The Impact of AI on Mergers and Acquisitions

Factors that fall under the umbrellas of both EHS and ESG are vital considerations for organizations undergoing mergers and acquisitions (M&A).

A Deloitte report revealed that nearly 70% of M&A professionals surveyed consider ESG (environmental, social, and governance) factors to be of "high strategic importance" in their decision-making processes. Additionally, EHS (environmental, health, and safety)  considerations are becoming crucial due to legal and financial risks associated with non-compliance.

Still, these high-risk factors may be overlooked during the M&A process for reasons ranging from inadequate frameworks to data availability and quality. Fortunately, new advancements in AI and machine learning are making it easier to discover, gather, and process relevant data.

Let’s explore how the mergers and acquisitions field is employing AI solutions to meet the demands of EHS and ESG due diligence, and how this explosive technology will change the work of M&A in the near future.

How AI Is Used in M&A?
AI use in the field of M&A is not as widespread as other sectors – yet. A report by Bain found that only 16% of M&A professionals are employing generative AI today. However, within three years that number is expected to reach 80%. According to the report, “the early adopters are primarily in technology, healthcare, and finance, and they tend to be larger companies with moderate M&A activity of three to five deals per year.”

M&A professionals reported a significant reduction in manual effort, with a downstream impact of accelerated timelines and reduced costs.

But AI technology encompasses more than just generative AI. Here are some examples of how AI can improve the integration of EHS and ESG considerations in M&A.

Due diligence
AI tools significantly streamline the EHS and ESG due diligence process by automating the review of large datasets. These tools can swiftly identify potential issues, such as non-compliance with environmental laws, safety violations, or lapses in governance. AI-driven natural language processing (NLP) technologies can analyze unstructured data from various documents, including sustainability reports, safety records, and regulatory filings.

Strategy and target identification
Companies can leverage AI to analyze vast amounts of data related to market trends, financial health, and operational efficiencies of potential targets. This analysis includes a deep dive into ESG and EHS metrics, ensuring that targets not only align with financial goals but also adhere to environmental, social, and governance standards. AI’s predictive capabilities enable firms to forecast future market developments and assess how well a target would integrate within the existing business structure.

Risk identification and modeling
Predictive risk modeling and scenario analysis AI models can analyze historical data to forecast future risks, such as the likelihood of a company's non-compliance with environmental regulations based on past issues, and estimate the potential impact on regulatory fines or remediation costs. Additionally, AI can simulate various scenarios to evaluate how environmental factors or regulatory changes might affect the merger.

Post-merger integration
Following a merger, AI plays a vital role by facilitating the seamless integration of systems, processes, and cultures. AI algorithms can suggest the best approaches to merging IT systems and databases, reducing downtime and minimizing disruptions to business operations. These tools can also be employed to monitor the integration's progress in real time, enabling managers to promptly address any issues that may arise.

Challenges and Limitations of AI in Mergers and Acquisitions
While AI offers numerous advantages in the M&A process, it also introduces specific challenges that organizations must navigate carefully to fully leverage its potential.

Data privacy
One of the foremost concerns when implementing AI in M&A is data privacy. As AI systems require access to a vast array of sensitive information to perform effectively, there is an inherent risk of data breaches or unauthorized access. This risk is compounded by the complex legal frameworks surrounding data protection, which vary significantly across different jurisdictions. Companies must ensure that their AI systems comply with all applicable laws, such as the GDPR in Europe, which mandates strict guidelines on data handling and consumer privacy.

Potential biases
AI systems are only as unbiased as the data they are trained on. This presents a challenge in M&A activities, where biased historical data can lead to skewed analyses and decisions. For instance, if an AI system is used to evaluate potential acquisition targets but is trained on data that reflects historical prejudices or incomplete information, it may inadvertently favor or exclude certain opportunities. This can result in poor investment decisions and potential misses in strategic alignment.

Regulatory hurdles
Navigating global regulations presents another significant challenge when integrating AI into M&A. The use of AI can trigger scrutiny under various regulatory standards, particularly concerning antitrust laws, where the use of algorithms in decision-making processes must be transparent and justifiable.

Industries such as healthcare or finance face stricter regulations regarding AI applications, posing additional compliance challenges. Companies must stay informed of current and emerging regulations to ensure their AI use does not result in unintentional violations.

Future Trends in AI Technologies for M&A
Emerging AI technologies are poised to make even more significant impacts on M&A strategies.

Natural Language Processing (NLP)
NLP technology is particularly useful in the M&A field due to its ability to analyze and interpret vast amounts of unstructured data quickly. As M&A activities often involve the review of complex documents such as contracts, legal filings, and due diligence reports, NLP can automate and expedite these tasks with high accuracy. Future applications of NLP could include more sophisticated sentiment analysis to gauge public perception and employee sentiment regarding potential and completed mergers, or to derive insights from financial reports.

Augmented decision support
Augmented decision support systems combine AI with traditional decision-making processes. These systems provide data-driven insights and predictive analytics, offering scenario planning tools that help strategists visualize the outcomes of various M&A strategies under different market conditions. In the future, augmented decision support could incorporate real-time data streams, allowing M&A teams to adjust their strategies dynamically as market conditions change.

What’s Next for AI in M&A
As AI technologies continue to advance, they will likely become more integral to the M&A process, providing companies with a competitive edge in identifying, evaluating, and integrating acquisition targets. This evolution will also enhance the integration of ESG and EHS considerations into M&A strategies, helping organizations undergo more financially, environmentally, and socially beneficial mergers and acquisitions.

Learn more about how Inogen Alliance can assist with your M&A needs

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