The relentless pace of business in the 21st century and the need for established businesses to find new revenue streams has led to a degree of merger and acquisition mania. Since 2000 there have been over 750,000 transactions globally at a combined value of over $75 trillion. The acquisition part of M&A is well understood – a company looking to increase revenues or capture market share by acquiring a competitor or maybe an enterprise in an adjacent market. There are many varied reasons for acquisition transactions, but some common examples are to secure new drug pipelines (pharmaceutical industry), the need to offer consumers a broader and rich set of content (media industry), to gain access to further reserves and production capabilities (energy sector) or enhanced market presence and growth opportunities (financial services). True mergers– the coming together of equals to create a larger organisation – are less common and when they do happen it is often to compete with a mutual, larger competitor. True mergers have been prevalent in professional services industries, like accountancy and law firms, but not so much in our industry. My early alma mater, Unisys, was formed between two relative equals, Burroughs and Sperry, both desperately trying to give IBM a run for their money, but again, generally true mergers are few and far between. A counter-intuitive part of M&A also needs to be considered – that of company-level divestitures where a company might split into two (sometimes more) separate legal entities. A well-known example would be HP which divested into HP Inc and HP Enterprise in 2015.
In all these cases –a merger, an acquisition, and a divestiture– there is clearly a pre-transaction phase and then a post-transaction phase. The former is generally termed the “due diligence” process, as the acquirer, merging companies or even the divestor try to understand what they are letting themselves in for with the proposed transaction. The latter is often termed post-merger integration, even though it covers acquirers and divestors, and the aim is to get to a state of BAU (business as usual) as quickly as possible.
Not unsurprisingly, a core component of the pre-transaction phase is understanding what obligations the target company might have that the acquirer needs to be aware of. These might be with suppliers, customers, regulatory authorities and so on. This is about understanding opportunities for synergies and for revenue optimization but also for how much risk is inherent or potential as well as what is the scale of obligation that the acquirer will be taken on. Much of that is tied up in a contract, the formal instantiation of a relationship between a company and its suppliers and customers. Given that the number of contracts can run into the hundreds of thousands or even millions, it would be clearly impossible to analyse the entire corpus in a due diligence phase. Historically, a legal team would be spun up, a key small percentage of the most importance buy-side and sell-side contracts identified, and that team got to work reading those contracts manually looking for those obligations and risk points. Using machine learning technology, often termed “legal AI”, has certainly helped increase the volume of contracts being brought into scope as well as improved the accuracy of results and efficiency of analysis. There are many legal AI companies out touting their capabilities to do this type of basic M&A due diligence, aka document review. The basic extractions might be core M&A specific clauses and language such as retention rights, change of control language, terminations, assignment rights and so on. Most of the document review centric tech is capable of extracting this level of data from a contract. The issue is whether they can do it at scale and with the degree of precision and recall that instills the acquirer with confidence in the obligations and risk they will be taking on with the transaction. Seal has long been able to do this, however, that is just not enough to deliver the kind of insight that an acquirer is looking for. Seal for Strategic M&A™, the advanced analytics pack, covers more topics, provides more details and ultimately delivers answers. It does not just answer the question of whether there is an assignment clause in the contract, for example, it dives into the clause and guides on the specifics of the clause – are there circumstances where it is non-assignable, is there a carveout, is prior written consent required? And it does it at scale across tens of thousands of contracts and both third-party paper as well as on your own paper. Seal is driving critical, actionable information without the need for deep subject matter expertise. Each topic has multiple sub-topics which Seal can surface.
For organizations needing to do due diligence at scale with a degree of accuracy, Seal has been an obvious choice. We have seen a significant uptick in investment which has paralleled the growth in M&A transactions.
That is, however, only half the story. Basic doc review is where the majority of the legal AI industry is at right now. Seal though addresses the equally important phase of the transaction, the post-merger integration. Which contracts does the merged company need to keep, which to cancel, which contracts do you carry forward? Which ones are duplicative in terms of suppliers? Which terms are better in contracts with mutual suppliers? Which need re-papering? And so on. This is the prosaic, post-honeymoon work which is a drudge for the legal teams from both sides of the businesses. Seal’s AI technology accelerates the understanding of how to get to a BAU state more quickly. And importantly it can do this at scale. If numbers are your thing, Seal has been tested to process more than 6 million contracts in 72 hours – a level which even the largest companies in the world would not reach.
Finally, although it is less frequent as a business event, we are seeing Seal being adopted to help with divestitures. A number of the largest and highest profiles have adopted or are adopting Seal to do document review on the hundreds and thousands of contracts to determine how they should be processed going forward. Do they go to this side of the house or that? Do they need repapering as the contract can’t logically go to one side or another? Are there assignability rights in the contract? Change of control language which might determine which side of the fence the relationship (and contract) now resides?
Seal is increasingly helping the global 2000 with their M&A use cases and delivering substantive benefits by speeding up the due diligence phase. Our strategic contract analytics solutions are surfacing answers to crucial questions and addressing the post-merger integration phase which is all about “the hard yards”.
To learn more about how Seal can assist you in your M&A project listen to our on-demand webinar.