Although the number of M&A deals involving software and tech-enabled companies has increased by some 3% during 2024, until recently the value of these deals was falling. This was due to multiple factors, including geopolitical tensions, inflation, and high interest rates. However, with inflation and interest rates falling in the second half of 2024, we’re now seeing deal values starting to rise again.
According to Accenture, 74% of CEOs now consider technology to be a growth enabler or source of competitive advantage in M&A. More specifically, 64% of M&A executives now believe generative AI (GenAI) will revolutionize deal processes. And this view is supported by Gartner, who cite AI as a key source of improvements in the M&A process.
One area of M&A where GenAI can play a vital role is due diligence, a key success factor in the pre-deal environment. Here, the majority of executives polled (66%) expect high or very high value from investments in GenAI.
AI Due Diligence: A Reappraisal
If you’re interested in finding out more about my take on the role of tech in the all-important due diligence phase, check out my earlier blog posts on the topics of advanced analytics, cyber due diligence, and AI in due diligence. Three years down the line, I’ve decided to revisit the third of these topics because of the increasing complexity of M&A activities – and the even greater value that AI support can now bring.
AI in Due Diligence: The Benefits
An inadequate data and reporting baseline, tight deadlines, and missed red flags are just some of the obstacles that companies face when tackling due diligence. AI can help them master these challenges. By automating the review of vast volumes of data and documents, AI (and especially natural language processing) helps increase efficiency – potentially reducing document review time by as much as 70%. Plus, the tech can recognize risks faster, significantly accelerating decision-making.
AI seamlessly integrates data examined at earlier stages of the process, enabling prior knowledge to be used for better future pattern predictions. What’s more, the tech supports a hypothesis-driven approach – with AI proposing data-based hypotheses, and human experts testing these hypotheses in interviews with relevant staff and experts. All in all, this results in enhanced deal value.
AI in Due Diligence: What You Should Bear in Mind
If you’re thinking of tapping into the benefits of AI for due diligence as part of your M&A, here are some of the key points to consider:
Reinvent talent within your team: Gain an understanding of how your generative AI can reshape your M&A team’s work – and upskill or reskill your people accordingly.
Make sure you have the necessary volume of fit-for-purpose data for training the AI model: Here, it’s vital to ensure that the tech is used responsibly and to consider that relevant data may be subject to strict NDAs.
Establish an AI-enabled, secure digital core: While some vendors incorporate AI directly into their due diligence solutions, you still need an IT infrastructure capable of delivering the necessary computing power for your AI model.
Drive continuous reinvention: Your strategy for AI in due diligence/M&A must be dynamic and designed to evolve going forward.
Don’t neglect human oversight: Despite their many benefits, AI-powered due diligence tools can still be prone to “hallucination” – for example, when it comes to detecting red flags.
Putting it all Together: Tech Due Diligence…
How you implement your tech due diligence will differ depending on whether you opt for an AI-powered or a more traditional approach. While tech due diligence and AI-powered (tech) due diligence both share the same core tasks, the former uses manual task management, and the latter leverages AI to automate large parts of the process.
In tech due diligence, the first step is to confirm the diligence framework and gather data. At this stage, you want to identify priorities and focus areas and tailor data requests to the relevant issues. Next, you focus on building the initial technology baseline. This step includes implementing the necessary platform capabilities and technical architecture.
Then, you want to take a deep dive into your technology landscape. This is the time to conduct analyses, identify opportunities for technology value creation, and find any capability gaps and risk areas across the technology baseline.
Finally, you need to focus on developing growth initiatives and financials – converting recommendations gained in the preceding steps into technology initiatives. The process concludes with compiling the final report and conducting a readout session.
…and AI-Powered (Tech) Due Diligence
As mentioned, the AI-powered approach to tech due diligence has the same steps as tech due diligence. But here AI enhances the efficiency of these steps, through automation of key procedures, such as gathering the data from the confirmed due diligence framework, technology baseline building, deep dive, and development of growth initiatives. Associated tasks include data request generation and tracking, interview questionnaires, generation of final reports, and contract analytics based on machine learning (ML) technologies.
In addition, AI supports code quality assessment. This involves analyzing the quality, structure, and maintainability of a company’s software codebase. The tech also generates preliminary findings, automatically identifying key insights and risks (such as data anomalies and potential compliance risks) at an early stage of the due diligence process.
Outsource or Invest?
Another central consideration is whether to outsource your AI-powered due diligence or handle it in house. According to Accenture, 44% of executives state that they’ve acquired companies over the last three years with a view to benefiting from the target’s AI capabilities or assets. And the trend toward AI-powered due diligence looks set to continue: 43% of executives report that they’re currently making investments in generative AI to benefit due diligence as a deal activity.
What Do You Think?
Want to find out more about tech due diligence and AI-powered tech due diligence in M&A? Then, please reach out to me. I’m also very interested to hear how you rate the value contribution of these two approaches in M&A. If you have views to share, feel free to leave a comment below.
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