Embracing Technology to Transform the M&A Process

It’s becoming an almost daily occurrence. You open a newspaper or pull up a website and one company is buying or merging with another. Thomson Reuters estimates M&A activity has jumped 41 percent from 2014 to 2015 year-to-date with no signs of slowing down.

Mergers and acquisitions and divestiture transactions are becoming commonplace in high-tech, financial services, pharma, retail and healthcare industries. We’ve seen it recently in the mega-deals brokered between Walgreens and Rite Aid, Marriott and Starwood, and Dell and EMC.

The consistent theme here is that strong companies are looking to evolve and grow, often buying, selling, and restructuring companies to maximize corporate opportunity and valuation. While there are countless benefits to a strategic mergers and acquisition – increasing competitiveness, reducing inefficiencies, gaining intellectual property, etc. – the acquiring or merging company is also opening the door to a significant amount of risk.

In the M&A process, the acquiring company buys all the obligations, legal liabilities and risk of the acquired company. That company needs to assess and truly understand these areas at two critical times- during the due-diligence process prior to a transaction (for valuation and related issues) and during post-acquisition integration. There are many potential landmines for the company to assume from its newly acquired contracts – many in provisions such as most favored nations, non-compete, change of control, assignment, termination for convenience, indemnification, limitation of liability, data breach obligations, auto-renewals, purchase incentives, and many more.

The Cause of Deal Failure

Deal failure can occur on either end of the M&A transaction – pre- or post-acquisition. The biggest factors that lead to failure before an acquisition include shareholder resistance, management and regulatory roadblocks. For deals that fail post-acquisition, the most comment causes are inability to properly merge both companies’ management teams, culture, financials and contractual relationships.

Most organizations gain an understanding of what is in contracts, by engaging a Legal Services firm who orchestrates a contract review. This is usually a very manual process that includes hiring expensive teams to read and review a percentage of the contracts, capturing key data in spreadsheets. To do a full review would take months or even years, depending on the scale of the acquisition- an amount of time unacceptable in the context of a fast paced acquisition.

Technology in Mergers and Acquisition (M&A)

While technology will never replace legal counsel and judgment, it can certainly assist in providing the information necessary to make better business decisions.

Technology can support the M&A process in three major ways:

  • Power the research and data analysis aspect of due diligence, so organizations can get a deeper assessment of what makes the contracts/relationships strategically important or valuable to the deal;
  • Speed the post transaction integration, categorizing contracts and indexing their contents for searching, management, and reporting. Help the team left on the back end of the transaction to more efficiently manage the 1,000s of contracts that hit their desks; and
  • Provide ongoing clarity to contract terms and conditions to better manage incentives and opportunities in contracts, complex and dynamic pricing structures and what can be evolving regulatory mandates such as Dodd Frank, Living Wills, and IFRS rev recognition rules.

Technology can help an organization, proactively assess the impact on the acquisition specific components of contracts and help identify which will require legal intervention and what liabilities they inherited as part of the purchase. This assessment may be required over 10,000s to 100,000s of documents and attempting this without technology is a near impossibility due to time and cost.

Contract Discovery and Analytics is a new classification technology legal teams leverage to get immediate insight into their newly acquired contracts. This type of software helps companies not only locate all of the contracts across various servers and systems, but also extracts the actual terms and conditions stated in each.

The benefits of Contract Discovery and Analytics include:

  • Crawling an organization’s network, discerning a contract from other documents, no matter the file format;
  • Having the capability to immediately extract the set of terms and provisions that impact obligations and revenue opportunities;
  • Being able to decipher word combinations, such that it can extract and compare clauses that may be written differently but have the same intent;
  • Training the system over time so that it knows company-specific products, terms, and language, for improving accuracy and speed;
  • And the ability to set up specific search queries to dive deep into portfolio of contracts to analyze specific contract components to directly address liabilities, obligations, regulatory compliance and corporate risk.

Conclusion

The legal industry has had a reputation for being slow to adopt new technology. However, there’s an increased willingness among many legal services firms and in house legal teams to embrace solutions to improve the ability to manage M&A transactions, to decrease time and cost, to help manage more accurate valuations and even to help prevent deal failure.

2015 was one of the biggest years ever for M&A deals and this trend will continue. Technogy gives legal teams a fast, economical and automated way to identify and analyze key information both pre- and post-deal. Armed with this information, legal teams can efficiently and effectively quantify and inform their clients of risk.

Christina Wojcik, Esq. is ‎the Vice President of Legal Services at Seal Software.