Whitepaper: How AI is transforming M&A due diligence

W H I T E PA P E R

How AI is transforming M&A due diligence

How AI is transforming M&A due diligence

www.legadex.com1

Twenty years ago, artificial intelligence, AI, was the stuff of a Steven Spielberg movie. Ten years ago, it was the wild child of start-ups and big-tech companies.

Today? It is increasingly present all around, helping us to optimise logistics and manage healthcare, to improve manufacturing robots and smart assistants, mapping diseases, powering tracker funds, and more.

That ‘more’ includes transforming M&A-related legal services

variety of workflows that make the due diligence process more

based on generic and industry-specific AI benefits. The generic

efficient. These include secure in-platform messaging, advanced

benefits include the huge productivity gains and cost savings

security and access control, and workflows for key requirements

that arise when you free humans from routine tasks that

like directing questions to the most appropriate respondent.

computers can handle. It also includes the opportunities this creates to focus on activities and advice that add more value

At Legadex, we approach document identification, collec-

for the business. The latter, the legal-specific benefits, include

tion and organisation in the context of the VDR setup and

the benefits to risk management and the emerging opportuni-

the client’s requirements. Other workflows include inviting

ties to use legal AI as a form of business intelligence.

potential purchasers to begin reviewing the documents in the VDR, initiating the Q&A process and directing questions to the

The upshot is that from streamlining transactional M&A due

people best placed to answer them. Redacting or black lining

diligence today, and, increasingly, routine legal workflows as

is another workflow that we typically perform as part of a VDR

well, the impact of AI is set to grow and grow as the technology,

project. And we use the VDR to organise and verify the signing

and our use of it, develop and improve.

process. All run via the VDR. All enabled by technology.

In this white paper, we take you through the established, emerg-

Legal-tech is leveraging the VDR hub

ing and prospective applications of AI in M&A services and out-

The second prong is legal-tech. In the early days of the VDR,

line the benefits they offer legal professionals in terms of speed,

much of the work outlined above was done manually – and

accuracy, risk management, cost efficiency and adding value.

many law firms and corporate legal departments still work this way. However, as we see in so many other industries, digitalisa-

VDR workflows and legal-tech are driving AI

tion stimulates innovation.

In the case of legal services, digitalisation is the spark that ignited an entirely new way of working: legal-tech. An advanced VDR run on digital workflows becomes a natural platform

The data room is now a due diligence hub

for the application of new technology. And this is what has

The growing application of AI in legal services has two prongs to

happened, is happening and will continue to happen for quite a

it. The first involves the transition from the classic physical data

while yet. Already, instead of collecting, analysing, indexing and

room that was used to house documents in an M&A deal, to its

organising documents manually, you can now use legal-tech to

high-tech online replacement, the virtual data room (VDR).

do this more quickly, more accurately and at far lower cost. You can redact the data to comply with GDPR by hand – or you can

This shift has changed the role of the VDR. No longer is it sim-

use artificial intelligence to do it for you. →

ply a repository for documents; today, the VDR is the hub for a

How AI is transforming M&A due diligence

2

Impact beyond the M&A process

jobs to aid in decision-making and spot trends and patterns

The bottom line is that not only do VDRs now provide the

that even the sharpest data scientist might miss. The technolo-

fastest, most efficient, most secure and most transparent way

gy that makes this possible is AI.

for M&A sellers to organise and share information, but the workflows associated with VDRs and due diligence are driving the development of exciting new applications that will have an

Why we need AI for due diligence

impact beyond the M&A process:

Be sure you know what you know • Filter the data you need (in a customised dashboard): au-

While the VDR has automated workflows, it hasn’t solved the

tomated legal, financial and business risk and opportunity

problems of how to review documents in the VDR easily and

analyses

manage the complexity of the Q&A process. This makes it hard

• Advances in workflow and exportable reporting applications

for lawyers to do an initial review, hard for them to prioritise

• Fast OCR search and analysis of vendor documentation, in

the transaction-critical documents, hard for them to avoid rely-

any language

ing on selective (and risky) document sampling, hard for them

• Automated document collection, reading and categorisation

to answer or ask questions efficiently, hard for them to move

• Intelligent redaction with AI.

fast when speed is of the essence, and hard for them to find the time to focus on high-end advisory legal work.

In other words, the legal profession is learning what chief information officers have long known: that technology makes

AI can fix all these issues by applying machine learning to

it possible to run routine tasks faster and often without human

these volume and workload challenges. Already, it is increasing-

help. This saves money and frees employees to focus on val-

ly being used by firms like Legadex and other Alternative Legal

ue-adding activities. And as technology becomes both less ex-

Service Providers to implement, locate, sort, assess, review and

pensive and smarter, and more advanced technologies emerge,

classify thousands of documents, documents that would other-

companies will extend the use of technology beyond routine

wise have to be processed by hand. →

How AI is transforming M&A due diligence

3

There are two model for the way AI can make a big difference to due diligence, to M&A and to routine legal workflows.

The first involves supervised learning in which an algorithm searches for answers within data based on previously discovered patterns and learnings. The other is through unsupervised learning in which an algorithm finds new data patterns by itself without any external direction.

How Legadex uses AI From contract review to next level due diligence Legadex has been using AI since 2012, primarily for contract analysis, contract review and risk and compliance reviews, both as part of an M&A due diligence project and as a routine legal service. Over that time, our team has built up a lot of experience in training AI systems in what to look for (and equally importantly, in what to ignore).

In 2020, we partnered with Luminance, the leading artificial intelligence platform for the legal profession. This partnership takes our document review capabilities to the next level. By combining our experience with Luminance’s powerful machine learning solution, we can perform legal review and due diligence more quickly and more thoroughly – a 75%-time reduction is easy to reach.

In fact, Luminance brings many of the AI requirements of Legadex together in one integrated platform. For example: • Luminance combines supervised and unsupervised machine learning to read and form an understanding of legal data.

Though Luminance we can immediately surface and flag key information such as datapoints, contract clauses and anomalies, enabling lawyers to start their review in the most logical and efficient way possible. We can also find information you didn’t know to look for (‘unknown unknowns’).

• M&A lawyers can securely upload and transfer legal documents into the Luminance platform with just one click.

• Luminance is language-agnostic and works seamlessly across documents in English, Dutch, French, German and other languages – over 80 in total.

• Luminance’s automatic document and clause-compliance technology means we can mark any clause or document as

“The partnership with Luminance takes our document review capabilities to the next level.”

a ‘model’ version for comparison. This is crucial in risk and compliance reviews and enables us to find and instantly see subtle variations in wording.

• Luminance learns from reviewer actions like tagging to generate additional insight, accelerating the review even further.

• Luminance works seamlessly with the other legal-tech platforms we use at Legadex. →

How AI is transforming M&A due diligence

4

Lawyers working with Luminance also benefit from a range of

of contracts, corporate information, employee information,

features that make their task even easier, including:

insurance, risk profiles, risk analysis, financial information and intellectual property rights. This will move due diligence into

• Dataset visualisations that identify different document types,

something more akin to business and financial-impact analysis.

clauses, anomalies, currencies, languages and regions • An intuitive, easy-to-use interface

Do more of the things you enjoy

• Automatic clause identification based on over 1,000 pre-set

This future is not far away. Already, we have used legal AI to

clause models • Automatic document and clause compliance based on standardised models and established learnings • Collaborative workflow tools include batch document allocation to eliminate duplication of effort

analyse a real estate portfolio – lease contracts, contract renewal end dates, renegotiation clauses and other financial aspects – and to analyse a mortgage portfolio for contract end-dates, floor areas, types of tenants and other contract information.

In both cases, the analyses helped to establish a fair and accurate valuation.

Legal AI is going to grow and spread

With the whole concept of AI being that computers learn by experience and become better at a task over time, we see no reason why this volution should not continue. Learning is an iterative process and we become better the more we do some-

Supporting for financial and business-impact analysis AI today

thing – especially if someone experienced corrects and guides

is used to look for, analyse and answer specific questions about

us. And this is true for AI, too.

contracts and, increasingly, to analyse documents. But we see no reason why its use should stop there – the opportunities and

Just as email transformed the way we do business, AI will

potential benefits are too great.

transform the work of the lawyer. Those who embrace it will find they have more time to do the things lawyers enjoy most:

In our view, the future of analysis and data sets lies in answer-

thinking, advising and adding value to the business. An end

ing due diligence-related questions and in extracting due dil-

to routine manual work for qualified legal professionals.

igence-related information. AI will, increasingly, not only help

How does this sound? ◻

to find the answers among thousands of documents, but it will also help to define the questions, too. And then it will generate the corresponding reports automatically.

More information?

As data analysis turns due diligence into a more proactive, data

For more information, please contact Luc van Daele or

driven process, so the nature and purpose of due diligence will

Morad Kada:

change from today’s identification, avoidance and management of risk, to tomorrow’s identification of opportunities as

Luc van Daele

well. Through this, legal AI will play a wider role in the analysis

+31(0)20-8208396 lvandaele@legadex.com

Morad Kada +31(0)20-8208396

“The opportunities and potential benefits of financial and business-impact analysis AI are too great.”

mkada@legadex.com

Legadex B.V. Antonio Vivaldistraat 64 1083 HP Amsterdam The Netherlands info@legadex.com +31 (0) 208208396

www.legadex.com

How AI is transforming M&A due diligence

5