Harnessing the opportunities technology offers M&A is a challenge. David Prosser speaks to advisers and investors about new technology and its impact on the future of dealmaking and execution.
Big data, tech and AI can bring feelings of promise and fear in equal measure. But for the tech revolution to deliver, people need to understand the capabilities and limitations of both the tech that’s available now and that’s likely to be available in the future. So where are M&A advisers on the tech journey?
“The COVID-19 pandemic was an inflection point,” says Scott Moeller, professor in the practice of finance at Bayes Business School, director of its M&A Research Centre and co-author of ‘The Deal Paradox’ (see ‘Automating M&A’, below). “Many dealmakers previously felt very uncomfortable working digitally – they wanted to see the whites of their counterparties’ eyes – but they were faced with a choice between using technology or doing no deals at all.”
In truth, many of the technologies that powered M&A during the pandemic – such as video conferencing and electronic signatures – had been around for years. But the crisis opened dealmakers’ eyes to their full potential, says Moeller: “COVID-19 hugely accelerated adoption of new technology in M&A.” And that adoption is continuing at every stage of the deal process.
It starts with deal origination. Corporates mulling a deal to expand into a new territory or market, or private equity firms pursuing a roll-up strategy, must look at a world with millions of businesses. Which ones might be suitable candidates for the strategic objective? What about businesses not on the radar? Traditionally, acquirers and their advisers have tackled this challenge by keeping tabs on businesses that might be of interest one day in the future, through networking, market research and intelligence. Inevitably, that has produced only a partial view of the possibilities.
Enter technology businesses such as mnAi, a platform that uses publicly available data sets to build a massive resource. It holds 12 billion searchable data points on nine million UK companies, covering everything from financial performance to the gender diversity of boards and shareholders.
Moreover, it is updated in real time, with around 30,000 changes each day, explains John Cushing, mnAi CEO: “Our clients can build landscapes of the areas in which they’re interested.” They do this by setting parameters relating to their interests and requirements – as general or as detailed as they like. They can monitor these ‘landscapes’ over time, then fine-tune their searches when they’re ready to do a deal and want to compile shortlists. “We help clients build at the top of the funnel, and then hone their search all the way through to the bottom.”
There is plenty of activity in this marketplace. Firms such as Grata and DealCloud also provide buyers and sellers with access to curated data that allows them to monitor potential counterparties over time and to identify specific targets. Platforms such as Megabuyte and Beauhurst focus on specific areas of the market – the former on IT and software businesses, and the latter on early-stage businesses. It is no surprise that law firms are also developing their own proprietary deal databases, tracking market practice.
Private equity firms and corporate finance advisers are also developing proprietary versions of these tools. In many cases, these seek to leverage external data sources, but also to use tools such as customer relationship management software to capture all the wisdom and knowledge held internally.
“Our bespoke back office system that we built on a Dynamics platform is really important,” says George Chatzimanolis, an investment executive who heads up deal origination for Mobeus Equity Partners. “It is the data infrastructure on which our business is built.”
The idea is that anyone in the firm should be able to tap into the intelligence all their colleagues hold on a particular company, sector or market. By uniting all the records and data everyone in the business is amassing all the time – in origination, deal management and marketing – the firm’s knowledge can be made available to everyone. “It’s a single data platform that everyone can use,” Chatzimanolis adds.
The aim is to distil all the learning of the entire business, says Keely Woodley, partner and head of UK corporate finance advisory at Grant Thornton, of similar initiatives there: “How do we harness the conversations our 140 M&A advisers have every day so that this incredibly valuable proprietary knowledge can be shared and accessed instantly? That is where the business is going today.”
In other words, dealmakers are using technology to be far more disciplined in their origination efforts. Not only are they more likely to identify the widest possible range of potential buyers or sellers for a given deal, but they’re also in a position to knock ones that don’t work off the list much more quickly. By mapping the connections between companies and, above all, people in the data, the system makes it possible to identify the most direct and impactful ways to make contact.
Sounds good so far – but origination only gets you to the starting line. Can technology also play a role in improving deal execution? Absolutely, says Moeller: “The advances we’ve seen on due diligence are especially exciting, but we’re also seeing lots of progress on valuation.”
For the former, the ubiquity of virtual data rooms is one part of the story. A decade ago, conducting due diligence on a target meant visiting it in person – probably at the same time as other suitors – in order to pull one dusty lever-arch file after another off the shelf. Today, virtual data rooms – and the secure online portals through which they are accessed – enable buyers and their advisers to peruse far more data and to do so at their leisure.
Data from SS&C Intralinks shows that the average number of pages in a typical virtual data room has increased from around 29,000 in 2018 to more than 50,000 today. Buyers are getting a far more granular view of targets than ever before – particularly as advisers are also able to access broader data on businesses from multiple external sources. And virtual due diligence isn’t just about document inspection – the use of drones to look at inaccessible locations or to tour plants, say, is now commonplace.
To take advantage of such a wealth of data, advisers also need tools to process it, particularly if their deal timelines are to remain on track. Here, technologies such as natural language processing can read huge volumes of documents at speed and provide a readout of the key issues that buyers should focus on. Predictive analytics tools can project likely financial and operational performance based on today’s data. Dealmakers can even use these tools to interrogate more subjective issues – potential ESG exposures, perhaps, or any cultural concerns.
“The due diligence process has completely changed over the past five years,” says Duncan Down, a transactions services partner at Deloitte. “We use specialist analysts to support our due diligence, rather than accountants. They’re using tools such as Power BI and Tableau rather than Excel, and they’re generating incredible insight into the profit and loss.”
When it comes to valuation, meanwhile, technology provides a means to help resolve those disagreements that can so often result in parties failing to get a deal across the line. Corporate finance advisers are developing sophisticated financial models that measure standardised metrics – these might span anything from a business’s rate of recurring revenues to its customer sentiment scores. This brings more science to the valuation process; the more that is known about a business, the easier it should be to value it accordingly. And when valuations are based on data, rather than one party sticking a thumb in the air, there is less room for dispute.
But it’s not simply a question of pricing, points out Grant Thornton’s Woodley. “We’re capturing term sheets in every deal – everyone should now understand what a good term sheet looks like; what is market value and what is not.” As for buyers or sellers who refuse to abide by the science, technology can help here, too – artificial intelligence solutions enable deal parties to interpret the behaviour of the other side in order to predict their intentions. In Australia, for example, technology firm Ansarada has developed a tool it calls AI Bidder Engagement Score; it claims a 97% accuracy rate in predicting bidder behaviour from day seven of the deal onwards.
All of which should ensure deal execution proceeds more swiftly and openly than in the past – but also that work is of a higher quality. In some cases, both sides will recognise insurmountable problems at an earlier stage and cut their losses; in others, the parties should make it to completion knowing each other far better. This should help with the final piece in the jigsaw of deal success, says Deloitte’s Down: “There can now be far more focus on value creation post-completion.”
Armed with much greater insight into the companies they’re buying, acquirers can start on integration work at an earlier stage; they should have a clear idea of the value accretion opportunities from day one of the new entity.
Indeed, there is more that can be done. Some deal processes now incorporate ‘clean rooms’. These cloud-based platforms, provided by trusted third parties, enable buyers and sellers to plug into each other’s data and systems without actually sharing sensitive information. They provide the insight with which to begin designing the future state of the company even before the deal is done.
The other aspect of deal integration where technology is potentially beneficial may be even more important. Often, transactions fail because of a clash of people and culture – the two organisations simply don’t get along. At a simple level, video technologies and similar tools can help with this, enabling key figures in both organisations to get to know each other more quickly. But there is also growing interest in the field of engagement analytics – tools that capture the feelings and views of the workforce, providing leaders with the insight they need to nip problems in the bud before they derail deal success.
This issue is a reminder of something fundamental: taking people out of the deal equation simply isn’t going to be possible. As dealmakers’ enthusiasm for new tools and technologies grows, it will be important to remember this, warns partner and UK deals leader at PwC, Lucy Stapleton. “Technology alone isn’t enough to disrupt any industry,” she says. “The differentiator and real value come from our people, their experience and how they apply these technologies to solve important business problems.”
In this sense, corporate finance advisers and dealmakers are confident that technology will not replace them entirely. “All of these technologies are really about how we share our knowledge, work more efficiently and focus on the areas where we can really add value,” says Chatzimanolis.
Moeller agrees: “We’ll still need the grey hairs that reflect wisdom,” he says of the need for human experience and deal expertise. “But maybe technology will help us accumulate fewer of them along the way.”