By David Silbert, Director, Seal Software
2018 was quite the year for mergers and acquisitions (M&A). At a near daily pace, global M&A activity hit an all-time high of $2.51 trillion during the first half of 2018, according to data from Thomson Reuters. Seen recently in massive transactions, such as Cigna’s acquisition of Express Scripts for $67 billion, and the $146 billion merger of Sprint and T-Mobile; large scale mergers, acquisitions and divestiture transactions are becoming commonplace in high-tech, financial services, pharma, retail and healthcare industries.
The consistent theme is one of strong companies looking to evolve and grow, often buying, selling and restructuring to maximize opportunity and valuation. While there are countless benefits to strategic mergers and acquisitions (e.g., increasing competitiveness, reducing inefficiencies, gaining intellectual property), the acquiring or merging of a company may also open the door to significant risk.
In the M&A process, the acquiring company buys all the obligations, legal liabilities and risk of the acquired company, unless otherwise negotiated. The acquiring firm needs to assess and understand these liabilities and risks across three phases:
(1) for due-diligence prior to a transaction;
(2) for valuation and related issues; and
(3) for post-transaction integration.
Provisions, such as most-favored-nation status, non-compete clauses, change of control, assignment, termination for convenience, indemnification, limitation of liability, data breach obligations, auto-renewals, and purchase incentives are just some of the many potential landmines a company might assume from its newly acquired contracts.
Historically, companies threw massive amounts of time and money at risk in the hope of preventing failed transactions. Today’s technology offers a better, more efficient method to minimize risk and increase the chance of post-transaction success.
The Greatest Risk of a Transaction is Failure
Transaction failure can occur on either end of the M&A transaction, both pre- or post-transaction. The biggest factors that lead to failure before a transaction include shareholder resistance, management, and regulatory roadblocks. For events that fail post-transaction, the most common cause is the inability to properly merge both companies’ management teams, culture, financials, and contractual relationships.
To combat this, most organizations gain an understanding of what is in their contracts by engaging a legal services firm to orchestrate contract review. This is usually a costly, manual process that requires hiring staff to read and review contracts and capture key data in spreadsheets. To do a full review could take months or even years, depending on the scale of the transaction. This is, of course, unacceptable. But even in cases where a partial review is appropriate, the cost and time involved remains a massive impediment.
Technology Can Mitigate the Risk of Transaction Failure and Add Long-Term Value
While technology will never replace legal counsel and judgment, it can certainly assist in providing the information necessary to make better business decisions in the M&A process.
First, it can cover the research and data analysis aspect of due diligence, so firms can get a deeper assessment of what makes contractual relationships strategically important or valuable. Second, it can speed up the post-transaction integration, categorizing contracts and indexing their content for searching, management, and reporting.
For example, instead of relying on static spreadsheets with outdated information, technology can provide dynamic reporting post-transaction. Arming companies with business intelligence on all inherited contractions post-transaction; even if specific, critical issues were not addressed during the due diligence phase.
This dynamic analysis further enables companies to obtain ongoing insights into contract terms and conditions that may arise post-transaction. Sometimes these issues may be driven by business needs set out in contracts, like complex and dynamic pricing structures, or may be driven by evolving regulatory mandates such as GDPR, banking regulations or IFRS revenue-recognition rules, to name just a few.
To get a head of the many potential M&A challenges, organizations must consider using advanced technologies. By leveraging the latest artificial intelligence and machine learning tool sets, financial institutions gain insight from unstructured data contained within their agreements and supporting documentation to address common use cases, such as M&A planning and post-transaction integrations.
Technology Can Drive Better, More Efficient Outcomes
Levering technology is crucial when it comes time to assessing the impact on the transaction-specific components of contracts. Helping to identify which contracts will require legal intervention, as well as the liabilities inherited as part of the transaction. This assessment may be required for tens or even hundreds of thousands of documents – a near impossibility when faced with the time and cost associated with a manual process.
For that reason, automated contract analysis is becoming the standard approach to solving this problem. Technology now drives a company’s ability to find relevant documents, collect them in a centralized repository, and analyze them to provide insight into newly acquired contracts.
Specifically, technology can crawl an organization’s network, discerning a contract from other documents, no matter the file format. Then it can immediately extract the contractual terms and provisions that affect an organization’s obligations and revenue opportunities.
Advances in artificial intelligence mean that tools can now decipher word combinations for extraction and comparison to clauses that may be written differently, but have the same intent. In this way, training the system over time with machine learning improves accuracy and increase the speed to information based on company-specific products, terms, and language.
The result is that, both pre- and post-transaction, those responsible for assessing contractual obligations can set up specific search queries for a deeper dive into the portfolio: analyzing specific contract components to directly address liabilities, obligations, regulatory compliance and corporate risk.
2018 has been one of the biggest years ever for M&A transactions, and all indications suggest that the trend will continue. Technology tools and platforms purpose-built for the M&A challenge give legal teams a fast, economical and automated way to identify and analyze key information both pre- and post-transaction.
Armed with these new tools, legal services firms and in-house legal teams should embrace solutions to improve the management of M&A transactions, decreasing efforts, time, and cost. Ultimately, the proper role of technology in the M&A process is to drive more accurate valuations and to help prevent transaction failure – an outcome everyone can applaud.