Artificial intelligence offers enormous potential for due diligence during M&As

The explosive arrival of ChatGPT last year marked a starting gun for the diffusion of generative artificial intelligence (AI). Transactions are already feeling the effect.

“AI has been a prominent discussion point in recent times as many companies explore opportunities that digitisation and AI can bring to their business. It is no different in the M&A [mergers and acquisitions] environment, where AI has the opportunity to change the landscape in how deal-making is carried out and how target companies are evaluated,” says Rory O’Keeffe, partner of the transaction services team at professional services firm BDO.

Traditionally bringing a transaction to market, negotiating a deal and running due diligence has been complex, time-consuming, and resource-intensive.

“Given this, M&A professionals and due diligence advisers are actively moving forward in developing their AI capabilities in order to enhance their deal-making capabilities and to best support their clients through their M&A transactions,” he says.

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For deal makers, the use of AI will allow companies to accelerate their target identification and evaluation of potential acquisitions. “We already see AI technologies used in many deal-research platforms where global M&A data is aggregated to provide insights on sectors, upcoming transactions, prospective target companies and buyer lists,” he explains.

In due diligence, AI technology has the potential to enable greater efficiency in understanding and evaluating target company data, while also deepening the sophistication of diligence being carried out.

“AI could analyse and write up findings and improve the quality and consistency of deliverables. This will provide the potential for significant time and cost savings through automating data analysis and quickly flagging anything that would require further review,” says O’Keeffe.

“Traditionally, the due diligence process starts with long lists of data requests where significant time is spent reviewing, reconciling, analysing and summarising in order to extract key insights and metrics to be considered in the context of the transaction. The potential benefits that AI can bring to this process are huge. However, it is not without risk as AI lacks human judgment and intuition, both of which are important attributes in evaluating financial metrics and other qualitative factors. The understanding of such can impact the due diligence findings and the overall deal success,” he adds.

Ireland’s transaction market is mainly mid-market, typically firms worth anywhere from €10 million to €200 million, with profits of about €2 million to €15 million. Many are on a growth path but are not yet using AI in any significant way themselves, points out George Byron, a partner in financial advisory at Deloitte who specialises in financial due diligence.

“Even larger PLCs and multinationals are just using it for the automation of repetitive tasks at present but not much more. So what businesses probably need to do in the first instance is to modernise their data,” he says.

“What is really valuable is data analytics, using big data tools and visualisation tools to support due diligence work which was previously done only on Excel. This allows you go much deeper into analysis really quickly, validating with greater accuracy, to very quickly determine if there are data gaps or to establish the robustness of the existing data. It allows you make more connections, on the buy side, spotting trends that perhaps the business itself might not be seeing.”

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AI-driven data analytics can support the sell side too. “Vendor due diligence is about coming to the deal with data that supports the sale of the business. That means data that supports the growth story and the equity story. In the current market, preparation is key. While there is plenty of capital out there, buyers are being choosy. There is also a valuations gap at the moment, so the more you can do to highlight the growth story, the more you are helping the process. Being able to bring the data out of your business to support that is more and more critical,” says Byron.

AI has already become a “game changer” in an array of financial processes, points out Fergal McAleavey, a corporate finance partner at EY. “In areas such as risk management, fraud detection, and customer service, AI algorithms analyse vast amounts of data at speeds unimaginable with traditional methods. This not only enhances accuracy but also allows for real-time decision-making. Its application could offer several benefits, however, it’s important to be aware of the potential risks and challenge,” he says.

While AI enhances efficiency, algorithms are only as good as the data they are trained on. “Biases present in historical data can lead to skewed results. Buyers need to ensure that the AI models are transparent, and they should validate the output against traditional due diligence methods. Sellers should be aware that AI-driven analyses may uncover aspects of their operations that were previously overlooked. It’s essential for sellers to conduct their own internal assessments before the due diligence process to identify and address any potential red flags. Open communication about the use of AI tools during due diligence is also crucial,” says McAleavey.

Charlie Carroll, corporate and M&A partner at A&L Goodbody and head of ALG Solutions, believes generative AI will become an integral part of M&A transactions soon. As such, law firms that invest in its capabilities ahead of the cycle will gain a competitive edge.

“Modern-day M&A transactions require clients and their advisers to handle, assess and report on ever-increasing amounts of data, and against a breadth of metrics that would have been unachievable even a decade ago,” says Carroll.

“Clients need to access, manage and analyse this data effectively to support their strategic decisions and achieve their deal goals. Forward-thinking law firms recognise that manual resources alone are no longer the singular solution to these challenges. Leading M&A law firms are therefore harnessing the power of AI technology to enhance their capabilities and efficiency for the benefit of their clients.”

Clients expect their legal advisers to provide them with the highest quality legal advice and market knowledge. Law firms want to empower their practitioners to deliver faster and deeper insights into the data, he explains.

“These are complementary efforts that, when done correctly, benefit both the law firm and the client.”

His firm has been testing Generative AI for the past year. “Generative AI can help create new insights, content, and data based on existing or new M&A transaction data, such as contracts, financial statements, data room repositories and online reports; and can marry that capability with generative output for queries on legislation, rules, codes of governance and so on. These next generative AI products are coming to the fore across many sectors, including in M&A transactions. We recently onboarded Harvey, a bespoke generative AI solution for the legal market and we are the first Irish law firm to do so,” he adds.

“Generative AI products like Harvey have the power not only to help it to automate and optimise some of the tasks that are repetitive or complex, such as identifying key terms and clauses or flagging potential issues or red flags, but just as importantly, has the power to put at the fingertips of our expert practitioners transaction information which empowers our clients to do deals.”

It is, of course, well aware of the risks and limitations of Generative AI, such as the quality, reliability, security and ethics of the generated content or data, as well as the oft-cited hallucinations that can occur.

“As we continue to evaluate the use of Generative AI in our business, we are careful to consider the training needs of our practitioners, the need to monitor and validate the outputs of Generative AI, and to use it as a tool to complement and augment our legal expertise and judgement — not replace it,” he says.

Early days for AI

Despite the hype cycle, it is still early days concerning AI and in particular generative artificial intelligence (GAI) of the kind unveiled by ChapGPT. Artificial general intelligence (AGI), which for some tech types the Holy Grail, is as yet the stuff of fantasy — but only just.

It’s why the race is on to see how the accelerating pace of tech development might affect a range of business services and processes, including M&A due diligence.

“AI is still relatively new, and the possibilities of GAI really only arrived into the public last year with the launch of ChatGPT, so it is still a work in progress,” says Elena Lillo, regulatory affairs executive at Financial Services Ireland, an Ibec group

“It is for sure transitioning from early adopters to mainstream integration. But we don’t have any data on its adoption at the moment.”

There is no regulatory framework either, although all eyes are on the EU’s forthcoming AI act, which will plug that gap. Existing GDPR and data security regulations will also hold sway, she points out.

“We know that the use of AI can identify patterns and analyse larger data sets, which would take more time and more people to otherwise do. But for interpreting results and making the final decision, there should always be a human behind it, and not just in relation to corporate transactions but in general,” she says.

“It is an evolving landscape and because of that, there are a lot of uncertainties. Firms know it will be good for them but there must also be transparency. And both sides of the deal will have to know in advance if AI technology has had some part in the decisions being taken, to safeguard against legal challenges.”