Tech has permeated the dealmaking world – but how is it adding value to the deal process in practice?
The use of technology has become part and parcel of the M&A process. Buyers and sellers are both reaping the rewards of faster access to detailed deal information through more advanced platforms. These systems allow sellers to get better pricing for their assets while buyers can take comfort in having a more solid understanding of their targets.
Indeed, there are several ways technology is helping dealmakers on both sides of the negotiation table enhance the value of a transaction.
The exponential growth in data, aided by tech, is one factor that is adding value to the dealmaking process. One aspect of this is that the increased amount of data provides a greater number of passed deal examples, readily available to dealmakers, which can be used to quickly settle disputes.
“More information can cut on some of the arguments during negotiations,” says Roger Griesmeyer, a partner at Andrews Kurth. “A lot of times, clients just want to get to the past deal that they shook hands on and agree to the terms. So if the data says that 80% of past deals have this provision, this makes it easier for them to agree to that.”
For example, buyers and sellers have disagreed on escrow account provisions where a portion of the seller’s money is held for indemnification purposes. Using past data reduces this tension. “There are often discussions on how long money should be held in escrow. Sellers would want their money back right away and do not want to have any liability,” Griesmeyer says. “Knowing how most of the industry views escrow provisions will help resolve this issue.”
More data also helps companies find an agreeable price quicker, avoiding valuation gaps. “The ability to make better comparisons between deals can help buyers and sellers have a more informal exchange and probably lead to a much more efficient reconciliation of the deal value,” says Richard Lukaj, a senior managing director at Bank Street Group.
Knowledge is power
As well as being able to increase the speed of a deal, the tech revolution is also ensuring dealmakers are making key decisions based on a wider range of information. “Significant data that is available much faster and more efficiently allows for a more informed decision-making process,” says Matthew Epstein, managing director at Sagent Advisors.
Epstein recalls a deal that his company was trying to sell to a final group of buyers that wanted access to the company’s general ledger as part of their due diligence. A general ledger contains all the records of a company’s transactions relating to its revenue, costs, assets and liabilities, and owners’ equity.
Epstein said this access allowed the buyers to conduct customized due diligence in a compressed timeframe that would have been impossible 10-20 years ago. “Ultimately, technology promotes a more efficient market for operational assets,” Epstein says
Getting more for less
Technology has also helped to create value by facilitating the creation of a virtual, efficient and extremely open marketplace. On top of this, the ability to send information electronically to a significant number and wider set of possible buyers has opened up M&A possibilities significantly.
This is promoting increased competition for assets. “Technology provides a place for buyers and sellers where the free-flow of information eliminates many of the market inefficiencies that limited the number of buyers such that price competition suffered from the lack of liquidity,” says James Rosener, a partner at Pepper Hamilton. “Technology also gives new buyers the opportunity to build visibility in a crowded market.”
The sheer number of buyers could also increase the bargaining power for those selling their assets. “I would not go as far as to say that a buyer will pay more for a company because transactions are easier to do as a result of technology,” says Brian Rich, a managing partner at Catalyst Investors. “I am talking from the standpoint of sellers being able to do a better job of offering a business to a wider, addressable market and getting a better price.”
Being able to address a wider audience of prospective buyers using tech also has the added benefit of saving money. “If you go back 10 years, you used to have to print 100-200 books and then post them to your prospective buyers,” says Rich. “Now, of course, that never happens, and you just do everything electronically. Transaction costs have gone down.”