Since the launch of ChatGPT, the world has been captivated by Artificial Intelligence and its possibilities. Whether AI will soon replace the human brain remains to be seen, but the benefits it brings are already of great value to many M&A firms.
The number of acquisition transactions was also at a high level in 2022 and thus such technologies seem poised to increase both the speed and efficiency of transactions. Also, the advance of these technologies has been accelerated by COVID-19. This has led to rapid adoption of (digital) technology, while dealmakers have been forced to adapt to working remotely.
The New State of M&A asked more than 2,200 dealmakers from different industries and regions the question of which technology is going to have the most impact on M&A in the next five years. Of all respondents, 30% named AI and machine learning as the development with the most impact.
Selection of potential businesses
AI can be used to identify potential acquisition candidates. This can be done, for example, by detecting information from businesses that affects their business model. For example, for an entrepreneur focused on acquiring a real estate company, AI can be used to collect different types of data that can be used to analyze the attractiveness of the acquisition.
This could include macroeconomic data, interest rates, real estate prices and business information. This would provide a multidimensional and more sophisticated picture of acquisition candidates and how they relate to business and economic conditions.
Due diligence
Currently, almost every M&A transaction uses a virtual data room (VDR). This is already a big change given the transition from physical data rooms to those in the cloud. This process can now be done even more efficiently. AI will soon be able to scan thousands of documents, reports and spreadsheets and draw a conclusion about them in no time. AI will also be able to assist well in editing confidential documents, a process that normally takes hours, if not days, is now done in no time.
This will shorten the execution of a due diligence process to a few weeks instead of months. This means that M&A firms will have more deal capacity because of the time they save with these developments.
Valuation
AI could also be used in valuing companies. In the market valuation method, various multiples, such as the EBITDA multiple, are taken from the market and then applied to the company's financial performance to arrive at a valuation.
With respect to market valuation methodology, AI could be used to extract real-time EBITDA and stock price data to create a live database of EBITDA multiples. In addition to this simple information, AI could be used to create an individualized valuation formula based on certain criteria, such as the size of the company or trends in different industries to arrive at a better valuation calculation.
A second method is the DCF analysis, in which the future free cash flows of a company are calculated and then discounted at a cost of capital. This cost rate reflects the risks associated with these cash flows. AI can help here by gathering information about these factors and thus a company's risks.
Conclusion
Advances in AI will enable M&A firms to access and analyze endless new information about businesses' economies, markets, businesses and consumers. This capability will help acquisition offices collect and process information that can be used to make decisions within M&A allowing some processes to be performed faster, more efficiently and more accurately.
In all likelihood, AI will have the most impact on market and industry data extraction, business selection, due diligence and business valuation. As the complexity of AI grows, so will its application in business processes.
