The year 2021 was truly record-breaking for global M&A deals, with deal values touching almost $6 trillion. Aggregate global M&A deal values fell by 32% in Q1 2023 from the peak a year ago. However, total M&A deal value still exceeded $1 trillion in the period and the outlook continues to remain mostly positive for the rest of the year.
A majority of M&A deals are complicated, involving staggering amounts of paperwork, poor execution, cultural mismatches, and unforeseen costs. No wonder M&A transactional teams all over the world remain busy – and in many cases, feel overwhelmed by the mountain facing them
This overwhelm directly translates into poor or inadequate due diligence on many M&A deals. When teams have to prepare multiple agreements, create a bunch of deal checklists, and assemble complicated closing binders, they are forced to spend more time on admin and take shortcuts wherever they can. Furthermore, tasks like manual contract reviews can be time-consuming and error-prone, again causing problems before, during, and after a deal is completed.
Can automation be the answer to these long-standing and common issues?
Can AI-based tools provide more comprehensive, faster, and accurate due diligence outcomes for M&A deals?
The answer is a resounding YES.
Deal Size and Contract Quantity: The Challenges of Manual Review
Typically, the larger the size of an M&A deal, the more contracts the transaction team has to review. Consider a deal with an expected value of $400 million. How many contracts are likely to be part of the deal? A few dozen? A few hundred? The answer is more likely several thousand. The client may deem 50 -100 contracts as “material” but it is more likely that the acquired company has thousands of contracts in place.
All these contracts must be reviewed as part of the due diligence process. Manually reviewing every contract can be a huge drain on the team’s time and resources. Moreover, many of the acquired company’s contracts may lie outside the usual sample set that the reviewers are used to and familiar with. It’s also highly likely that the reviewer will miss some crucial piece of information that may affect the due diligence outcomes and decisions, ultimately affect the outcome of the deal itself.
These facts show that manual reviews are not the best way to do due diligence.
So what is?
Answer: Automation.
How Automation Can Simplify Contract Reviews and Improve Due Diligence
AI technology is perhaps the best way to perform automated reviews of contracts for M&A due diligence. AI can extend the reach of reviews, not only to the most important material contracts, but to all contracts involved in the due diligence process. One example is LIBOR reviews that typically involve thousands of documents – a volume that’s simply too big for manual reviews.
AI-based review tools like Litera Kira can look at the contracts that human-based reviews may not encompass. It can also discover many risks that may be missed by manual reviews, such as most favoured nation clauses, exclusivity terms, and indemnity provisions. These risks may cause downstream problems for the acquiring firm so it’s important to review them early and comprehensively – something that is not always possible with manual reviews.
The Future of AI-based Contract Reviews
More and more law firms are now exploring automated AI-based review tools when documentation scale and volumes become problematic. That said, it is mainly the technologists and innovation teams that understand the power of automated reviews. The partners driving the deal work are still not completely on-board, so the supporters need to test and evaluate real-world document sets to drive the move to automation.
Also, an increasing number of firms are using AI-powered review on some deals. However, not many have started using AI for every deal and beyond the normal review scope. This indicates that there remains some inertia in the market. Moreover, many law firms remain happy to let their clients take a call on what constitutes material risk. Since they are still conservative about advising clients on what should be a reasonable level of review, they often don’t suggest automated reviews of a large number of contracts using technology.
The good news is that AI-assisted document review is no longer a new idea or an untested one. If anything, fast-moving technology vendors like Litera have already developed powerful AI-based review tools that automate the review process – regardless of the number of contracts involved – and help to simplify due diligence for every kind of M&A deal.
In today’s M&A environment, AI is the way forward for transactional teams and law firms to improve their services and capabilities in M&A due diligence situations.
Conclusion
If your law firm has been leaving M&A due diligence work and money on the table, the culprit may be manual reviews. As we have seen, manual processes can create a lot of problems for your firm and client. Adopting AI-based automation with a solution like Litera Kira will help you complete reviews faster so you can avoid downstream issues and complete each M&A deal faster and better than before.
