Tinder for M&A and The Future of Due Diligence
A recent development within technology used in M&A is an app developed by Goldman Sachs and pioneered by David Dubner, Goldman’s global head of M&A restructuring, which helps existing clients to identify potential acquisitions and to also helps them to improve their own businesses. It allows clients to view different divisions of clients’ companies from the eyes of a potential investor. This development may prove to be a stepping stone in the development of technology and big data used within investment banking that could end up revolutionising the way the industry works.
This technology is already being used internally at Goldman Sachs and the app has proved successful enough to extend its use to clients. It hopes that clients will be able to use the app to identify underperforming parts of their business, such as certain divisions that could make the clients’ firm vulnerable to activist investors aiming for higher returns or certain areas within the firm that will make investors less willing to invest in the firm as a whole due to ESG concerns.
Another benefit of the app is that it can help clients to identify sale or spin-off opportunities and highlight poorly performing areas within the clients' firm. This is specifically useful as it can be used for both sell-side and buy-side clients: it can help those looking to sell their firm and identify areas that could be improved in order to cut costs and achieve a higher EBITDA and generate higher levels of free cash flow, but also it can be useful for buy-side clients who are identifying specific areas of a firm with more potential within an acquisition target. The division specific analysis makes this app especially useful, combined with an apparently straightforward interface which can make navigating the app easy to even the least tech-savvy CEO’s.
One of the ways that the app works is through a formula that compares revenue growth, profit margins and other metrics as a percentage of sales within different areas of the firm. It then compares these metrics across a wide peer set to provide a score at the individual segment level that is then used to assess relative performance amongst peers which is then available to the client to compare and contrast different acquisition targets.
This is part of an ever more apparent trend within investment banking. As big data and artificial intelligence process information more efficiently, M&A will be more informed, faster and less labour intensive. Lots of the work in investment banking seems to be thinking of companies that prospective clients could acquire, making a list, calculating different metrics manually, comparing targets and then pitching these targets to prospective clients. The success rate of this kind of activity seems to be very low and such analysis is quite tedious and drains resources in the form of analysts being tasked on these tedious activities.
The opportunity cost is less productive teams as they cannot focus on higher turnover activities like actually completing transactions. However, Goldman Sachs have accelerated this process, identifying plausible deals with the use of AI and collating all these targets in a simple and accessible way that makes life easier for clients. For the junior investment banker, it gives them the opportunity to gain actual deal experience rather than churning numbers like some sort of deal monkey. The app is scalable and eliminates basic targets that would have just been crossed off the list by a more senior investment banker and therefore the app increases overall team productivity.
Moreover, this app comes at a time where M&A activity is drastically low, with volume down 47% annually at $1.1 trillion. The pandemic has not majorly changed reasons to conduct transactions. Interest rates are historically low, there is a lack of organic growth that will lend itself towards consolidation across industries. Synergies can help to provide this growth. Moreover, with air travel being difficult and working from home being the norm, technology could be useful to conduct new business.
However, no matter how far technology within M&A advances, not much can rival meeting clients for dinner or coffee chats to help consolidate relationships and close transactions. Nevertheless, this app will undoubtedly provide a starting point for the further development of technology within M&A and is an innovative way to make clients’ lives easier during a strange time in the M&A landscape.