05 Nov 2020

A shifting landscape: digitalising M&A in EMEA

Merlin Piscitelli examines dealmakers' attitudes to the digitilisation of M&A and the benefits it can bring across the whole lifecycle of a deal


The COVID-19 global pandemic has brought economies around the world to their knees. As Europe and much of the world braces for the full impact of a second wave, many businesses that were lucky enough to withstand the first bout of lockdowns may find themselves in a different position now. Many have already filed for bankruptcy and some may soon be heading that way. Still others are seeking to explore strategies to address their sustainability through restructuring or financial repositioning. In the months ahead, there is little doubt that there will be an increase in activities around restructuring and M&A, mechanisms that can help businesses to modify their debt and improve operations. 

There are a variety of reasons why businesses look to restructure. Restructuring can assist in cutting costs, retaining talent, improving (or simply helping to maintain) a competitive advantage, reducing and consolidating debt, focusing on key products or accounts, and importantly, incorporating new technology to drive the business forward. Using new technology can be instrumental in keeping businesses afloat, particularly if they choose to restructure through the M&A route, and is often a consideration for both struggling businesses and those seeking to invest in viable businesses.

But while technology is making activities such as restructuring easier and faster to complete for all those involved, not everyone is conducting these activities the same way, or indeed as much. Technological advances have already revolutionized M&A, helping to create the virtual data room (VDR) and advancing security and efficiency exponentially from the days of the physical data room. AI is set to transform and speed up the process once again by automating repetitive tasks.

But will AI replace the need for M&A professionals entirely? No, just like digital publishing didn’t wipe out paper. However, it will require a shift in the way dealmakers think about and approach due diligence and the broader M&A life cycle. It may also help to explain why some are still holding back on adopting newer tools and technologies. According to more than 2,200 global M&A practitioners, 860 of which are based in Europe, the Middle East and Africa (EMEA), there are still some barriers to the digitalisation of these processes. So, while the global pandemic has reinforced the need for remote and virtual working practices, many, particularly in EMEA, still aren’t sure about using new tools to get their deals done.

EMEA lags behind

Findings from our report, The New State of M&A: an EMEA perspective, show that EMEA dealmakers lag behind their peers in the Americas when it comes to adopting digitally mature and technologically sophisticated M&A processes. The report shows that 67% of EMEA dealmakers say that the process at their company will have a high level of digital maturity and technological sophistication by 2025. This compares with 77% of dealmakers from the Americas who predict the same for their company and 71% who say the same of the M&A process industry wide. In APAC, the figures were 43% and 72% respectively.  

At the same time, a full 77% recognise that new technologies have the power to enable greater analytical capability in the due diligence process in five years’ time, but a staggering 83% admitted that the biggest barrier to adopting relevant digital technologies was financial or investment constraints. This was followed by data security and privacy issues and integration challenges with existing systems and tools. According to the report, company culture is also a barrier, especially in companies in the UK, France and Central and Eastern Europe. 

Let’s break these down.

AI to cut time for due diligence

Dealmakers do recognise that new technologies will shorten the time it takes to complete due diligence, what they identified as the most time-consuming phase of the process. In fact, dealmakers in EMEA see new technologies such as AI transforming the M&A process by decreasing the time it takes to perform due diligence. A full 64% believe due diligence will take less than one month by 2025 from the one to three months it takes today. Key to speeding up the process is the use of VDRs. For example, one of the most challenging and time-consuming parts of any M&A process is organising and preparing the files needed for review by potential investors or purchasers – this can take weeks and even months to perform. AI and similar technologies can streamline this process, allowing deal makers to concentrate their time and energy on other parts of the deal. In fact, 93% of EMEA practitioners surveyed said that the ability to load large volumes of data quickly is the most useful tool in restructuring situations.

Data security and privacy

It is no secret that governments around the world have struggled to regulate how businesses store and use people’s personal information. However, this is changing and doing so at pace.

The European Union was one of the first to issue comprehensive policies through the European Data Protection Directive (EDPD). This was quickly followed by the General Data Privacy Regulation (GDPR), which came into full force in 2018. The GDPR, which covers all companies that deal with any form of data of European citizens, requires businesses to protect this personal information and the privacy of its citizens. Failure to do so can result in exorbitant fines.

Across the pond, the California Consumer Privacy Act (CCPA) created new consumer rights related to the collection, processing and retention of personal information obtained by businesses in the US.  The CCPA is the first privacy regulation of its kind in the US and is expected to serve as a road map for similar policy in other states. Even India – home to 1.3 billion people – is considering legislation that would regulate how data is stored, processed and transferred.

With these protections becoming increasingly regulated, entities of all sizes need to focus on data privacy to not only attract and retain customers, but also potential investors and business partners. This is particularly important for companies that may be looking to acquire or be acquired. Likewise, global dealmakers need to quickly understand that the old ways of managing sensitive information during the M&A process are officially over.

The New State of M&A highlights the importance of these issues when it comes to the deal itself. Nearly half (41%) of practitioners in Central Eastern Europe admit to having worked on M&A transactions that have not progressed because of the concerns about a target company’s compliance with data privacy regulations. A huge 69% of EMEA practitioners expect data privacy regulation, like the GDPR, to be a very important consideration in M&A due diligence in five years’ time. This is up from only 16% today.

Environmental, social and governance

An entity’s environmental, social and governance (ESG) practices are becoming an increasingly accepted metric for investment today, especially as investors see that companies with higher ESG scores perform better than their peers.

While most practitioners in all three regions agree ESG is an important or very important consideration in M&A due diligence today, notably fewer EMEA practitioners (75%) currently say this compared to their peers in the Americas (86%) and APAC (96%). But the vast majority of EMEA dealmakers (94%) believe it will be an important or very important consideration by 2025.

With 81% of EMEA practitioners stating that they have worked on M&A transactions that have not progressed due to concerns about a target company’s ESG credentials, there is no doubt that ESG will play a significant role in whether a deal succeeds. As financial regulators in many countries consider whether to require greater disclosure from companies about the risks that they face from climate change, proof of ESG credentials is becoming a requirement in any potential combinations.

Moving forward

In an increasingly digitalised world, there are also other ways that technology can help dealmakers and their organisations move forward:

  • To streamline key activities in early deal making, dealmakers can take advantage of tools that fully automate outreach to and tracking of potential buyers of assets. These tools can not only help enable a better understanding of buyer or creditor habits, which leads to better visibility into essential business metrics, but they can also provide project status reviews, all in one place.  No longer will there be questions about how many teasers have been sent, how many NDAs are still in negotiation, or how many CIMs have been sent and declined.
  • AI and machine learning capabilities can now automatically categorise thousands of documents in minutes, allocate and index these into appropriate folders, and bulk redact sensitive information and data in seconds to ensure regulatory compliance (with the GDPR and/or the CCPA.)

Being realistic, technology can help only so much. More than one third of EMEA dealmakers said that incomplete or inaccurate deal documentation and information is the factor that slows the M&A process down the most. Additionally, survey respondents agree that making deals still depends on human soft skills, including connections, collaboration, sentiment and confidence. Interestingly, a further 47% of practitioners in the region referenced a lack of insights on buyer behaviour across mandates being the most challenging aspect of marketing an asset for sale.

Still, it is more than clear that technological innovation is moving the dial toward making the M&A process more efficient. The right technology can help, and is helping, dealmakers take control over the entire lifespan, including preparation, marketing, conducting due diligence and management of post-merger integration.

Moving forward, adopting the right technology to efficiently and effectively manage the entire M&A process will be critical for companies to not only survive but to thrive in the ‘new normal’. There is hope ahead for deals to be successful. Those that invest in their restructuring strategies will no doubt fair better than those who don’t. After all, having more accurate and time efficient data processes can only improve the bottom line. Today’s investment is tomorrow’s profit – technology can pave the way.

Merlin Piscitelli is chief revenue officer for EMEA at Datasite

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