Buying a business?
Prepare for the impact of ‘Big Data’ on M&A due diligence
‘Big Data’ is changing the face of Mergers and Acquisitions (M&A). Say goodbye to junior lawyers disappearing behind mountains of documents as digital storage confines physical “data rooms” to the pages of history. Now, despite data increasing exponentially, technology is evolving so M&A due diligence can be undertaken faster than ever before.
We consider the impact of Big Data on the due diligence process, examine existing technology and provide our view on how the process will continue to evolve.
What is ‘Big Data’?
With the rise of powerful digital technology, businesses of all sizes now collect and store unprecedented volumes of data in the cloud. The term frequently used to describe this mass of data is ‘Big Data’.
Due diligence is about assessing risks and opportunities before deciding to buy a company, so traditionally the more data, the better. Each additional piece of information could throw further light on whether to buy and the terms of any transaction. However, ‘Big Data’ can be too large to process using conventional reviewing methods. This is particularly so in an M&A context where parties work to very tight timelines.
As an example of these challenges, Norgate McLean Dolphin recently acted for a vendor in a large business sale involving over 5,000 items stored in a due diligence data room. Despite the purchaser assembling a due diligence team of over 20 people, it later admitted to reviewing only a fraction of these items in order to meet deadlines.
Dropbox and Google provide two of the most popular cloud based digital platforms used in due diligence. There are also specialist data rooms purpose built for M&A due diligence (such as Ansarada). However, we are now seeing the development of technology incorporating powerful search capability and text analytics that may begin to deliver more insightful due diligence.
This is exciting because the sheer mass of Big Data means reviewing each and every document and data set is often not feasible, efficient or cost-effective. To overcome the mass of information M&A professionals will increasingly use technology that searches documents. Think lawyers searching contracts for key words like “change of control” or “indemnity”. The result is quicker processing of large data sets and identification of relevant documents and with a higher degree of accuracy.
We expect technology to progressively incorporate more advanced analytical tools and algorithms, allowing M&A professionals to extract greater value from the available data.
In particular, we anticipate further development of predictive analytics and the ability to compare target company information against competitor or other third party information. The result may be a better ability to predict future risks, opportunities and performance of the target company thereby better equipping purchasers to negotiate and make decisions such as what price they will offer.
If used effectively, Big Data analytical tools may enable purchasers to
- obtain a more accurate picture of a business, including the stability and sustainability of its revenue streams and customer base;
- discern patterns which may lead to unique insights into a target’s customers, markets and competitors;
- quickly assess and capitalise on potential synergies;
- swiftly process vast amounts of information to detect risks and opportunities;
- extract maximum value from the purchase of the business; and
- test the likely accuracy of sale and financial forecasts provided by the target company.
In our view, it is only a matter of time before sophisticated analytical techniques are readily available and regularly used in M&A due diligence.
Businesses that quickly adapt will be well positioned to unlock valuable information that may not be available to competitors relying on traditional due diligence methods.
If you are considering buying a business (or preparing to sell) and want to know more, contact us to discuss.