Frictionless AI for M&A Due Diligence – How to use it?
- Last Updated: Jan 06, 2025
- 15 min read
- Devinderjeet Singh
M&As are all around us. Let us take some recent examples. Tech giants such as Meta and Amazon have started acquiring other players in the field to expand their prowess in the industry. Although it is a remarkable strategic move, it has garnered some unwanted attention from antitrust and regulatory agencies and has even landed businesses in trouble with the law.
In early 2022, Microsoft acquired Activision Blizzard, the publisher of wildly popular games such as Candy Crush and Call of Duty. In 2021, Microsoft also acquired the game publisher, ZeniMax Media. The deal made it the third-largest gaming company in the world.
Foreseeably, this announcement piqued the interest of the Department of Justice and the Federal Trade Commission. Only a few hours after the news came out, they decided to revisit merger guidelines to prevent any unfair practices that could affect competition in the market.
Needless to say, companies involved in M&As will have to tread very carefully. New deals of considerable size and impact – such as the one Microsoft just announced – are likely to be scrutinized heavily, and rightfully so. And this is yet another time when contracts become extremely crucial for businesses as they go through rapid changes.
Leveraging artificial intelligence for M&A due diligence can help. Let’s explore how.
Contracts Hold the Key to Ensuring Better Outcomes During M&As
It isn’t just about keeping regulators satisfied and meeting legal requirements during an M&A event. When a company merges with or absorbs another company, they have to come to an agreement on how they will operate together. Each company has different kinds of contracts with their own suppliers and customers, that too, on disparate applications.
Entire business systems need to be integrated and hundreds of due diligence queries need to be answered. Even a simple question around contract expiry dates or the locations of the latest versions of contracts can slow down M&As.
As a result, companies often find themselves grappling with a labor-intensive manual review process that requires significant time to identify key risk elements in contracts. In addition, the inability to compare third-party contract clauses to standard enterprise clause language and position increases risk exposure.
M&As are messy affairs. There’s usually very little time at hand to assess risk exposure and obligations hidden in contracts during the integration process. The problem is that When contract intelligence isn’t available, there isn’t any reliable way to assess their impact on contract compliance.
A manually driven legal review process can take months, or even years, depending on the size of the acquisition. It especially becomes extremely chaotic, since scores of contracts from two different companies need a closer evaluation, mapping, comparison etc.
Using Artificial Intelligence for M&A Due Diligence
If we were to imagine what a possible solution to the M&A problem can be, the first step must begin with contract digitization. For this, we’ll need a CLM platform that can seamlessly integrate with an existing IT ecosystem comprising data silos such as ERP, CRM, P2P, file servers.
The goal will be to connect to these systems, pull in contracts and associated documents, and allow the CLM system’s AI to extract data such as clauses, obligations, service levels, price tables and more from these unstructured sources. The ideal system should also be able to extract information from multi-column or tabularized documents authored in different languages.
Once inherited contracts are extracted, this data can be migrated to a cloud-based centralized repository to make it immediately interrogatable. This in turn will help legal reviewers shorten cycle time. If the CLM platform offers AI-led legal review capabilities, it can be leveraged to enable risk discovery within the digitized corpus of contracts. The ideal system should automatically be able to identify risk elements such as missing clauses, clause deviations, and more.
In turn, this ‘intelligence’ will enable the inheriting business entity to rapidly act on and remediate the risks that have been discovered in contracts. A best-in-class CLM platform will provide novation capabilities, which will allow reviewers to seamlessly update party information on contracts, for individual and multi-document contracts alike. The CLM’s authoring module can also be leveraged for subsequent authoring, contract negotiation, approval, signature, as well as post-signature tracking if needed.
The Scope for Contract Intelligence Beyond Due Diligence
In horizontal mergers particularly, both the companies operate in the same industry and there is a significant possibility that both have contracts with common suppliers. In that case, contractual terms may be different in each contract and there is a need to renegotiate with the suppliers.
An advanced contract management solution, with a comprehensive change management module, can enable businesses to quickly amend and rationalize supplier contracts and prevent future disputes in a completely seamless, automated manner.
Mergers and acquisitions become successful when companies can bring synchronization to their operations. The more time required to set the contracts straight, the more time it will take to streamline procedures and realize synergies and possible savings. A delay in updating contracts can even reduce the overall benefit of becoming a collaborative entity. After all, your teams should be focused on serving customers instead of worrying about contracts.
An AI-led approach that utilizes artificial intelligence for contracts can reduce the pressure of doing the grunt work of integrating and standardizing contracts manually. It can smoothen operations faster and retrospective analysis of both companies’ contracts can improve the overall way of doing business. If this sounds exciting and something that you would want to explore, get in touch with us.
Additional Resources
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