#26 Too Many Pages, Not Enough Eyes: As Data Room Size Increases, the More Important AI in Due Diligence Becomes
This week, I discuss an article about AI’s impact on M&A with an interesting statistic about the recent increase in data room size.
AI will change the world, but how will it change M&A? I want to focus on AI’s impact on M&A in this newsletter. I am not an expert on either M&A or AI, but I want to learn about both topics and how they intersect. I thought there might be others in my situation (or people who are experts in one field or the other) who would find information on M&A and AI helpful in their careers, so I created this newsletter to track and share what I learn.
Too Many Pages, Not Enough Eyes
University of London Professor Scott Moeller’s article, “The Future of M&A: How AI Will Shape the M&A Deal Process” discusses AI’s impact on M&A. Professor Moeller identifies several areas where AI will change the M&A process and some areas where AI will have no effect. I will discuss some of the highlights of the article.
AI and Due Diligence
Professor Moellis includes this graphic showing the number of pages in a deal’s data room.
As you can see, the number of pages increased significantly from 2018-2022. There is a cost-benefit analysis for the time it takes to review 50,000 pages versus doing other deal-related tasks. It is probably not worth it to review all 50,000 pages. The problem is, that there is some chance that one of the 50,000 pages contains important information. AI is the obvious solution to this problem. Instead of manually sifting through the documents, AI allows M&A professionals to use natural language search to quickly identify relevant documents. For example, instead of searching through each contract in the data room, a user could prompt an AI tool to “find every contract that has due on sale clause,” and the AI tool would quickly bring them up.
The counterargument to this point is that diligence is split up for the different advisors, making it more manageable. For example, legal diligence goes to the lawyers, and financial diligence goes to the accountants and business professionals.
While this is true, the overall number of documents will increase so much that even the categories of diligence will become unmanageable. I am not sure whether there is a bright line number of pages for human manageability, but it certainly seems inefficient for a person to read all 10,000 relevant documents.
This is a great statistic from Professor Moellis. I think most people in M&A expect AI to automate some of the diligence processes, but the expansion in the number of pages gives tangible evidence of why that is the case.
Areas Where AI Will Have Less Impact on M&A
The author identifies negotiations and communications with deal teams and stakeholders as areas where AI will have less impact on the M&A process.
We have talked about this before—M&A is a human thing, not a robot thing. People do deals because they want to do business together, which almost by necessity means that they have some personal connection with each other. People do not do deals because “AI told me to.” That would be bad!
For this reason, negotiating and communicating will remain basically unchanged by AI. Imagine picking up the phone to discuss an agreement and an AI voice is on the other end. That would not be a great look. Additionally, while there are some AI tools out there that can assist in communication (writing emails, for example), AI won’t replace people communicating with other people.
As for negotiations, AI currently can negotiate basic documents, like NDAs. I think AI would struggle to keep up with more complex negotiations over more fundamental aspects of a deal, like the purchase agreement or a non-generic letter of intent. There are tools that can assist in negotiations, but they don’t replace people’s judgment. Henchman, for example, can identify the type of provision and suggest alterations based on prior provisions stored in the user’s knowledge management system. Negotiations require human judgment which AI lacks.
Conclusion
I agree with Professor Moellis’ perspectives in his article. While AI will transform a lot of areas in M&A, like due diligence, others will not change as much. It will be exciting to see how this develops as technologies evolve and more use cases emerge. Who knows, we may be wrong—AI may take over the whole M&A process! The more likely outcome is that AI will “augment” the M&A process, to borrow from Professor Moellis.
About me
My name is Parker Lawter, and I am a law student pursuing a career as an M&A lawyer. I am in my last semester of law school, and with some extra time on my hands, I decided to create this newsletter. I hope it is informative and helpful to anyone who reads it! I am not an expert at either M&A or AI, but I am actively pursuing knowledge in both areas, and this newsletter is a part of that pursuit. I hope you’ll join me!
Follow me on LinkedIn: www.linkedin.com/in/parker-w-lawter-58a6a41b
All views expressed are my own!