Tools for advanced M&A – How to reduce uncertainty in transactions

D&I Quarterly Q3-Q4/2017

Posted on

4 Dec


Dittmar & Indrenius > Insight > Tools for advanced M&A – How to reduce uncertainty in transactions

2017 has witnessed strong M&A activity, with year to date figures for Europe showing increase in aggregate deal value compared to both 2015 and 2016. The outlook remains promising with a robust deal pipeline and an abundance of dry powder and strong corporate balance sheets. However, there are significant factors that continue to cause uncertainty for M&A.

TThe nature of deals is changing. Deals are getting bigger and frequently involve complex multi-jurisdictional aspects, the market players are facing increasing pressure to get the deals done in a highly competitive and unpredictable landscape. In addition, the clichéd phrase “every company is a tech company” has interesting implications for transactions; the value of companies more often lies in intangible assets, making the valuation more challenging and expanding the scope of due diligence to complicated issues involving technical, IPR and data privacy matters. Ultimately, all of these factors contribute to the parties in M&A transactions facing growing uncertainty in an increasingly complex world – and we did not even mention the rapidly changing political and regulatory landscape! Against this background, it is vital that all parties involved in M&A make the most of tools which help to reduce uncertainty and enable focus on issues that really matter.

Comfort through M&A Insurance

In broad terms, M&A insurance is a product enabling the buyer and/or the seller to transfer risks related to the transaction to the insurance market. With the help of M&A insurance, the transaction can be structured in a way that typically provides the buyer with less risk and equal or better protection, while the seller achieves the best possible price in combination with an exit with less or no risk or liabilities. The most widely used type of M&A insurance policy is W&I insurance, which insures the seller’s representation and warranties, bridging the gap between the parties in M&A negotiations on the potential post-closing erosion of value.

M&A insurance has become an appealing antidote against uncertainty and it has become a fixture on Nordic deals, especially transactions with private equity involvement. M&A insurance brings clarity to the allocation of risk and allows the parties to focus on fundamental questions. Used correctly, M&A insurance means more straightforward transaction processes reducing the time spent in negotiations. As the insurance market evolves, we also expect to see a rise in the use of opinion based insurances against specific known tax or litigation issues, complementing W&I insurance and further expanding the toolbox.

AI – the End of M&A lawyers?

AArtificial intelligence (AI) has been characterized as the most important technology of our time and its revolutionary significance to the mankind is often compared with that of steam engine or electricity. Not surprisingly, AI is already being integrated into M&A processes and can play a vital part in helping the parties to focus on what really matters. In the context of M&A, law firms have adopted AI tools in particular in the work intensive stages of due diligence which have traditionally required hundreds of hours of document review. We at Dittmar & Indrenius have introduced the Luminance® AI platform as a part of our due diligence process in order to better enable us to focus our efforts on providing added value to our clients.

“The rise of AI will highlight the significance of the remaining human factors in the M&A process, making the choice of legal advisor perhaps more essential than ever.”

Despite of the inevitable triumph of AI – and perhaps to the regret of some – M&A lawyers are not an endangered species. At least for now, the uses of AI are limited to routine tasks which do not require creativity. While AI is handling more and more routine work in transactions, the lawyers need to focus on increasingly complex issues which call for creativity, judgment and efficient communication. These are all tasks that machines are not very good at, at least not today. Consequently, the rise of AI will highlight the significance of the remaining human factors in the M&A process, making the choice of legal advisor perhaps more essential than ever.

Pablo Picasso once said that computers are useless because they can only give you answers. This observation, while perhaps somewhat exaggerated, provides insight also on the limits of AI. It is a tool for analyzing massive amounts of data and answering specific questions, not for posing them. Lawyers who figure out what problem to tackle next, or what new possibility to explore, will continue to be essential. Paraphrasing the leading AI researchers Erik Brynjolfsson and Andrew McAfee from MIT, over the next decade AI won’t replace lawyers, but lawyers who use AI will replace those who don’t.

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