How Technology is Reshaping M&A Due Diligence

Mergers and acquisitions (M&A) due diligence used to rely on physical data rooms – secure locations filled with stacks of printed financial, administrative, and other documents – where buyers could conduct manual reviews that would take weeks or even longer.

But things have changed.

A large amount of data is now transmitted via secure online platforms, processed by complex algorithms, and then evaluated remotely by cross-functional teams, and it all takes much less time.

This technological shift has, for the most part, been driven by three market realities:

1. The volume of data and its complexity in transactions have skyrocketed.
2. Expectations for completeness have become higher, yet timelines for M&A deals are increasingly shorter.
3. More transactions mean more data, technology, and intellectual property, all of which call for more in-depth research.

To put it simply, today's M&A deals require the analysis of large data volumes to be undertaken in less time and with greater accuracy, which digital tools are well-suited to achieve since they can:

1. Automate repetitive tasks.
2. Carry out analysis at a scale and speed humans are simply unable to match.
3. Facilitate collaboration among teams operating in different parts of the world.

Understanding the Transformation of Due Diligence through Technology

Over the last few years, easy access to informative data has shifted from being an exclusive activity to becoming a necessity, particularly in the due diligence process.

And there are several reasons for this, namely:

1. Growing need for data

Organizations need data as a tool to tackle issues and so have to face the fact that large volumes of information must be managed

2. Enhanced data access and friendly user experience

Users have become comfortable working with data because they know that data and technology solutions make this process simple, less error-prone, and simply painless.

3. The need to help people to use analytics to discover solutions on their own

In addition to using analytics to respond to client inquiries, organizations also need to enable users to undertake their own research because when self-service options are available to clients, investors, or constituents, this is a win-win situation.

General Benefits of Improved Data Quality in the Due Diligence Process

At Expert Network Calls (ENC), we would like to highlight three key general benefits:

1. Improving Efficiency and Speed

Modern technology substantially reduces the time required to collect, organize, and review data. Virtual data rooms (VDRs), automated document indexing, and AI-powered searches mean that:

• Thousands of documents can be uploaded and categorized in hours rather than days.
• Reviewers can instantly locate clauses, terms, or topics across large contract sets.
• Standard analyses can be pre-processed before human review, for example, to identify unusual payment terms.

2. Improving Accuracy and Reducing Risks

Manually reviewing a large number of files is highly susceptible to errors, and technology can address this by:

• Applying the same rules to each document or collection of data.
• Automatically spotting any anomalies or missing data.
• Ensuring nothing important is missed when undertaking repetitive tasks, whereas when people have to repeatedly carry out an identical checking procedure, they can easily miss something.

3. Facilitating Remote Collaboration and Access

Did you know that between 40% and 90% of M&A transactions fall short of expectations, often as a result of poor digital integration?

These days, cloud-based platforms, such as VDRs and collaboration tools like DealRoom or Midaxo, can make modern deals more efficient and safer.

Work in multiple offices and time zones simultaneously

Today, companies need tools that can work 24/7 anywhere, and cloud platforms make this easy by offering information from different locations without any delay.

• For example, in cross-border mergers, consultants in Europe can edit documents while a team in the United States reviews these.

Real-time collaboration

This can save weeks in a merger due diligence process by addressing problems immediately rather than waiting for meetings to be arranged.

• In a merger due diligence process, this means fixing issues on the spot without having to wait for people to gather to discuss the issue.

Safe access

Cloud platforms use encryption and user permissions to share sensitive files safely.

• You could think of this as a locked online vault to which only authorized people have the key.

Clear audit trails of who accessed what and when

The system registers every activity, such as views or modifications, including timestamps and user details, thus assisting with compliance and the ability to spot issues.

• This can be compared to a digital security camera for data, which is vital for audits or disputes in regulated deals.

Useful for cross-border M&A and private equity

Cloud tools help to address time differences and legal regulation disparities, thus making coordination better than using traditional methods, which means faster completion and lower costs.

• For instance, in private equity portfolios, it helps to manage multiple investments globally without chaos.

Key Technological Innovations Reshaping Due Diligence

At ENC, we believe that several key technologies are transforming the way due diligence is carried out, namely:

1. Artificial Intelligence (AI) and Machine Learning (ML)

AI-powered software can automatically examine contracts, legal documents, and financial information at speeds and scales that manual teams cannot match.

In due diligence, ML algorithms (subsets of AI) can examine previously collected data on financial transactions to identify any unusual trends that might indicate illegal or suspicious activity.

* It’s important to note, however, that AI is intended to augment and not replace expert judgment, and best practice lies in the hybrid approach:

1. AI undertakes the data analysis.
2. Professionals apply their knowledge to the AI-flagged issues.

2. Data Analytics and Visualization Tools

Advanced data analytics tools – a broader category of AI – can be used to spot hidden financial and operational patterns. These tools can be split into:

1. Advanced software for statistical analysis.
2. Business intelligence dashboards.
3. Visualization platforms.

* For example, an analytics tool can help a company to integrate sales databases, customer data, and market metrics to help a buyer to:

1. Understand a company’s revenues.
2. Spot trends, for instance, which customer segments or product lines are driving growth.

Visualization tools help to transform the data from complex analyses into easy-to-understand charts and graphs.

3. Cloud-Based Data Rooms/Virtual Data Rooms (VDRs)

What is a cloud-based data room?

A cloud-based data room (or Virtual Data Room, VDR) is a highly secure online platform for keeping, handling, and exchanging sensitive business documents. It is vital for activities such as M&A and legal due diligence.

Some examples include Ansarada, Datasite, Intralinks, iDeals, and Firmex.

Key Benefits of Virtual Data Rooms (VDRs)

1. A VDR centralizes deal data for more efficient management and version control.
2. It includes advanced features such as full-text search, user tracking, analytics, and AI for document categorization, clause review, and automating tasks like contract analysis.
3. It boasts strong encryption, granular permissions, and anonymization.

* Note: Buyers and sellers must ensure the VDR selected has strong security certifications and follows strict usage guidelines, such as limiting downloads and requiring two-factor authentication.

Cybersecurity Considerations

Cybersecurity audits are intended to evaluate a company's cybersecurity policies and practices, as well as its incident handling strategy and ability to respond to and recover from cyberattacks.

Cybersecurity audits utilize tools that include vulnerability scans, network checks, and document audits.

Important things to consider:

1. Vulnerabilities can result in breaches, service disruptions, or regulatory fines.
2. Non-adherence to data protection laws (such as GDPR and CCPA) could be a deal breaker.
3. Cyber experts are frequently part of a due diligence team, reviewing:
   • • • Security guidelines and past incidents
       • Firewalls, intrusion detection tools, and data encryption
       • Access management and staff training.

Challenges and Risks of Implementing Technology in Due Diligence

At Expert Network Calls (ENC), we have identified several challenges that companies might and actually sometimes do already encounter when adopting technology for due diligence. We consider some of the key challenges to be:

Overcoming Resistance to Change

Many experts with years of experience in handling deals could be accustomed to spreadsheets, emails, and physical files, which could lead to certain resistance to implementing new tools.

Although things change, some of the concerns could include:

• Fear that technology will “miss something important.”
• Lack of experience with new interfaces under tight deadlines.
• Belief that adopting a new system will slow the deal down.

Managing Data Privacy and Security

Due diligence could involve trade secrets, employee details, and sensitive financial data, which is why some people have valid concerns about moving to the cloud, such as:

• Where is the data kept, and under which jurisdiction?
• Is the platform compliant with regulations like GDPR, CCPA, and other local privacy laws?
• What are the conditions for downloading, printing, and sharing content?

It is important that companies thoroughly vet their technology providers, use strong encryption and access controls, and align operations with corporate compliance and information security guidelines.

Ensuring Technology Reliability and Support

Technical problems can be expensive when deal deadlines are tight, which is why businesses should take into account:

• The provider's past performance in response times and uptime.
• If they are available at crucial times, including weekends and evenings.
• How tools will be tested and implemented before they are used in deals.

Future Trends in Technology-Driven Due Diligence

The Rise of Automation and Continuous Due Diligence

Technology can help to manage the entire due diligence process, and with that said, here are some potential developments:

Robotic process automation (RPA)

An automated bot* is a software program that mimics human actions to carry out repetitive tasks on a computer and can:

1. Pull financial data from a data room, ESG data from third-party providers, and compliance records from internal systems.
2. Complete a due-diligence checklist and update a risk dashboard.

*Explanation note: Companies can either buy or build their own RPA software tools (like UiPath or Automation Anywhere) that allow bots to be created that connect to existing systems (email, databases, websites), or internal software, and then be prompted to carry out certain tasks automatically.

Continuous diligence

Businesses can continuously monitor important indicators such as revenue fluctuations, regulatory updates, or new legal issues and receive alerts when something changes.

Useful tools:

• Salesforce, among others, provides real-time monitoring of important indicators such as revenue fluctuations via dashboards and automated insights.
• The Workiva Platform is a cloud-based software-as-a-service platform that allows companies to gather, manage, and examine important data in real time.

Continuous Improvement through Feedback and Adaptation

Technologically powered due diligence is a continuous learning process.

• Machine Learning tools

If an AI model is “fed” more specific information, it can become more proficient at spotting patterns of risk or opportunity.

Businesses will have an advantage if they carefully select data from previous due diligence and feed this back into their AI systems.

• The processes will also adapt

When teams become accustomed to the new ways of working, it is possible they will find new features or new techniques. For example, they could discover that they can use advanced analytics to assist project performance following the merger.

• Post-mortem after the deal

Companies can conduct a 'post-mortem' with a particular focus on the due diligence process after a deal has closed:

• What information about the business did the team discover that they wish they had known sooner?
• Would a different method or technology have revealed this more quickly?

Conclusion: Embracing Technology for Competitive Advantage in Due Diligence

Using technology in due diligence helps organizations to close deals faster, identify risks and opportunities more effectively, and negotiate from a better position.

All in all, technology improves speed, precision, and insight, allowing teams to grasp the big picture of a target company and make better choices regarding pricing, whether to proceed, and how to move forward after the deal.

And yet, for insights to be turned into wise decisions, technology still works best when paired with experts and well-thought-out procedures that can be accessed via Expert Network aggregators, such as ENC.