By Omar Janabi, Senior Director, EMEA, Merrill Corporation
In the past couple of decades, due diligence has evolved and improved, thanks in large part to the advance of technology and digitisation. Where before the process was frustrated by physical data rooms and huge volumes of paper documents, due diligence is rapidly moving into sophisticated, intelligent virtual data rooms, replete with digital content libraries, advanced analytics and robust reporting capabilities.
These advances have led to greater speed, simplicity and security across the entire due diligence process by providing practitioners with faster, more relevant information access to enable them to close – or withdraw from – deals faster. But, if due diligence is more advanced and efficient than it has been in the past, how much more advanced and efficient could the process become in the future? Can technology and digitisation truly transform due diligence? And what are the main challenges that =new technologies could resolve for more sophisticated M&A due diligence?
The need for speed
Whether M&A is part of an organisation’s growth strategy or is taking place as a one-off transaction, the pressure to be efficient in deal-making is forcing companies to look for new ways to manage the due diligence process. Many practitioners are using technology and new project management techniques to manage the due diligence process in an organised, smart way, so that they can focus on what really matters — running their business.
Our recent survey of EMEA M&A professionals found that most executives expect the due diligence process to be faster, more simple and secure; whilst providing greater capability for data analytics over the next four years. Seventy-eight percent of respondents said that due diligence – from sourcing a deal through to deal completion – will take less than three months on average in 2022, up from 64% spending less than three months in 2018. Regionally, 80% of executives in Europe believe it will take less three months (up from 72%), compared to 71% of Middle East executives (up from 48%) and 66% in Africa (up from 38%).
Our survey revealed that the single biggest challenge in due diligence that respondents believe technology could provide a solution for is being able to review and analyse hundreds and thousands of pages of contract text accurately and swiftly.
Conversely, when asked what factor slows the due diligence process down the most, the standout response among respondents across EMEA was accessing, gathering, verifying and reviewing all the documents, information and data related to a transaction. This is unsurprising, given the increasingly vast reach of necessary due diligence data and information sources in today’s M&A practice.
Regulation was also cited as an ongoing challenge; with most EMEA practitioners (66%) overall stating that they believed the EU’s General Data Protection Regulation (GDPR) has and will continue to increase acquirers’ scrutiny of the data protection policies and processes of target companies.
Big data: a likely culprit
Over the past two decades the scope of due diligence has also widened considerably. Where once a check of the financial and legal documentation was considered a good and thorough job, diligence today routinely covers human resources, information technology, environmental impacts, regulatory and compliance issues, commercial (or market) data, tax information, insurance, property, intellectual property, customer information and operations.
This information explosion has created its own challenges and creates more potential hurdles for speedy due diligence. Our data shows that the average number of pages uploaded has grown by 40% between 2017 and 2018. Who knows what other areas will fall under due diligence over the coming years, and how that will further add to the sheer volume of documentation that needs to be reviewed and intelligently analysed?
Can technology and digitisation potentially transform due diligence?
M&A due diligence is a labour-intensive process – one of the most time-intensive parts of the M&A lifecycle. Thankfully artificial intelligence (AI), specifically machine learning, is already being successfully applied in some quarters, enhancing the accuracy and speed of the review process and the expectation is that this kind of technology will help to solve, and potentially transform, the operation entirely. We are seeing in in multilingual search capabilities, improved operational flow and analytics, to name a few.
It is these technologies, individually and collectively, that can empower and better equip practitioners, ultimately enabling far greater analytical capability, speed, accuracy, security and simplicity in due diligence.
AI – the future of due diligence
Artificial intelligence is often cast as the technology that will save the world and revolutionise business. One area where AI is set to have the biggest impact is due diligence, where deals require in-depth analysis of huge amounts of data, in a short period of time.
As our survey suggests, AI can streamline that process. Virtual data rooms (VDRs), for example, may contain many thousands of documents that need to be evaluated by interested parties on the buy side. Our survey revealed that most EMEA practitioners (63%) believe new technologies will enable greater security in the due diligence process over the next five years, followed closely by enabling greater analytical capability (61%) and simplifying the entire process (45%).
Most EMEA practitioners (42%) state that they believe AI and machine learning technologies have the greatest potential to transform due diligence over the long-term, followed by data analytics (34%) and blockchain technology (15%).
Perhaps unsurprisingly, fully half of EMEA practitioners expect the use of technology in due diligence to moderately or significantly increase the number of people involved on a transaction over the next five years. Some 31% expect the numbers to stay about the same as today, and the remainder (20%) expect numbers to decrease.
Speed remains central to M&A due diligence
The longer the process runs, the higher the risk that the deal goes cold and potentially unravels. In the past decade, due diligence has accelerated, thanks in a large part to the advance of technology and digitisation. The question is just how swift the process can be in the future, as we move into 2022 and beyond.
The advance of technology and digitisation has naturally enabled practitioners to better manage information and speed up the increasingly complex operation that is due diligence. The hope is that new technologies – from AI and machine learning to data analytics – can help solve some of these organizational and access challenges and potentially transform the operation entirely.