Mergers and acquisitions continue to shape today’s business landscape.
To name just a few recent blockbusters: Home Depot acquired SRS Distribution for $18.25 billion; Synopsys acquired Ansys for $35 billion; and, in one of the biggest acquisitions ever in the consumer packaged goods space, Mars just announced it was acquiring Kellanova for $35.9 billion.
These astounding numbers demonstrate the critical value business leaders see in M&A activity.
Yet, as discussed in a recent webinar with Microsoft, Accenture, PacSun, and Icertis, the success of these business transactions is hardly guaranteed.
Indeed, 78% of executives say their M&A deals are not delivering value at the speed expected, according to Accenture survey data.
The critical importance of contract data during mergers and acquisitions
In the webinar, the speakers discussed one make-or-break element of M&A: Data.
“I've experienced multiple mergers and acquisitions throughout the years in different multiple companies …,” shared the representative from PacSun. “The key lesson I’ve learned is that well-organized and indexed data is the key to speed.”
This is especially true in the age of AI. M&A requires a massive amount of due diligence work ahead of time and then ongoing analysis post-M&A to extract value from the data. Poor data quality can make analyzing information difficult or, worse yet, incomplete, leaving surprises for the company post-M&A.
“In my experience, data integrity is essential,” she continued. “You could have a great system. However: Garbage in, garbage out.”
Contract data can be particularly difficult for companies to effectively analyze. Contractual commitments don’t become null and void just because a merger and acquisition occurs, meaning companies must have a firm grasp of what those commitments are – and the commercial and risk implications of them. However, many companies have contracts scattered across the enterprise, making it difficult to conduct comprehensive analysis.
Business observers have noted the detrimental impact of poor contract data in M&A. In a recent report, MGI Research reported: “In field practice, we have seen examples of companies unable to either acquire or be acquired due to a lack of contract automation. When buyers, sellers, and investors cannot get an accurate picture, and assess the full impact of all existing contracts, clauses,s, obligations and entitlements, deals often do not close.”
The contract questions that arise in divestments, mergers, and acquisitions
Analyzing those contracts can be challenging, especially if managed manually. First, surfacing all impacted agreements in filing cabinets, SharePoint sites, and desktops can be extremely laborious, and the act of digesting and reviewing those contracts–which entails separating contractual responsibilities and assigning them to the correct entity pursuant to the change-of-control and assignment clauses–is an arduous, risk-filled process, sometimes involving thousands of contracts.
Countless questions must be considered: What contracts stay with Old Entity A? What contracts move to New Entity B? Which can be assigned and transferred by operation of law? Which contracts have an express prohibition against assignment without written consent?
Target companies need to respond to a huge volume of due diligence queries on material contracts involving customers, vendors, suppliers, key employees, intellectual property and more. Even a simple question around contract expiry dates or identifying the most recent version of an executed contract can unnecessarily delay the transaction and affect the purchase price between the parties.
Finally, once a transaction is signed and closed, an acquirer must integrate the acquired company's contracts (along with executed assignment agreements, where applicable) into its own system. For companies that have been through the process, ‘seamless' is not a word they typically use to describe it.
The role of AI-Powered CLM
As more change-of-control transactions occur, AI combined with contract management software can be used to replicate what the attorneys in one major spinoff accomplished.
In 2012, a large food conglomerate divested its $18 billion North American grocery business. The divestment ultimately affected 20,000 patents, 40,000 contract documents, and 80,000 trademarks. The grocery business had to secure the duplication or consent to the assignment of more than 6,000 agreements to proceed with the spinoff—an effort that ultimately involved more than 200 legal professionals and a homegrown contract repository to manage the workload.
A decade later, AI technology has progressed so that much of this manual (contracted) labor can be handled by algorithms trained on contracts to extract key metadata, clauses, and financial data. Furthermore, the rise of enterprise-grade contract lifecycle management software means more and more companies have all their contracts in a centralized, digital repository, for an even more comprehensive review.
Conclusion
We can expect to see lots more action on the M&A and divestment front. Companies need to find the right M&A opportunities to stay out in front of market needs.
The pain and labor associated with contract assignment in connection with M&A and other change-of-control transactions like divestment can be greatly mitigated. With the right technology, companies can leverage their contracts for advantage and agility amid commercial turbulence–be it for M&A, divestments, or other strategic pivots. Without the right technology, well … expect to increase your budget for human lawyer review.
