Q&A: Unlocking deal value and mitigating risk with disruptive tech and analytics
July 2023 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
July 2023 Issue
FW discusses unlocking deal value and mitigating risk with disruptive tech and analytics with Jim Clayton, Matthew Goldberg and Manny Ngan at BDO USA, LLP.
FW: To what extent are you seeing buyers and sellers, for various reasons, integrating new tools into the deal process? What role are disruptive technologies and advanced analytics playing in this trend?
Clayton: Because of the disruption of the last few years, deal parties, especially buyers, are taking a more holistic view of a transaction, which includes pressure-testing their models with factors that extend beyond the financial aspects of a deal. Buyers are using technology to build models that reflect potential interest rate changes, data from unintegrated add-on deals or public access data like exchange rates, to see how they could impact the pro forma financials of the company. We are also seeing models that account for a target company’s resiliency under different economic scenarios, or emerging priority areas of supply chain, and environmental, social and governance (ESG). These tech advancements follow urgent demand to evaluate all aspects of a target’s business. Previously, buyers devoted 80 percent of their attention to the financials of a deal. With the advent of advanced data analytics, they can now assess a company’s full business cycle when considering a transaction.
FW: Could you outline the types of disruptive technology and analytics being utilised in M&A? In what ways are they being applied to assess the risk and value attached to a target company?
Ngan: From a valuation professional’s perspective, we have witnessed the widespread use of several key tools. Robotic process automation (RPA) has emerged as a valuable M&A asset, streamlining data collection and analysis processes. Deal teams that leverage RPA can automate repetitive tasks, enabling them to efficiently extract data, enhance accuracy in financial modelling, and ultimately improve buyer and seller valuation assessments. Predictive modelling, such as machine learning (ML) and regression analyses, assesses potential risks and future value of target companies. By analysing historical data and identifying key variables, predictive analytics provides insights into the key drivers of value creation and helps mitigate uncertainties associated with M&A transactions. We are also seeing buyers and sellers deploy inferential statistics and data visualisation to uncover hidden patterns and trends within large datasets. These techniques provide a comprehensive understanding of a target company’s financial performance, market dynamics and growth potential, enabling a more accurate assessment of its value.
“Robotic process automation (RPA) has emerged as a valuable M&A asset, streamlining data collection and analysis processes.”
FW: Drilling down, to what extent can technology help acquirers to gather, organise and analyse vast amounts of data to gain insights that may be impossible to reveal using a manual approach?
Clayton: Newer deal technologies, which rely on data modelling to build vast repositories of business intelligence, enable quick analysis of large volumes of data. This is important because the disruption caused by the coronavirus (COVID-19) pandemic means buyers sometimes request pro forma financials based on more than three years of financial data to assess if that period was an anomaly. This would not be possible if the tech did not exist. We are seeing increased usage of third party specialist firms to uncover deeper and more industry specific data. These specialist firms that cover, say, retail or manufacturing, provide more in-depth insights about how customer behaviour has evolved in those sectors over the last 24 months. They can also provide comprehensive HR due diligence, accounting for data on turnover rates, the recruiting pipeline and talent assessments – all of which have become greater priorities in the last 12 months.
FW: What challenges and limitations might the introduction of disruptive technology and analytics pose to the transaction process? How can buyers and sellers overcome such obstacles?
Goldberg: We are seeing increased complexity in valuation models. Disruptive technology and analytics can introduce sophisticated models and algorithms that may be difficult to validate. If these models do not follow industry best practices or if they are not transparent and auditable, they can create deal risk. Another limitation is data quality. Disruptive technology and analytics still rely on data inputs, meaning they are only as good as the information received from target companies. This can be challenging to obtain, especially for privately held or early-stage companies. At the outset of a transaction, deal teams should employ robust data gathering and due diligence processes to obtain the necessary information for accurate valuation assessments. Lastly, advanced models and algorithms may generate outputs that are not easily understood by all stakeholders involved in the transaction. Presenting meaningful insights concisely and through data visualisation can help bridge the gap and facilitate informed decision making.
“Interactive dashboards and visual representations of financial models will enhance communication and transparency throughout the deal process.”
FW: How can analytics help acquirers to develop strategies for post-deal value creation?
Clayton: The biggest challenge is marrying analytics with the company’s business plan. Buyers sometimes make the mistake of thinking of analytics only in the context of a rote synergy or cost reduction plan without considering the larger picture on the path to creating value. Savvy buyers will leverage the forecasting capabilities provided by analytics at the beginning of a deal and use it to determine how the target company can be properly integrated. The emphasis on forecasting, especially with the ability to analyse longer periods of financial data, can better enable the buyer to prioritise areas of the business in which to make investments. For example, there might be an insight from the analytics that leads a buyer to mitigate a previously unseen supply chain risk or upgrade a crucial piece of workforce technology.
FW: What essential advice would you offer to buyers and sellers on using technology and analytics to mitigate risk and unlock value in an M&A transaction? How can they achieve optimal results?
Ngan: There are several ways buyers and sellers can utilise technology to help mitigate M&A risk and unlock deal value. First, enhance valuation accuracy. Deploy advanced analytics to improve the accuracy and reliability of valuation models. Incorporate data-driven insights and predictive modelling techniques to assess target company value, potential synergies and future performance. Second, apply sophisticated risk assessment techniques. Use technology-enabled risk assessment methodologies to evaluate and quantify various risks associated with the transaction. Advanced analytics can provide insights into market volatility, regulatory compliance and financial instability, enabling buyers and sellers to mitigate potential risks. Third, harness capital market data and intelligence. Engage technology platforms and analytics tools to access and analyse real-time market data, industry benchmarks and competitor analysis. This provides a deep understanding of the market landscape and competitive dynamics to enable informed decision making. Finally, optimise deal structuring. Leverage analytics to help optimise deal structures based on financial modelling and scenario analysis. Incorporate cash flow projections, sensitivity analysis and capital allocation strategies to assess potential returns and negotiate favourable terms.
“The emphasis on forecasting can better enable the buyer to prioritise areas of the business in which to make investments.”
FW: What are your predictions for how disruptive technology and analytics will feature in the dealmaking process in the years ahead? What kinds of innovations can we expect to see, which will have a positive impact on M&A?
Goldberg: We anticipate that disruptive technology and analytics will continue to play an increasingly prominent role in the dealmaking process and bring forth several innovative advancements that will positively impact M&A. We expect advancements in ML and artificial intelligence algorithms to enhance predictive modelling capabilities and enable more accurate forecasts of future performance and risk assessment. By leveraging data from various sources, such as customer behaviour and industry trends, deal teams can gain a deeper understanding of target companies’ market positioning, competitive landscape and growth potential. We also anticipate an even more common application of advanced visualisation and reporting tools, enabling stakeholders to comprehend complex valuation analyses and reach data-driven decisions quicker. Interactive dashboards and visual representations of financial models will enhance communication and transparency throughout the deal process.
Jim Clayton is a principal in BDO’s management consulting practice and also serves as the private equity national advisory leader. He has more than 20 years of combined experience impacting the visibility and performance of companies through orchestration of resources, operations, process improvement, policies and protocols. He has extensive experience in M&A transactions focusing on integrations, carve outs and IPOs. He has led significant business transformations, including multiyear initiatives focusing on upgrading foundational technology in finance and operations, and optimising business models and associated processes. He can be contacted on +1 (610) 455 2077 or by email: jclayton@bdo.com.
Matthew Goldberg leads the financial services, complex financial instruments and hard-to-value assets services in BDO’s valuation & capital market analysis practice. He brings more than 15 years of advisory and financial services experience to help clients achieve a range of business and strategic objectives. In addition to valuation services, his team provides model validation, risk management and asset liability management consulting services and he has extensive experience valuing a wide range of debt products and complex derivatives. He can be contacted on +1 (720) 479 1485 or by email: mgoldberg@bdo.com.
Manny Ngan is a managing director in BDO’s valuation & capital market analysis practice. He has more than 10 years of experience providing corporate finance and valuation services to clients as well as assisting them in identifying, quantifying and managing risk. He specialises in complex financial instruments valuation, capital market transaction analytics and corporate finance advisory services. He can be contacted on +1 (415) 490 3096 or by email: mngan@bdo.com.
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