After two years of record-breaking deal volume, all reports pointed to a 2017 robust with M&A activity. So far, that prediction has held. Fueled by corporate growth and low interest rates, deal volume is up 14 percent year over year, according to data gathered by PwC.
In this hypercompetitive market, M&A fever has cash-rich companies and oversubscribed private equity funds vying to get deals done quicker than ever before. The desire for lightning-fast sales can raise unique challenges in the context of an increasingly complicated and risk-laden compliance landscape.
These newfound pressures add to the complexity of the closing process, and have made technology ubiquitous throughout the deal as a means of speeding the process while ensuring compliance and due diligence are properly addressed.
This article touches on the current landscape and recent developments of compliance and technology in the M&A space, and outlines considerations for law firms and others who manage—and seek to streamline—the deal-making process.
Compliance Risk Management Takes Center Stage
Under increasing regulatory scrutiny domestically and abroad, compliance risk management plays an increasingly central role in the M&A process. Acquirers must vet targets carefully to minimize the risk of taking aboard compliance-related liabilities in a merger. This is no easy task, given the characteristics and range of liabilities are always changing.
For example, the SEC has undertaken a broadening of their oversight duties in the wake of the financial crisis and subsequent Dodd-Frank legislation. The rising number of cross-border deals bring successor liability under the Foreign Corrupt Practices Act to the fore as an issue of expanding concern, and one which has been a focus of the SEC and others for over a decade. Cybersecurity compliance, one of the fastest-changing and most critically important areas in the world of M&A, has also become a primary concern of the SEC in recent years.
Not only is the SEC of concern when considering compliance risk management, their actions also help shape the general best practices across many industries. These best practices can mean the difference between a good deal and a failed one.
While there are many high-profile examples of deal failures associated with improper or incomplete due diligence, it is important to remember that for every such example there are many others that didn’t make headlines but still severely impacted companies. Such failures can be especially damaging for smaller ventures without the resources to buffer bad outcomes.
A Tsunami of Data
Data is a blessing and a curse. With greater data, an acquirer can know more than ever before about the firms they purchase. However, nothing complicates the entire M&A process more—especially the due diligence and compliance components—than the sheer volume of data it is now necessary to comb through during a deal.
The amount of data companies produce has doubled in the last two years, and is forecasted to double again in two years, according to research by Deloitte. Increases in email and electronic file volumes are one factor, but social media has created an explosion of additional data that must be considered in a deal, from company Facebook and Twitter profiles to reviews on sites like Glassdoor. This new type of data has led to a multitude of commercial and reputational due diligence capabilities that were not feasible a generation ago.
Enter Virtual Data Rooms
Now widely embraced, virtual data rooms, or VDRs, arose in the early 2000s and were M&A’s first major foray into the digital world. The rise in the adoption rate of VDRs parallels the growth in the volume and complexity of data to analyze.
VDRs have replaced physical law firm deal rooms, replete with their stuffed accordion folders, allowing secure access to all documents related to an acquisition. At their core, VDRs streamline communications between all parties by providing a single online destination that can be accessed 24/7 from the computers and mobile devices of bidders and sellers anywhere in the world. This capability was just the first wedge of the digital transformation that is currently underway in the M&A space.
The VDR sector includes traditional providers, but there are also many newcomers disrupting the market with impactful technology enhancements. Most providers, even those industry stalwarts, typically offer e-readers, redlining technology for editing, and review technologies to make identifying and pulling critical information from document depths easier. Other offerings include automatic logs to track changes, and notifications when a new file is uploaded for review.
Given the rise of cybersecurity concerns, quality providers offer substantial and dynamic technology for securing both the documents and the digital instances themselves. These offerings allow users to manage who has access to folders and documents and limit virtual entry to certain IP addresses. Other security protocols include encrypted communication applications that meet international security and data protection standards, antivirus software and multifactor authentication.
The Future of VDRs
As deals and data grew more voluminous and complex, the need for VDRs to keep pace by evolving and developing new technology and offerings became clear to practitioners and providers alike.
Eighty percent of corporate leaders surveyed by Deloitte said data analytics to assess targets and evaluate deals will become increasingly important, and 64 percent said they had already dramatically increased their reliance on data analytics to assess deals. Meanwhile, the VDR market has experienced double-digit growth. The industry could top $1.2 trillion this year, up from a mere $628 million in 2012.
Adaptive technologies are doing more to streamline deal workflows, particularly when it comes to managing contract negotiations. This costly, deadline-driven process can be complex to control, particularly when large teams of people must weigh in on different pieces and at different stages. Today, VDR software follows a contract throughout its lifecycle, letting users save templates and clauses to ensure total compliance, and establishing workflows so important milestones are never missed.
Some additional recent VDR advances include:
API solutions that allow different technology platforms to communicate, enabling direct searches of public records, lien activity and court records. Dealmakers can securely share documents and data and, in the process, streamline workflows into one system. These solutions also allow for real-time updates to online documents, ensuring nobody is looking at outdated versions.
Sentiment trackers to uncover red flags during reputational and commercial due diligence. Often used by social media marketers and brand managers, these tools collect and sort qualitatively subjective digital records, such as posts and reviews, allowing buyers to quickly tease out a brand or company’s reputation with customers. Instead of relying merely on random samples, sentiment trackers aggregate large data volumes and make it possible for acquirers to hone in on everything from a company’s competitive market position to whether its online ordering system works well from a customer’s perspective.
Artificial intelligence (AI) solutions that automatically understand complex legal and contractual documents and pull out important details without oversight by a human. A rapidly developing technology, AI can classify and organize information in a VDR, translate documents in other languages, and even redact personal or sensitive information. One VDR provider just unveiled a robotic worker as part of their offering: a VDR analyst built on a platform of AI, natural language processing and machine learning. Not unlike Siri, but customized for data rooms, the analyst is said to understand the meaning and intent of questions and can provide fully contextual answers. What’s more, the machine grows and learns over time to become an ever more efficient “employee.”
The Future Looks Busy
As we enter the final quarter of 2017, speculation abounds regarding what 2018 could hold in the M&A market. Most reports forecast continued robust activity—with some caveats.
Deal values in the United States could reach a peak of $1.4 trillion in 2018 if pro-business legislation is pushed through, according to Baker McKenzie. Deals that may have been put on the backburner in 2016 and 2017 because of uncertainty about economic and political issues also may move forward in 2018. At the same time, outside of the domestic sphere, global transactions will continue to thrive.
For dealmakers, that means the complex negotiations with players around the world will continue at breakneck speed, feeding the need for further technology advancements to make their work fast and thorough.
And, with the compounding rate of technological change, the possibilities are endless—from eye or fingerprint recognition tools that could be used in lieu of signatures, to robots who could take over asset management and other white-collar financial jobs.
To stay abreast of the latest tools and solutions, law firms and other legal practitioners should constantly be on the lookout for more advanced technologies and align themselves with the best providers. Best practices show the need for “technology champions,” individuals or teams who stay on top of new opportunities to streamline the M&A process, maintain contact with third-party experts, and facilitate a flow of information back to their firms.
As we look to the future, the only certainty is that if a law firm doesn’t make the move to the best and most advanced technologies, others in the industry will, giving those advanced firms a competitive advantage and allowing them to close their deals first.
John Weber is president and CEO of Legal Information Services, a business area of Wolters Kluwer Governance, Risk and Compliance. He leads a portfolio of market-leading solutions, including CT Corporation.