The Future of the M&A Transactions With Artificial Intelligence
For the past decades, the due diligence processes play a significant role in most, if not all, of the mergers and acquisitions (M&A) transactions. Just as it can encourage a transaction it may prevent it or even ruin it as had happened with thousands of deals. Human error -that is unavoidable and at some point, reasonable- has been one of the reasons why these transactions sometimes fail. Having said that, here is where Artificial Intelligence’s becomes a overriding tool; its principal objective is to make several processes more efficient and helps mitigate human error in certain tasks. For sure, due diligence processes cannot be replaced -at list, at this moment- but definitely they can be more efficient and here is where Artificial Intelligence (AI) focuses. Are we ready for this? Probably no at a 100%, but change is here and we must get into it.
Therefore, no one wants to make a bad deal; but, what makes a good or bad deal? Well, it depends upon several factors, one of the most important one is getting to the right price to be paid. Probably you may wonder, why talking about the price of a M&A transaction in a AI article? The answer is simple, and it is because it’s usually during the due diligence process, where the price can be set, preventing what might can be “bad” deal. Just in some specific cases, which I will not address in the present article, an as exception, the price cannot be negotiated after the due diligence process.
The due diligence process is usually an investigation process, which is commonly addressed by audit and law firms, in which they review several documents of a target company with the principal objective of identifying liabilities, risks and opportunities. Briefly, the usual due diligence process is as follow: the acquiring company requests to the target company access to certain key documents, agreements and/or other information. These documents are, generally, uploaded to a data room in which the acquiring company and its due diligence team reviews it. I must emphasize that usually only the key documents are reviewed, despite the fact that the target company has provided more information, the main reason is because reviewing all of them is time consuming and almost impossible, even if it is possible, it might be unaffordable. Therefore, according different factors lawyers choose some of these documents and proceed with the review process. Once they conclude the revision they prepare a report with the liabilities and risks of the targeted company. This report is delivered to the acquirer and sometimes share with the company to acquire.
Is common for the parties of a transaction, before they starting a due diligence process, to already have several previous negotiations (i.e terms sheet, letter of intent, etc.) in which they preliminary agree on the terms of a further agreement. Even though, the final agreement is always performed and negotiated after the due diligence process. As the Corporate Finance Institute (CFI) in their 10-step M&A process highlight, the due diligence process is usually exercised just before the execution of any definitive agreement. This is important because, as discussed before, it is after labilities and risk are identified, that the terms and conditions of a transaction are commonly renegotiated or amended, allowing the buyer and seller to have a fair and good deal.
Artificial intelligence is defined by Encyclopedia Britannica as, “… the ability of a digital computer or computer-controlled robot to perform tasks commonly associated with intelligent beings.” According the Forbes contributor Bernard Marr, “Intelligent beings are those that can adapt to changing circumstances”. In other words, the AI is the capability of a computer to execute human activities (i.e. due diligence).
Since the due diligence process is a key part of the M&A transactions, the more efficient and accurate the process, the better. Just imagine, what will happen if the parties of a M&A transaction were able to review all the necessary documents related to a company, in a short period of time and without the possibility of a human error. Definitively, companies would close better deals, with less transaction expenses, a quicker due diligence processes, fewer or non-negligence claims, among others.
AI is going is focusing on developing different tools capable of classifying and reviewing documents, including contracts and other key documents. Usually the review of just a contract can take hours of a team of lawyers and has an average cost of UD$ 1,200. Imagine if a machine can review all of the documents in just seconds, identifying key terms for a really reasonable cost and therefore a better price?
A Canadian company -Kira Systems Inc.- developed a software called Kira due diligence that uses artificial intelligence to highlight, analyze and organize documents of due diligence processes (i.e. agreements, term sheets, reports, etc.). With this technology, the number of documents that are usually reviewed in a due diligence process, can be increased and revised avoiding human mistakes. However, this software cannot execute a full due diligence by his own and it is always essential the participation of lawyers. Despite, we may be entering into a new era of due diligence in which we will forget about the long and expensive processes and will start having just a report printed by a machine and the analysis can then be performed by the audit and law firms.
Are we ready for this? The tool is already out there, and even if it sounds like far-reaching, many big law firms in the world, have already start relying in this type of software. Since late 2017, Davis Polk & Wardwell and Latham & Watkins made public, that they will be using Kira’s software. In addition, Noah Waisberg’s said in his article, Wall Street Wakes Up to Legal AI for Due Diligence, “Other major deal-making firms that have said publicly they use Kira's technology include Baker, Donelson, Bearman, Caldwell & Berkowitz; Clifford Chance; DLA Piper; and Freshfields Bruckhaus Deringer. The Toronto-based company has publicly announced deals with 14 clients since March 2016. Those are mostly law firms but also include accounting giant Deloitte, which Waisberg said has 5,000 internal users of Kira software.”
Just as the idea of a self-driving car sounded crazy and impossible. Today, we listen everyday more about of companies that are investing into building up this type of cars. For example, “Toyota Is Investing $500 Million in Uber to Get Self-Driving Cars on the Road” according to the Time Magazine, and like this, we have hundreds of companies investing on this technology. Peter Holley of the Washington post said, “Earlier this year, an AAA study found that 63 percent of U.S. drivers report feeling afraid to ride in a fully self-driving vehicle, down from 78 percent a year earlier.” As Holley states, these statistics proves that millennials and new generations are more willing to try and trust in these technologies and tools.
The above reports are just evidence that in general, AI is making changes and probably they are coming faster than we can expect. Decades ago, lawyers were experimenting the change of writing machines and computers. Then the implementation of electronic storage instead physical. Now, we are living in a new era of changes. Machines analyzing contracts and making some of our day to day tasks. Probably, this change might be more revolutionary than what computers and electronic storage where when they became popular, because we are talking that a machine will substitute some of the tasks that are made by lawyers (i.e. analyzing and reviewing contracts). Certainly, this is not only happening in the law field, it´s happening in all fields. Nonetheless, this will allow, in general, people to invest more time in things that machines cannot do, like developing new skills, or just having more time to share with important people, like family and friends.
Even if the future looks uncertain, and probably it can change more than we can expect, we can conclude the following. Companies are always looking to make their day to day operations a more efficient process, so if a machine can help, without a doubt, they will rely and invest on it. Even if a machine or software -like Kira- that use a high level of AI can execute certain activities more efficiently than humans, human action will not stop being relevant just as the intuition, feelings and other people skills, that help lawyers recommend an action plan. The implementation of AI in M&A transactions will make the process more efficient, cheaper and a lot more accurate, but even if a machine will replace some activities -usually executed by lawyers- it is important to understand that the AI is not taking our jobs, its only opening the door to a new kind system to which we have to adopt, and that will make a few tasks less time consuming. This is a new era we are facing, so we should embrace it and take advantage of the benefits it can bring.
About the Author
He has acquired extensive experience in corporate and transactional law, providing advice to several local and international companies. His work has developed in several matters such as corporate governance, notarial, and commercial transactions, including involvement in complex M & As. Recently, he has been involved in some complex M & As, including preparation of shareholder agreements, commercial agreements, joint ventures, negotiation and formalization of syndicated loans, and structuring of the corresponding guarantees.
Juan Pablo is an important piece for the firm in structuring and restructuring business and corporate groups. He has experience in planning family wealth of different familiar corporate groups. His knowledge goes beyond local companies, as he has extensive knowledge in off-shore companies and vehicles for planning family wealth, such as Panamanian Private Interest Foundations and trusts from different jurisdictions.