Contract Analytics: A Key Tool for Strategic M&A
The relentless pace of business in the 21st century and the need for established businesses to find new revenue streams has led to a degree of merger and acquisition mania. Since 2000, there have been over 750,000 transactions globally, at a combined value of over $75 trillion. The acquisition part of M&A is well understood: a company looking to increase revenues or capture market share by acquiring a competitor or maybe an enterprise in an adjacent market. There are many varied reasons for acquisition transactions, but some common examples are:
- To secure new drug pipelines (pharmaceutical industry)
- The need to offer consumers a broader and rich set of content (media industry)
- To gain access to further reserves and production capabilities (energy sector)
- Enhanced market presence and growth opportunities (financial services)
True mergers—the coming together of equals to create a larger organization—are less common, and when they do happen, it’s often to compete with a mutual, larger competitor. True mergers are prevalent in professional services industries, like accountancy and law firms.
A counter-intuitive part of M&A also needs to be considered, that of company-level divestitures where a company might split into two (sometimes more) separate legal entities. A well-known example would be HP, which divested into HP Inc and HP Enterprise in 2015.
In all these cases, there’s clearly a pre-transaction phase and a post-transaction phase. The former is generally termed the due-diligence process, as the acquirer, merging companies or even the divestor try to understand what they’re letting themselves in for with the proposed transaction. The latter is often termed post-merger integration, even though it covers acquirers and divestors, and the aim is to get to a state of BAU (business as usual) as quickly as possible.
Not unsurprisingly, a core component of the pre-transaction phase is understanding what obligations the target company might have with suppliers, customers, regulatory authorities and so on that the acquirer needs to be aware of. It’s also about understanding:
- Opportunities for synergies and revenue optimization
- How much risk is inherent or potential
- The scale of obligation that the acquirer will be accepting
Much of this is tied up in contracts, the formal instantiation of the relationships between a company and its suppliers and customers. Given that the number of contracts can run into the hundreds of thousands or even millions, it’s clearly not possible to analyze an entire corpus during due diligence. That’s why historically, the acquiring company would identify a legal team along with a small percentage of key buy-side and sell-side contracts, and then that team would read those contracts, manually looking for those obligations and risk points.
That all changed with machine learning technology (often termed legal AI), which helped increase the volume of contracts considered within scope, improve the accuracy of results and boost the analysis efficiency. There are many legal AI companies capable of document review and extracting basic M&A-specific clauses and language, such as retention rights, change of control language, terminations, assignment rights and so on. The issue is whether they can do it at scale and with the degree of precision and recall that instills the acquirer with confidence in the obligations and risk they’ll be taking on with the transaction.
DocuSign Insight and Insight Accelerators provide targeted, in-depth analysis on a range of critical topics including M&A. Insight doesn’t just answer the question of whether there’s an assignment clause in the contract, for example, rather it dives into the clause and guides on the specifics of the clause. Are there circumstances where it’s non-assignable? Is there a carveout? Is prior written consent required? And it does it at scale across tens of thousands of contracts, both third-party contracts as well as your own. Each topic has multiple sub-topics, which the Insight Accelerator can surface.
Due diligence, however, is only half the story. Basic doc review is where most of the legal AI industry is at right now. DocuSign Insight takes it a step further by addressing post-merger integration, an equally important phase of the transaction that addresses concerns such as:
- Which contracts do you need to keep from the merged and which can you cancel?
- Which contracts do you carry forward?
- Which ones are duplicative in terms of suppliers?
This is the prosaic, post-honeymoon work that’s a drudge for the legal teams at both companies. DocuSign Insight accelerates the understanding of how to get to a BAU state faster. And it can do this scale.
Similarly, a number of large, high-profile companies are using DocuSign Insight to help with divestitures. DocuSign Insight dramatically accelerates the contract search and review process to help M&A teams manage and analyze large volumes of agreements when determining answers to such questions as:
- Does the contract go to this side of the house or that?
- Should it be repapered, since it doesn’t logically go with either side?
- Are there assignability rights in the contract?
- Is there change-of-control language that might determine which side of the fence the relationship (and contract) should reside?
DocuSign Insight includes customizable “views” that display detailed, topical analysis of each agreement for specific objectives or use cases such as mergers and acquisitions. You can apply views across a group of contracts to see a side-by-side comparison of relevant contract language and answers to posed questions.