DealLawyers.com Blog

AI is certainly a hot topic in M&A, with native AI companies and those with adjacent technologies featuring ever more prominently in the deal landscape.  This excerpt from a recent Herbert Smith Freehills Kramer blog moves beyond the topic of industry specific transactions and discusses some of the risks and opportunities associated with AI from a buyer’s perspective:

For some prospective buyers, AI may be a transaction driver. Strategics may be looking for target businesses that will help them adapt to the changing tech environment, while sponsors may target companies operating in industries ripe for disruption by AI, offering opportunities for cost reductions and profitability upside. Conversely, others may be more hesitant to buy legacy businesses which are not sufficiently future-proof to withstand potential disruption.

Meanwhile, assets such as data centres, power providers and others with significant ‘compute’ power are experiencing tailwinds from booming investment in AI.

But AI is now a sector-agnostic consideration; whether a target is in manufacturing or retail, its exposure to AI-driven disruption – or its failure to adopt it – will directly impact its long-term viability.

The difficulty however is the speed with which AI is evolving, making it hard to predict how far it will go and which businesses and industries will be winners and losers. Buyers must think about:

– Cost uncertainty, including the current levels of subsidies given to customers.
– Sustainability.
– Obsolescence risk, as the AI model currently used in the target’s business may become obsolete or be overtaken by new, improved models.
– Adoption costs, including the cost of adopting and implementing new technology and driving change in business.
– The dataset – an AI tool is only as good as the data it is trained on, and a target’s value may lie in the data it owns rather than the AI software itself.

Regulatory scrutiny is another key factor – around the world, regulators are not just looking at current market size/turnover but also the future potential market size. They have had an increasing focus on so-called “killer acquisitions”, where large companies acquire smaller targets in highly innovative sectors to prevent competing products from reaching the market or eliminating an early-stage competitor. AI is one of their key areas of focus in this area. Regulators are also increasingly concerned about data monopoly – where acquisitions are driven primarily by access to data.

The blog also discusses how AI tools are being used in the M&A process, and highlights their current and potential use cases in preliminary negotiations, due diligence, documentation and the closing process.

– John Jenkins