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AI: The Future of M&A

From sourcing to diligence, artificial intelligence is transforming how deals are done

AI: The Future of M&A

Following the recent buzz around OpenAI’s ChatGPT, Google’s Bard and Microsoft’s upcoming Copilot, artificial intelligence and data analytics are being discussed in every industry, including financial services.

AI and data analytics are already transforming how we complete M&A deals. Traditionally, M&A has been a complex process involving demanding stakeholders, shifting expectations, lots of data crunching and tight time frames.

However, recent breakthroughs in data analytics and AI have shown the potential to significantly transform the M&A industry in the near future.

This section of the report originally appeared in the Fall 2023 edition of Middle Market DealMaker.

There is already an opportunity to streamline and automate all stages of the M&A process, making completing an M&A deal more efficient, accurate and cost-effective than ever before.

The areas that are currently benefiting most from these tools are:

PRE-DEAL VALUE CREATION: AI and data analytics can be used to create an impact on the P&L of companies by (i) optimizing business activities (e.g., optimizing supply chain management, energy and resource management, predicting maintenance or enhancing cybersecurity); and (ii) identifying new sources of revenue (e.g., by monetizing data, optimizing the use of customer data for consumer targeting, supporting complementary product development through cross-selling, etc.).

DEAL SOURCING: Where traditional methods of deal sourcing rely on researchers mapping and monitoring company activity or relationships, AI tools analyze real-time market trends and alternative data sources (e.g., website traffic, Google searches and social sentiment) to identify potential targets. This helps M&A professionals source deals more efficiently and effectively. The same tools can then be used to identify potential targets or partnerships for companies looking to utilize M&A for revenue generation, international growth or new product offerings.

DUE DILIGENCE: AI and machine learning tools are already regularly used in due diligence processes to complement and enhance preparing for and executing M&A deals. AI due diligence is used across compliance and risk assessment, information synthesis, information analysis and discovery. This is done by extracting insights from vast amounts of information, reviewing documents and data points, and writing legal documentation—all at a faster speed and with more accuracy than its human counterparts—as well as reducing risk and eliminating the potential for human error.

VALUATION AND NEGOTIATION: Where valuations are traditionally model-based, AI can improve accuracy and help predict future financial performance. AI also uses comparable analysis across much wider peer groups or previous transactions. This analysis can be applied to the target company’s financials and used to develop real-time databases serving as the valuation basis or to create valuation adjustment formulas tailored to the target and specific criteria to improve calculation quality. Also, when completing a wider analysis than traditional methods can, there is the potential to unmask additional company synergies and potential risks to ensure a smooth integration. This helps M&A professionals make more informed decisions about potential deals and negotiate better terms for clients.

AI and data analytics are already used in all aspects of M&A and will likely only be more widely available in the next five years.

AI and data analytics are already used in all aspects of M&A and will likely only be more widely available in the next five years. The tools available already have the potential to revolutionize the M&A industry by streamlining processes, reducing costs and improving decision-making. As the technology continues to evolve, we can expect to see more widespread adoption of AI in M&A processes, leading to a more efficient and effective industry.

This is why we are utilizing innovative AI and data analytics solutions to transform our offering at Alantra. We are convinced that digitalization, AI and advanced analytics, in particular, will become a critical differentiating factor in the years to come, as much as global presence or sector specialization has been in the last decade.

However, AI won’t only transform how deals are done; it will also change M&A opportunities. Companies are increasingly looking to add AI capabilities to enhance their value, regardless of the sector in which they operate. In most cases, they’re adding those capabilities through M&A. With global M&A activity down 48% in the first quarter of 2023 over the year prior and at its lowest levels since the start of the COVID-19 lockdowns, according to Dealogic, AI-related deals are behaving comparatively better. Deal activity in this segment increased by 175% compared with a year earlier in terms of value (up to $12.7 billion vs. $4.6 billion), while deal volume decreased by only 7%, according to GlobalData’s report on Mergers & Acquisitions in TMT.

Related content: Embracing Innovation in Business Development

Corporates are the driving force behind this trend—just look at Microsoft’s investment in OpenAI, Google’s $300 million investment in AI startup Anthropic or Accenture’s acquisition of Objectivity, which Alantra advised on. Comparatively, PE firms only completed 28 AI deals in Q1 2023, worth $432.3 million (vs. $6.8 billion in Q1 2022). The remaining deals were completed by corporates.

We’ll continue to closely monitor this rapidly evolving space, but we believe that AI is additive to advisors in M&A processes. While AI can provide valuable insights, it’s ultimately up to individuals to make the final decision on whether to pursue an acquisition or not. Therefore, a combination of human expertise and AI-powered analytics is likely to be the most effective approach to identifying potential targets and successfully closing deals.

Philipp Krohn leads Alantra’s U.S. operations from New York City. He was promoted to CEO of Alantra U.S. this year, after serving as head of corporate development.

Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.