The mergers and acquisitions (M&A) process has several steps and take a long time to complete. From the preliminary negotiations to the deal closure and integration, many parties can be involved – corporate experts, accountants, lawyers, financial advisors, tax consultants, etc. The preparation phase consists in developing an acquisition strategy, identifying potential target companies and performing an analysis. Following this, all participants share and process a wide range of data especially throughout the due-diligence process. It is a procedure implemented by the seller (vendor due-diligence) or an acquirer (buyer due-diligence) for purpose of analysing historical and prospective situation (financial, tax, legal) of all or part of one or more companies.
Globally it is providing information to enable investor/ purchaser to make an informed judgment as to the balance of risks and opportunities and the terms at which to proceed to completion of the transaction. From the non-disclosure agreement to the sales and purchase agreement, there is a cumbersome signing process which requires negotiation, drafting and compilation of approvals and signed documents in order to achieve the transaction.
Technology will radically change the way financial professionals work and help them to face growing challenges. The new technological tools such as artificial intelligence, robotic process automation, Internet of Things, enterprise resource planning and blockchain will modify the approach to M&A transactions. From target screening to implementation and integration, the M&A process will be fundamentally transformed to offer more visibility on the deal, to make it more fluid and generate added value.
Among game-changing technologies, blockchain could come in handy at some phases of an M&A. Created in 2008, blockchain is above all a storage and information transmission technology. Offering high standards of transparency and security, it works without a review body as it is completely decentralised. In a simultaneous way, users can share a large range of information and all users are able to manage the register. This chronological register contains every historical exchange carried out by all participants since its creation.
Initially, blockchain was developed to support cryptocurrency (such as Bitcoin digital currency) transactions, but its use is not limited to this. Many business lines are interested in this technology and take advantage from it. For example, the banking sector is testing blockchain to automate money-laundering checks; the logistics sector uses blockchain to track and trace products or even the art market can use it to make identification and certification of works of art more reliable.
Within the M&A process, blockchain technology can have a significant impact to improve the quality of the process. Possible applications would be to provide an unalterable and secure register through a virtual data-room (VDR) during the due diligence process or to use smart contracts to speed up the transaction and enable automatic payment at the closing stage.
The virtual data-room in the age of blockchain technology
Once the due diligence process starts the vendor makes available to the buyer and his advisors bundle of documents via the data room. It is a place for consult the principal documents giving financial, accounting, tax, legal and economic information on a company that’s up for sale. Traditionally, it was a physical room, nowadays it is made available virtually via an internet connection.
A register securing confidential data
These documents are subject to a deep review and contain strategic data as well as confidential information. There are two types of data collected, stored and transferred to third parties throughout the data-room. The first type is personal data used to create the user account (name, first name, company, position, email, password). The second type is commercially sensitive data such as financial statements, trial balances, list of suppliers/customers, contracts, shareholder resolutions. Both types of data require a high level of protection. Blockchain technology seems to offer a great opportunity to secure this content against potential cyber-attacks but also to ensure compliance with regulations.
An immutable record offering transparency
The main feature of the blockchain is its immutability, it guarantees the integrity of the data and the recording of the transactions. Any changes to the record would be seen by other users. And the blockchain provides an encryption solution to stored data that enhances the security of exchanges and transfers. This traceability enables users to know at what time documents were consulted, which ones in particular and by whom. The sharing of information between users is transparent, simplified and more secure. The technology eases the comprehensive storage of the surrender file to provide a copy of all the information disclosed in the VDR to the parties, as well as compliance with legal requirements of archiving. In addition, it helps prevent the risk of post-transaction conflict by accurately proving the level of access to information that each of the parties had thanks to the history of consultations and exchanges.
As a large number of parties are involved during any M&A process, there is a high risk that information may leak. The protection of confidential data and discretion are the keys to a successful transaction; blockchain technology provides a safe environment in order to achieve this goal.
Smart contracts: innovative and trusty M&A agreements
Smart contracts represent another asset of the blockchain technology. It is a computing conversion of a contractual agreement, made between two or more parties, which allows them to define mutual obligations and to apply them automatically. Once the code is pre-set on the basis of the initial terms of contract, it can be performed by a computer network and without the need for intermediaries. It works on the following principle: if a given condition is met then the related obligation will be performed. Smart contracts strengthen the trusted environment and reduce the risk that the conditions expected are not met.
A disintermediation reducing costs
Smart contracts found their use in many cases from public sector, insurance to health care. This function has the potential to play the role of the trusted third-party to confirm the contract’s execution and, one day, it could replace it. The disintermediation of this contractual process may reduce the costs usually generated to pay a bank, legal or notarial fees. And modification or manipulation of the programmed contract is not possible without due authorisation, which guarantees the integrity of the contract and its outcome.
Having this in mind, it seems that smart contracts are poised to change the way M&A agreements are concluded. The parties can benefit from a high degree of security and guarantee, and smart contracts can be used whenever mutual trust between several parties is required. From the non-disclosure agreement – by ensuring traceability of the parties’ interest – to the earn-out provision – by determining how much the vendor is paid based on different performance factors.
Accelerated cross-border payment processing
This allows also automatic payment which is interesting in case of cross-border payments arising from M&A transaction. Through the blockchain, parties can trade assets without central authority, reducing transaction fees and using smart contracts that can execute instantly a transfer and accelerate term of payment.
Another key to an M&A transaction’s success are trust and speed. Using smart contracts, blockchain solutions establish mutual trust between the parties and speed up the execution of concluded agreements.
Blockchain technology has a bright future and offers plenty more functionalities that have not yet been used during M&A transactions. However, despite all the advantages discussed above, human contact remains essential, as at this stage technology cannot replace counsel and judgment, although it certainly enhances significantly the process.