The pandemic has dramatically disrupted deals, yet PE dealmakers have increased adoption of remote due diligence processes to continue investing. To further set themselves up for success, PE firms should evaluate solutions that can support workflow and due diligence and integrate AI and machine learning for team collaboration.”

Other areas of interest of interest for PE firms include employing AI to monitor and benchmark across their portfolio companies, and integrating transaction data as well as operational results and forecasts to improve portfolio management and exit strategies. Many portfolio companies benefit from market intelligence, whether as part of ‘buy and build’ strategies or to outperform benchmarks set by their competition. AI and ML can provide an edge.

Many PE firms are increasingly using data infrastructure and investing in AI to source deals and gain timely insights into the market. They are also using AI to support and expedite the exit process, as detailed information on the target can be stored electronically, analysed and organised by an AI system, and presented in a neat package to prospective buyers.

To gain the full benefit of the AI or ML tools at their disposal, M&A practitioners need to be comfortable using them. They should understand the essence of how these tools work. As AI and ML adoption spreads, more tools will become available, and many will operate differently.

While technology will be applied across the M&A space, it will not, certainly for the foreseeable future, fully usurp humans. Skills like negotiation, long-term strategic thinking and creative problem-solving will remain crucial for dealmakers and facilitators.

For smaller to medium-sized organisations in particular, there is also the cost to consider. AI and ML are generally expensive to implement, so larger, better capitalised firms are more likely to take advantage.

But going forward, dealmakers expect to use even more technology to conduct and execute their deals. Given mounting pressures and stakeholder expectations, AI and ML will help simplify and speed up the transaction process, and reduce risk in an increasingly challenging business landscape. While it is not without its challenges, buyers and sellers cannot ignore the potential of digital solutions to get deals done.

Richard Summerfield