AI and big data are reshaping strategic decision making in Mergers & Acquisitions (M&A), with its utilization increasing in recent years. Currently, AI adoption in M&A processes is in its infancy, with only about 5-10% of deals incorporating AI technology. However, projections suggest a substantial surge, with an estimated 80% adoption rate in the next three years as AI models become more sophisticated in predicting market movements and identifying strategic growth opportunities.
This adoption spans across both sides of the M&A equation; the process when seeking a buyer in terms of due diligence and value creation; and the process for the buyer to assess the potential of the acquisition (risk mitigation).
In this article, we explore three ways organizations are harnessing the power of AI to drive better M&A deals, from streamlining due diligence to deriving value through advanced valuation modelling.
Table of Contents
1. Efficiency and Speed During Due Diligence
1. Efficiency and speed during due diligence.
One of the key areas where AI is making waves is in due diligence processes. Traditionally, due diligence involved labor-intensive tasks and time-consuming document reviews. However, AI-powered tools are revolutionizing this process by streamlining and enhancing the due diligence process by analyzing vast amounts of data quickly and accurately, particularly from legal and news sources. The algorithms can identify potential risks and red flags in the target company’s data, but it falls short of providing the complex analysis the human brain does. According to a recent survey, 78% of organizations achieved productivity gains from reduced manual effort and 54% saw accelerated timelines.
Virtual Data Room (VDR) AI assistants, such as those offered by DFIN (Donelley) and Intralinks, can help process large amounts of documents and datasets used in the due diligence process, highlight critical points and potential red flags at a speed and depth unattainable by human teams.
Organizations using AI tools for due diligence can save time and increase their accuracy through the process.
2. Risk Mitigation.
Through AI-powered tools, organizations can assess and mitigate risks associated with potential deals, leading to more informed decision-making. These tools can help quickly identify hidden risks, uncover financial irregularities, and simulate post-merger scenarios to assist in establishing contingency plans.
This increased transparency in the risk assessment process builds trust and confidence among the stakeholders involved throughout the M&A process. Advisors will be better equipped to make more informed decisions, or simulate various post-merger scenarios and action preventative measures earlier to minimize potential issues that can harm a deal.
Risk intelligence platforms like Quantifind’s Graphyte platform leverage AI to uncover hidden risks and enhance compliance during M&A deals.
3. Value Creation.
Beyond risk mitigation, AI unlocks hidden value in M&A deals, particularly in valuation modeling. Sell-side advisors are using AI algorithms to predict business valuations more accurately, helping entrepreneurs understand their business’s worth in the current market. It will analyze financial data, market trends, company performance, competitive response and industry benchmarks much faster and more comprehensively than traditional methods.
The predictive modeling of accretive elements of a deal (those that improve the earnings per share (EPS) of a company) or using historical data and market trends to predict future performance offers the most value. It can also eliminate subjective factors when doing an analysis and benchmarking. AI-driven models can also continuously update valuations in real-time, a significant advantage over traditional methods.
Organizations are using financial data platforms such as S&P Global Market Intelligence, Capitaliz, and FactSet who offer AI-powered tools for quicker and more comprehensive data analysis to support valuation decisions. Capitaliz, developed by an exit coaching company in Australia, can project the future value of a company.
Conclusion
Looking ahead, the future of AI in M&A is promising yet nuanced. While AI holds great potential in streamlining M&A processes, challenges such as bias, data privacy, and transparency remain. The ability to access data and the accuracy of the data is still in infant stages.
“Increasing efficiency enables you to review a greater number of deals, yet it doesn’t guarantee a better deal. While certain tasks that once required weeks of research can now be completed within an hour, it’s the value-enhancing actions you take with your extra time that counts. For example, assessing a company’s valuation isn’t the same as assessing its value. During the process, you shouldn’t overlook subjective factors completely as they can sometimes be the key value drivers for potential buyers. At STS, we often refer to them as the Rembrandts in the attic!” STS Managing Director, Michael Smith.
By collaborating with experienced advisors like STS Capital Partners, you gain access to experts with expertise in M&A transactions. We have navigated both buyer and seller perspectives and understand the balance between leveraging AI tools and incorporating human judgment for Extraordinary Exits. STS Capital understands the potential value of AI and is exploring resources to enhance our Selling to Strategics methodology to maximize our clients’ deal value.
