How digital is M&A?

Experts from various disciplines use the term digitization consistently and define it as the conversion of analog information into digital information.  In this way, analog information becomes digital bits of zeros and ones. A simple example of this is taking a photo and converting it into a digital photo.  Another example is the scan of a contract document, which is transformed from its analog state as paper into the digital state of a PDF file. Due to its properties, digital information can be easily stored, transferred, edited and displayed. This also implicitly means that "digitized" information can be transferred more easily, cheaply and accurately between different points. But what is the difference between this and digitalization?

To differentiate between the terms digitization and digitalization, it is worth taking a look at the transformation of the Finnish tax system (source: Parviainen et. al.):

If the authorities had "digitized" the Finnish tax system, they would have replaced the previous paper form with a digital form and asked the citizen to attach a photo or scan of invoice, receipts, etc. in electronic form. Instead, however, they have adapted the process so that the authorities receive all the necessary information from companies, banks, etc. digitally in the form of structured data, calculate the tax and send it to the citizen. If the citizen agrees with the calculated tax, he or she does not have to do anything further.  

This simple example clearly illustrates the difference between the two terms. Digitization thus describes the transformation of analog information into digital information and forms a kind of preliminary stage of digitalization. This is because digitalization encompasses the transformation of processes and business models as well as the development of ecosystems through the use of digital technologies with the aim of increasing efficiency and effectiveness.

But how should digital development be classified in the M&A sector?

The requirements for M&A projects and their execution are constantly growing. For example, the number of due diligence disciplines, people involved and consultants has increased continuously over the past decades. As a result, the need for digital tools to handle such projects more efficiently has grown. In the 1980s, the Microsoft Office programs Word, Excel, and PowerPoint made their way into the handling of M&A projects and led to the first increases in efficiency.  These programs are still central software solutions used in the M&A process today.

Following this first step towards digitalization, virtual document rooms emerged in the mid-1990s. This technological advancement represented a key turning point in the handling of M&A projects, as documents were transferred from the physical world to the virtual world through a scan. By freeing them from the constraints of the physical document room, all documents relevant to the transaction were now available 24 hours a day, 7 days a week.

This innovation has once again led to significant efficiency gains.  However, it can be deduced that M&A has essentially been digitized to date. This means that the previously analog documents are transferred to digital images and are thus available in virtual form. However, digital documents continue to be used rather than structured data.

However, in the course of digitalization, especially with regard to buzzwords such as artificial intelligence, big data analytics, machine learning, etc., expectations for future efficiency improvements continue to rise. Among other things, these technological advances have led to a very sharp increase in the number of software providers appearing on the market.

One problem that has not yet been solved by the progress made to date in the digitalization of M&A concerns the distribution of information within projects. In general, M&A projects are information competitions in which the aim is to reach the target company's information level as quickly as possible and, at the same time, to distribute the information within one's own project organization as optimally as possible so that every project member and all those affected by it have all the information they need in the right quantity and quality at all times.  However, M&A projects are very large projects with parallel processes and often a large number of people involved. In theory, there are various M&A process models (e.g. Lucks/Meckl) that represent optimal process integration. This means that the information flows, the processes interlock and thus an end-to-end process flow is made possible.  To achieve this, however, interface managers are sometimes used to distribute information between the processes and to ensure that the inputs and outputs between the processes are connected.  In the age of digitalization, however, this is no longer appropriate.

However, IT integration does not exist in most companies and the IT solutions used (e.g., VDRs) are mostly isolated solutions. Here, new types of M&A platforms offer a solution approach in which they connect the previous isolated solutions in a kind of "digital backbone", ensure the seamless flow of information and thus enable a digital end-to-end process flow. This is of central importance, because a lack of integration can lead to media disruptions and information losses within M&A projects at departmental boundaries, different areas of responsibility or phase transitions, such as between the transaction and the integration phase. This negatively impacts the M&A process in terms of quality, efficiency and stability.  

In conclusion, it remains to be said that M&A has so far essentially only reached the digitization stage. After all, digitization is more than simply converting analog documents into digital ones and making them available in the virtual data room.  However, the need and the possibilities to reach the level of digitalization do exist.