Manually sifting through thousands of contracts takes considerable time and resources—two things not usually available during a merger or acquisition. Could artificial intelligence (AI) be the solution? See how new AI technology could help increase efficiencies across the M&A life cycle.
The well-worn adage “the devil is in the details” is very much relevant to mergers and acquisitions (M&A). That’s because, based on our experience, about half of all corporate contracts have conditions that restrict assignability. And parties involved in transactions can benefit from knowing if contracts will need to be renegotiated or terminated to reach desired results and justify the deal price.
If you think these details seem trivial, think again. Because contract clauses can be costly. And until recently, the only way to assess the extent of potential liabilities and opportunities lurking in contracts was to manually review thousands of agreements and record key terms and provisions. That’s a slow and tedious process that requires considerable resources and time—factors that may not be present while preparing for an M&A transaction.
But those days may be over. Advances in cognitive technology—such as artificial intelligence (AI) software—now enable the rapid identification and extraction of key provisions through review of thousands of contracts and other documents within a few weeks’ time.
Having a provider on your deal team that specialises in deal strategy and can leverage state-of-the-art technology can enable you to markedly speed up the M&A process and free up resources. Further, the use of cognitive technology is becoming more accurate, limiting human tendencies to tire, get distracted, or overlook information.
But it’s also important to note that advanced technology isn’t a substitute for people. Rather, it’s a force multiplier that allows people to turbocharge their work—and get deals done more quickly, more efficiently, and often at a lower cost.
Let’s take a closer look at how new technologies can increase efficiencies across the M&A life cycle.
The review of key supplier contracts is a common task performed during financial due diligence. In the past, this process was handled manually: Reviewers sifted through documents looking for supplier contracts and capturing key provisions, such as take-or-pay requirements, renewal dates, and fixed fee amounts. While pricing information is often redacted or scrubbed in the contracts during due diligence, assignability provisions have been aggregated and summarised manually by due diligence teams for years.
Today, this data can be pulled through software and put into a visualised format to show the buyer the financial exposure and costs associated with the contracts that come with the transaction. The process is far quicker and more accurate than manual review.
"One company we worked with recently spent eight weeks (and $400,000) and had nine reviewers combing through more than 1,000 contracts. That work could have been handled in no more than three weeks for approximately 20 percent of the cost had the company brought in the right adviser to leverage available technology for their contract review."
Contracts are often a window into supplier and customer relationships, which can be pivotal in a merger or acquisition. Due to time constraints, the prior approach to reviewing contracts relied on sampling some contracts and extrapolating company-wide results.
New AI technology, however, shifts the prior balance between limited time and the desire to plan, understand, and mitigate risk. These new technologies enable a more comprehensive view in the same—if not shorter—time period, enabling analysis to go beyond just review and into helping plan next steps. This enables companies involved in a deal to better realise synergies and address obstacles immediately upon close.
The highest potential for risk is often seen with corporate divestitures because companies increasingly bundle spend and contracts across numerous divisions, creating complexity when separating a business unit.
Contracts generally aren’t business-unit specific, nor are they designed to account for an event such as a divestiture. Further, supplier contracts, particularly those related to software, typically have significant embedded restrictions of which companies often aren’t aware. But AI can help companies realise their full exposure before deciding to divest a unit.
As deal activity persists, companies can save resources and benefit from better, more accurate, and more comprehensive information embedded in contracts by leveraging the latest in cognitive technology. It’s a next-generation approach to deal making: combining strategy with technology.
Whether a company is looking to integrate or divest a business, it’s beneficial to understand the nitty-gritty details of all corporate contracts to prepare and make sure there are no hidden surprises. It can also help companies capture valuable insight into third-party and customer relationships in contracts.
To see more examples of how AI can help companies turbocharge their next merger or acquisition, download our full report.