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Oct 12, 2023

Biggest companies lead on AI use in M&A due diligence, survey finds

Only 8 percent of respondents say their company has so far used AI and machine learning for M&A due diligence


Larger companies are more likely than smaller firms to use artificial intelligence (AI) in researching M&A targets but the tool is so far limited in its uptake, according to research from Corporate Secretary.

Due diligence around M&A transactions has traditionally been a lengthy, labor-intensive process, and new technologies such as AI offer the potential for companies and their legal teams to reduce the reliance on manual tasks. But just 8 percent of respondents to the survey, Corporate transactions and the board: Governance across M&A, say their company has so far used AI and machine learning for M&A due diligence. Just 6 percent say their company uses Digital Intelligent Content Extraction (D-ICE).

The uptake of AI and machine learning is more pronounced at mega-cap companies, where almost three in 10 respondents (29 percent) say they have adopted such tools. That compares with just 3 percent of those at small caps and 2 percent of those at large caps. Similarly, 19 percent of respondents at mega-caps say their company uses D-ICE tools, compared with 3 percent of those at small and mid-cap firms.

Overall, the most commonly adopted technology tool for M&A due diligence is virtual data rooms, cited by 77 percent of respondents. This is followed by cloud-based tools, mentioned by 30 percent of those taking part. Nine in 10 respondents in Europe report that their company uses virtual data rooms, compared with 77 percent of those in North America. Those in Europe are also more likely (38 percent) to use cloud-based technology than those in North America (29 percent).

The use of technology, along with market conditions and changing practices, can affect how long companies devote to ensuring that an M&A transaction can and should go ahead. Overall, a quarter of respondents in the survey say the length of time spent on due diligence for M&A deals their company has been involved in increased over the past 12 months, with 9 percent saying their company has spent less time on this part of the process.

Almost three in 10 (29 percent) of those at mid-caps say their company is spending much or slightly more time on due diligence. This compares with 28 percent of those at mega-caps, 26 percent of those at large caps and 16 percent of those at small-cap firms.

The report is based on the findings from an online survey conducted between December 2022 and March 2023. A total of 211 respondents took part. You can download the full report here for free.

Due diligence was put in the spotlight recently when the US Department of Justice announced a new M&A safe harbor policy intended to encourage companies to self-report wrongdoing they uncover when preparing for a transaction.

Deputy Attorney General Lisa Monaco described the policy in remarks on October 4. ‘Going forward, acquiring companies that promptly and voluntarily disclose criminal misconduct within the safe harbor period, and that co-operate with the ensuing investigation and engage in requisite, timely and appropriate remediation, restitution and disgorgement, will receive the presumption of a declination,’ she said.

‘The last thing the department wants to do is discourage companies with effective compliance programs from lawfully acquiring companies with ineffective compliance programs and a history of misconduct. Instead, we want to incentivize the acquiring company to timely disclose misconduct uncovered during the M&A process.’

Companies wanting to qualify for the safe harbor must disclose misconduct discovered at the acquired entity within six months from the closing date, whether the misconduct was discovered before or after the acquisition. Companies will then have one year from the date of closing to fully remediate the misconduct.

Ben Maiden

Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...