NOTE: This top introduction is redundant from Parts 1 & 2. The new text begins below the experts photo.
Technology is now widespread throughout all stages of the M&A process, from targeting to due diligence. It has transformed the way that transactions are done. The use of different platforms is facilitating the quick delivery of deal information to a wider group of participants. As a result, crucial stages in a transaction can now be done remotely and simultaneously by several deal parties.
Technology is also affecting other areas of the deal process. Negotiations between buyers and sellers can be less contentious with access to past data. With advanced technology, it has become easy to compare past deals and take away precedents that these parties can agree on and apply to current transactions.
However, despite the advantages, there remain risks. The proliferation of information has heightened the potential for possible leaks of confidential deal data. On top of this, sector-specific issues, particularly in tech-heavy industries, have their own regulatory nuances dealmakers must navigate.
With all these factors coming into prominence, Mergermarket and Vintage gathered five experts to discuss the growing role of technology in the M&A process. In particular, they look at how the presence of technology has unlocked value in M&A deals while tackling the issues of potential risks and regulatory scrutiny.
Q: How has technology impacted the due diligence side of a deal? How has technology as an area to scrutinize in due diligence increased in prominence?
Richard Lukaj: Some security tools have been introduced to protect data during the deal process. In the past, a person’s physical presence was needed to protect information from being taken, whereas now parties can decide virtually who gets to see what and who gets to download information by giving those permissions explicitly. In many ways, it has made the due diligence process much more efficient and allowed deals with multiple parties to be conducted much more effectively.
The only questionable element is that it has also reduced the human interaction in deals very dramatically. As a result, there are many transactions now where parties and negotiating counterparties have very little face-to-face interaction. There have even been deals where there has never been a meeting among parties that are transacting in the deal.
Matthew Epstein: The target’s technology has become considerably more important in the due diligence process. Even some non-technology businesses have a significant technology component that has to be closely examined. For instance, businesses dealing with consumer payment data have to deal with the Payment Card Industry compliance requirements. This means checking whether the target is protecting the consumer data properly becomes a diligence item itself.
Beyond this, it becomes an issue of protecting data from any form of hacking. When it comes to infrastructure, how do companies monitor their operational assets? Are their monitoring and operation systems reliable and protected? If the technology involves corporate data, are they protecting that properly, to not expose trade secrets? Overall, many companies have various obligations to maintain their systems and processes for regulatory purposes. Every company that’s public has the Sarbanes-Oxley requirement. Are they capturing the data appropriately to make sure they’re SarbanesOxley-compliant or are they in compliance with the Anti-Money Laundering rules? These issues are extremely important for companies that have cross-border businesses.
Roger Griesmeyer: Scrutiny during due diligence also usually involves examining a target’s intellectual property (IP). Does a company own IP that is properly licensed? What are the IP risks? From a practical perspective, in running a deal, it is important to ask whether the technology works. There has to be someone independent and unbiased who is an expert and who can really go in and take a good look.
Brian Rich: There is a need to look at the social media aspect as part of the due diligence process as well. When we conduct due diligence on a company, we’re monitoring the company’s online profile, Facebook and Twitter pages, MPF score, and the Glassdoor reviews on its management team.
Q: What is the focus of regulatory scrutiny in the area of technology risk as it relates to the M&A process?
Richard Lukaj: In many respects, the regulatory compliance requirements have struggled to keep pace with technological introduction. Many of the rules and regulations, particularly for broker dealers, were designed to prevent the inappropriate use of broadcast capabilities from the investor-risk perspective. In many cases, technology is still struggling to operate in a regulatory regime that is created and governed by the basic principles of protecting the unsophisticated retail investor. But in the commercial or in the mid-market and larger transactional setting, there really aren’t unsophisticated parties involved.
Brian Rich: The type of regulation that applies is totally dependent on the kind of company being bought. The kinds of companies that we invest in are generally not subject to regulatory scrutiny, but we just participated in some wireless spectrums, which are highly regulated. I don’t think that the regulatory scrutiny has changed at all because of the changes in technology. Regulation is sector and size specific. We invest in the data center space and buyers of very large data centers might be subject to regulatory scrutiny, but probably won’t be if they are buying a smaller mid-sized one.
Roger Griesmeyer: Leaks of material, non-public information are important in terms of publicly traded companies. There is technology risk here, whether it is just about people posting deal information on Twitter, or something more nefarious than that. Some parties, including the media, want to report on deals that are in process. If there’s a tip that something’s breaking down in the transaction, they want to be the first to get it out. I don’t think that has changed in the many years of dealmaking, but now it’s an issue of just how quickly the information can be disseminated and impact a deal.
James Rosener: Yes, I agree, so much goes back and forth with the deal process now that obviously regulators are worried about data privacy. The question that needs to be asked is what are people doing to protect that information? If there was a public announcement of a major data breach, regulators would be asking everyone to beef up ways to protect data.
Matthew Epstein: The key regulatory scrutiny that I see relates to information leaking and insider trading by the linking of deals. This is not surprising given the increase in Internet-mediated communication, virtual data, and emails. Deals can also be discussed on cell phones in public spaces. We are, and have to be, very careful about confidential information for client purposes. The use of technology, while it could promote efficiency, also increases the potential for leaks and good processes need to be put in. Parties have to be very careful in sending materials and in granting access to virtual data rooms.
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