Published on January 30, 2024, 8:09 am

The Rise Of Generative Ai In M&Amp;A: Transforming Deal Making And Navigating Regulatory Landscapes

DEAL makers are increasingly utilizing artificial intelligence (AI) and generative AI tools to enhance their M&A processes, according to a report by consulting firm Bain & Co. These tools are being employed to source data, screen targets, and conduct due diligence, particularly amidst growing regulatory concerns surrounding mergers and acquisitions.

The report highlights that although only 16% of the surveyed M&A practitioners have previously relied on generative AI, a staggering 80% expect to incorporate it into their operations within the next three years. This indicates significant potential for transformative changes in how companies approach deals.

Both buyers and sellers are expected to leverage generative AI technologies, such as self-learning models capable of generating text, images, and other content. Suzanne Kumar, a vice president at Bain’s M&A practice and co-author of the report, suggests that the adoption of generative AI for decision-making purposes remains a long-term question but emphasizes an eagerness among companies to integrate this new technology into their processes.

According to the study, generative AI enables M&A professionals to identify targets that may have gone unnoticed using traditional methods. It aids in identifying deviations in contracts and focuses attention on problematic areas. Early adopters of this technology span various sectors including technology, healthcare, and finance. Typically larger companies engaging in three to five deals annually tend to be more proactive in exploring these innovations.

However beneficial these technological advances may be for deal makers, concerns still persist regarding the reliability of data supplied by generative AI systems as well as the safety of available market tools.

The Bain report also provides insights into anticipated trends and challenges within the M&A landscape. After a 15% decline resulting in total M&A activity amounting to $3.2 trillion—its lowest levels seen in a decade—the firm projects a resurgence in deal making starting from 2024 onwards. Factors contributing to last year’s decrease include high interest rates, mixed economic signals, geopolitical uncertainties, as well as diverging views on valuations between buyers and sellers.

Bain predicts that a backlog of potential deals will drive buying and selling activities in 2024. Private equity firms, which have typically held more than half of their portfolio businesses for over four years, are likely to divest their assets. This follows a slowdown in deal making throughout 2023 due to the aforementioned unprecedented challenges.

Specifically, strategic deal makers are expected to engage in more M&A transactions driven by relatively low valuations. In 2023, these players traded at a median valuation of 10.1 times their earnings before interest, taxes, depreciation, and amortization (EBITDA), marking a near 15-year low compared to 12.1 times in 2022. While exceptions include the financial services sector where valuations increased, valuations across various industries remain favorable for potential acquirers.

The anticipated decline in interest rates outlined by the Federal Reserve further supports projections for increased M&A activity. Chief Financial Officers may seize opportunities presented by lower pricing resulting from reduced interest rates.

Nevertheless, heightened regulatory uncertainty continues to loom, necessitating stress testing of planned deals among companies. Negotiations surrounding termination fees and solidifying financing plans are also becoming increasingly crucial amid this uncertain landscape.

In terms of deal structures, cash remains the primary means of payment with companies paying for 65% of deal values using cash during the first nine months of 2023. The remainder was divided between cash and stock payments or solely stock payments. Compared to the same period in 2022, there has been a slight increase in the usage of stock to fund acquisitions. It is worth noting that data on debt-raised cash is not available according to Bain’s report.

As companies navigate evolving regulatory landscapes and overcome challenges posed by economic uncertainties resulting from the pandemic, they are actively exploring ways to leverage generative AI technologies throughout their M&A activities. These tools help address inefficiencies, identify hidden opportunities, and streamline the deal-making process. With the assured growth of generative AI adoption in the coming years, the M&A landscape is poised for transformative changes driven by technological advancements that will reshape how companies approach deals and navigate regulatory environments.


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