Q&A: M&A digitalisation trends and opportunities
July 2021 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
July 2021 Issue
FW discusses M&A digitalisation trends with Timo Klees and Clément Mengue at PwC.
FW: Could you provide an overview of how digitalisation is becoming a game changer for the M&A process? In what ways is technology upending existing processes and giving rise to new skill sets?
Klees: M&A is a time consuming and complicated process that not only requires thorough investor or target identification, risk assessment and appropriate due diligence, but also collaboration across multiple stakeholders. Time and efficiency are crucial to the success of a deal, and this is where digitalisation is proving to be a game changer, encompassing the complete M&A lifecycle from deal origination to value creation. Analytics and artificial intelligence (AI)-based insight engines can revolutionise the deal sourcing process, increasing efficiency by quickly highlighting attractive targets in high growth market sectors, assessing strategic gaps and company attractiveness. Data management and automation-based tools and data transfer can enable faster and more accurate evaluation of a target’s performance compared to its peers, and the validation of a business plan resulting in a reduction of due diligence time by roughly 30 percent. Digital solutions can help facilitate crucial steps of a post-merger integration or carve out by using AI to help automate data transfers. However, leveraging digital tools requires a cultural change impacting the deal management structure, team setup and skill sets required. Along with traditional M&A practitioners and data analysts, digital strategy and operations teams are needed who have a knowledge canvas large enough to see patterns and connect the dots between disciplines to deliver outsized enterprise value.
FW: What kinds of digital tools are available to improve deal management? What benefits do they offer?
Mengue: There are a broad range of digital tools, such as target screening engines, data integration and management software, contract management software, project management tools and so on, spanning the entire deal lifecycle. These technology tools are addressing the classic pain points of the M&A lifecycle effectively, by empowering companies to source the right deals that align with their strategy, enabling the sourcing, collection and supply of a large volume of documents or the ability to store and more quickly process confidential information, improving tracking progress of negotiation and agreements, or facilitating the integration of processes, cultures, workforce and technology. Generally, end to end deal management solutions help optimise data integration and enhance project management office activities across the deal lifecycle by coordinating interdependencies and tracking milestones across large teams. Among the key benefits are executive dashboards, transparency around activity coordination, automated reporting and insights from best practice playbooks. Another area gaining traction has been virtual collaboration tools enabling the completion of deals with remote teams, partially driven by the COVID-19 pandemic. Here we have seen a significant expansion of virtual workshop formats capable of hosting more than 60 participants globally to negotiate deal terms. Similarly, we have seen an increasing demand for drone powered and geospatial solutions to help market assets sell-side, replace site visits for asset inspection, and create digital mapping of facilities.
“We are observing the positive evolution of M&A digitalisation, but most M&A practitioners are not tapping into the full potential of digital possibilities.”
FW: Drilling down, how can artificial intelligence (AI) and machine learning (ML)-enabled applications assist with aspects such as target identification, due diligence, contract drafting and post-deal integration?
Mengue: To begin with, AI and ML can be applied throughout the M&A process. During deal sourcing, AI and ML can be employed in precision-target scoping and value analysis to highlight targets in high-growth sectors based on openness to investment, and a wide range of company signals such as R&D, executive movement, IPO activity and so on, in a semi-autonomous way. It is imperative for strategic and financial investors to redefine target sourcing by harnessing the power of AI technology and abundant unstructured data to gain a competitive edge in the limited universe of good targets. This reduces asset screening time by 50 to 60 percent. In the due diligence phase, a huge amount of data is usually required in a relatively short time. AI can make this process seamless by scanning virtual data rooms with thousands of data points in a matter of minutes, as compared to multiple days of analyst time. Meanwhile, data analytics tools can derive insights on the drivers of company growth, margin trends and factors that influence those, organisational capabilities, product portfolio, website traffic and so on. During the execution phase, AI and natural language processing can be used for automating data entry and auto-tagging documents, which help to streamline data sharing and protection, negotiation management, post contract negotiation and contract enforcement. Lastly, in the post-acquisition phase, advanced analytics can be used to help identify potential synergy opportunities, risks and hurdles to prepare for integration and execution.
FW: In your experience, what are some of the typical risks that may arise when integrating digital tools into the M&A process? What steps can dealmakers take to manage and mitigate them?
Klees: While not commonplace, three of most critical risks when implementing a digital-first M&A approach that M&A practitioners should anticipate are biases and glitches in AI-enabled tools leading to inflated or erroneous results, cyber security breaches due to the online nature of document sharing and collaboration, and hesitancy to use the digital tools or not leveraging their full potential due to lack of technical expertise. Mitigating these risks entails a system of best practices and standardised checks. Regarding biases and glitches, even the most sophisticated solutions based on AI require human intervention. It takes time to train a system, but as a human curates the output and tailors the technology, results will improve. It is important to enter the digitalisation of M&A with the discipline to focus on innovating, testing, measuring, and improving and starting again. Cyber security risks can be addressed with proven best practices such as changing passwords, tailoring permissions, and doing regular cyber due diligence to mitigate threats before they occur. Finally, proper change management techniques, including training people to use new digital solutions and clearly explaining the benefits, are instrumental to creating a culture where technology is used to its full extent. This is even more important in cases where the parties are not experienced in dealmaking.
FW: How important is it for dealmakers not to become over-reliant on technology? Given that human interaction and decision making remain fundamental to M&A transactions, how can dealmakers ensure digital tools complement rather than dominate the process?
Klees: M&A experts must remember digital is just a tool enabling them to enhance their abilities. While an algorithm can learn to extract insights and identify patterns, a glitch in the code or bias in the programme can have exponential consequences, such as automated trading causing large market sell-offs. A study carried out by Harvard Business Review in November 2020 evaluated the performance of an AI-model against 255 angel investors. The model outperformed novice investors but fared worse than experienced ones. Therefore, dealmakers must ensure that they have strong technical expertise to programme the solution, and conduct curation with the support of experts to guide the programme’s learning and, for example, map outputs to a robust knowledge graph and validate the accuracy of the insights. While human decision making is and always will be fundamental to the M&A process, digital acts as a ‘turbo-target’ to the dealmaker, empowering them rather than dominating the process. Particularly when it comes to negotiating a deal, the level of experience and the tactical behaviour of the parties is key. Thus, the decision-making process, as well as the final definition of the major legal and economic parameters of a deal, will always require human interaction.
“Proper change management techniques, including training people to use new digital solutions and clearly explaining the benefits, are instrumental to creating a culture where technology is used to its full extent.”
FW: What essential advice would you offer to dealmakers seeking to digitalise their M&A process? What considerations do they need to make when evaluating potential offerings on the market, and choosing the right solutions to meet their requirements?
Mengue: Digitalising the entire M&A process is a complex undertaking, and it is critical for dealmakers to take certain steps. First, frame the business problem and the issue to be solved, including identifying and tagging the existing gaps. Second, understand what potential technology solutions, such as AI, ML and automation tools, are available and align priorities. This can be done with a digital maturity assessment. Once the requirements are translated into a well-defined solution roadmap, determine what solutions fit the bill based on a detailed assessment and comparison of business features, technical features and pricing models. Fourth, start small and then scale. Given the nascency of such solutions, it is always advisable to start small and gradually ramp up the deployment to minimise any potential risks. Finally, consider future solution extensions of data-driven capabilities to integrate them into the M&A process.
FW: Looking ahead, how do you predict M&A digitalisation will evolve? What sophisticated innovations are we likely to see in the coming months and years?
Mengue: We are observing the positive evolution of M&A digitalisation, but most M&A practitioners are not tapping into the full potential of digital possibilities. There are multiple, potential areas for improvement, but thinking about our role in M&A, we see three key applications with high innovation potential in the near term. Linking disconnected data to create new dimensions for analysis, integrating an outside-in view on industry and company attractiveness, based on signals from competitor websites, analyst and customer reviews, locations, social media comments, blogs and forums, and AI-powered analysis of potential buyers and sellers, as well as value creation opportunities, to anticipate M&A propensity, is one of the hottest innovations we are anticipating in the near term. In the future, these intelligent M&A discovery tools and models will also be capable of analysing personality traits and work patterns required for success, for example the likelihood of deal success based on past deals data, evolution of the market and competitive landscape, quality of the leadership team and so on. Essentially, this means redefining traditional M&A playbooks by amplifying identification of proprietary deal opportunities and success patterns for investors, providing them with an edge over their competitors.
Timo Klees is a partner with PwC in Germany and heads the firm’s German distressed M&A activities. He has more than 15 years of M&A experience. Prior to joining PwC, he was a partner at KPMG, leading the distressed M&A and insolvency practice in Germany. To date, he has successfully concluded more than 60 sell-side and buy-side transactions in special situations, insolvency proceedings and dual tracks (refinancing and M&A). He can be contacted on +49 69 9585 6614 or by email: timo.klees@pwc.com.
Dr Clément Mengue is a director in PwC Germany’s deals strategy practice. He leads commercial advisory and diligence services for private equity, venture capital and corporates around technology enabled growth, digital business opportunities and investment strategies leveraging on exponential technologies and digital ecosystems. Dr Mengue supports his clients in resetting their technology enabled growth strategy from linear to exponential. He can be contacted on +49 151 629 78769 or by email: clement.mengue@pwc.com.
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