Dealmaking (R)evolution – AI, ESG and M&A

18 months ago, at the height of Covid-19, I wrote about how the pandemic had served as a wake-up call to society on the importance of ESG, and how M&A, as an essential tool for a sustainable and “green recovery”, was becoming increasingly influenced by ESG factors in both deal sourcing and execution process, as well as in post-deal management (refer to “M&A – An Essential Tool for a Green and Sustainable Economic Recovery” –Sep 7, 2021).

ESG is no longer considered an emerging trend, but an increasingly technical, quantifiable and tactical approach to a business’ fundamental strategy, competitive positioning and value creation driver. Prior to the pandemic, dealmakers had already begun approaching transactions with a greater emphasis on “ESG positive” features. Yet, the focus was largely on the environmental ("E") criteria, with the governance ("G") and social (“S”) aspects falling somewhat by the sidelines.

When the impact of Covid-19 became more readily apparent, we began to see a gradual change in our societal mentality, with a much greater focus on the "human" impact, or the “G” and “S” considerations: access to sustainable healthcare and education, sympathy towards more vulnerable communities, employees’ mental wellness as a result the impact of the pandemic, corporate culture and specifically diversity, equity and inclusion – and the multitude of factors that constitute social equality and inclusivity.  

Artificial Intelligence – Measuring the “ESG” Factor & the New Era of M&A Execution Process

As the world is entering the new era of “AI 1.0”, M&A deal making and execution process, including the ESG factor, will also be significantly impacted. While ESG is becoming more and more quantifiable, when it comes to determining the value of an organization driven by the “S” and “G” factors, for example, the long-term moral capital or brand value as a result from the leadership position around ESG-related policies and technologies, effective and efficient of governance, inclusive culture and management/staff diversity, remains hard to quantify.

Enter: Artificial Intelligence (AI) and Machine Learning (ML)

From the overall transaction execution perspective, AI and ML can supplement or assist in due diligence exercises, company valuation analysis and evaluating some of the transaction legal documents in a similar respect. Post-acquisition, AI and ML may also help with the integration process, identifying potential synergies from both the acquirer and the target by analyzing data from both sides.

While there are plenty of ESG frameworks and standards to refer to, at present, it is largely down to the M&A professionals’ judgement to ascertain which information or criteria "matters" most. And with the pre-determined due diligence focus areas, AI and ML can hopefully provide a new perspective to analyze and quantify the incongruent and disaggregated data from vast and varying sources, that relate to the “S” and “G” elements. For example, data related to labor practice, diversity metrics, governance efficiency and social impact.

With the help from AI and ML, M&A professionals will be able to facilitate a much more efficient execution process in the future, but there are still shortfalls at present.

The “Softer Side” of M&A Dealmaking

What AI and ML cannot do (yet) is address the "softer" or "human" side of dealmaking.

AI and ML cannot replace judgement, intuition or the strategic thinking of a dealmaker who has gained years of experience working on and executing deals. The strategic thinking and judgement call is also particularly relevant when M&A deal makers need to quickly adapt to and sense the latest key market themes or capture opportunities to proactively support their clients in reshaping their business during a changing market environment. For example, in the current market, we pay special attention to industrial upgrading via digitalization, business diversification, divestment of non-core businesses, to be more resilient, among others.

As we saw through the Covid-19 pandemic, deals were still getting done, but there is significant value-add in face-to-face meetings - forming connections "in real life" and building trust among various stake holders, which is one of the most critical elements in the M&A deal making process. If we take post-merger integration/culture fit as an example, AI and ML can examine the data and represent a clear factual decision when it comes to best optimizing the combined teams, but it probably cannot advise on how two corporate cultures might work together, how employees will adjust to change, how these changes might impact productivity.

Moreover, while deal makers are facing a challenging market environment, M&A professionals must come up with much more innovative transaction structures to bridge the valuation gap between buyside and sellside and mitigate risks, either via earn out, minority deal with path to control, or contingent components, etc. Creativity is another key component of the “softer side” of the deal making.    

The human factor still plays a significant role in M&A, and this is unlikely to change. AI and ML does not consider these intangible elements, or the moral or ethical implications of such decisions. Empathy is an inherently human trait.

While there are significant advantages, there is cause for caution when using AI and ML to facilitate the M&A process. Care needs to be taken to ensure that algorithmic bias is not built into the analytical process. With the vast amounts of data being collected, data privacy too is a real concern. It’s also worth bearing in mind that no matter how well thought out, like people, AI and ML also has the capacity to make mistakes. Technology is not foolproof.

That said, make no mistake, AI and ML are here to stay, and can be a great partner in informing the M&A process, ESG aspects included.

With this in mind, and in the context of International Women’s Day, I asked ChatGPT, “How can Diversity and Inclusion benefit M&A?”.

While I’m not sure that I need to worry about being replaced by a machine just yet, you can see the power of AI and ML tools to support learning and the decision-making process.

ChatGPTs response:

Diversity and inclusion can bring numerous benefits to Mergers and Acquisitions (M&A) initiatives. Some of these benefits include:

1. Improved decision-making: A diverse group of individuals with different backgrounds, perspectives, and experiences can lead to better decision-making. This is because they bring different viewpoints to the table, leading to a more well-rounded analysis of the situation and a wider range of solutions.
2. Better representation of customers: Having a diverse team helps ensure that the company has a good understanding of its customers, as the team members have a deeper connection to different customer segments. This can lead to better product development and marketing strategies, which can drive growth.
3. Enhanced creativity and innovation: Diverse perspectives can lead to new and innovative ideas, as well as a more efficient and effective problem-solving process.
4. Increased employee engagement and satisfaction: A culture of diversity and inclusion can increase employee engagement and satisfaction, as employees feel valued and respected. This, in turn, can lead to higher productivity, lower turnover, and a better overall work environment.
5. Improved financial performance: Companies with diverse and inclusive cultures have been shown to have better financial performance, as they are able to draw from a wider pool of talent, better understand and serve a diverse customer base, and are able to tackle challenges in a more creative and effective manner.

Overall, diversity and inclusion can bring many benefits to M&A initiatives and help companies to achieve their goals more effectively.

The future is coming, and we need to be ready to embrace the uncertainties of the changing world, to capture the opportunities presented by ESG and DE&I (and AI).

As humans, we have a responsibility to wonder and be curious, to empower ourselves with the knowledge to make judgement calls with conscience, ethical values and deeper purpose. As dealmakers, we strive to contribute to creating a better world through the transactions we advise on.