How AI is transforming the due diligence process
Have you ever wondered how mergers and acquisitions (M&A) lawyers choose what to review during deal due diligence? In an M&A deal with a target company valued at £400 million, typical law-firm due diligence contract review is likely to cover 75 to 500 contracts. But these companies don’t have 500 contracts, they have closer to 5,000 or 10,000.
This means counsel may review under 5 per cent of the target’s contracts. Why? Because due diligence reviews are time consuming and expensive. Even a scoped-down contract review is likely to consume 30 to 60 per cent of total legal fees on a project.
However, this doesn’t have to be the case. Top law firms are using artificial intelligence (AI) solutions, specifically machine-learning technology pre-trained to recognise legal concepts, contain costs, reduce risk and speed up the contract review process.
LOWER COSTS AND MAINTAIN QUALITY
Manual contract review, generally done by a team of junior associates, can cost £1,000 or more a document. The fact that companies are willing to pay that much underscores the importance of the due diligence process for the long-term success of the transaction. But if a firm could complete the exact same review faster and at a lower cost, why wouldn’t they?
The culprit may be the unfounded assumption that manual review is always more accurate. We know this isn’t the case. In head-to-head comparisons run on the same matters, with the same documents and provisions, contract review analysis solutions have proven to be at least as accurate as a person alone and the software doesn’t get tired after a long night at the office.
COVER MORE GROUND AND REDUCE RISK
Rather than reducing due diligence spend, dealmakers may want to reduce risk with a more comprehensive review. Can companies have more documents reviewed in the same amount of time and ultimately reduce their deal risk?
Manual contract review has natural human limitations, so deal teams must decide what is “material” to the transaction. Unfortunately, “materiality” has become code for a contract value threshold or estimated monetary impact, but some serious risks may not be easily quantifiable or may fail to meet the value-criteria threshold.
What if there is an exclusivity provision in an unreviewed contract? How about a non-competition clause? The only way to really know whether there are material issues hidden in a target’s contracts is to actually review them. Here again, technology can provide greater insight into which risky contracts should actually be considered “material”.
INCREASE REVIEW SPEED AND BEAT THE COMPETITION
A recent survey of UK-based dealmakers found that 50 per cent desired closing twice as many deals a year as they did. And the due diligence process was a key contributor to transaction delays.
Kira Systems’ machine-learning technology has been used on thousands of deals to review contracts accurately in half the time
Armed with the right tools, dealmakers can complete reviews faster and gain visibility into market trends. What if the other side of a deal, or another bidder, employed technology this way to improve their negotiating position? The ability to see what the other side can’t see allows a company to negotiate from a more knowledgeable position.
DO MORE, RISK LESS WITH AI
Adopting the right technology to assist with contract review for M&A can make all the difference. Kira Systems’ machine-learning technology has been used on thousands of deals to review contracts accurately in half the time.
Companies whose transactions are powered by Kira don’t have to wonder how their counsel chooses what documents to review and why – they can decide. Many of the world’s best firms, including Freshfields Bruckhaus Deringer, Deloitte, Clifford Chance, Axiom, DLA Piper, Addleshaw Goddard, Herbert Smith Freehills, and Latham & Watkins, are already using Kira.
If your firm isn’t, you should find out why.