Mergers and acquisitions are some of the most fascinating and complex procedures a company might have to face in its lifetime. These are complex, time-consuming and risky transactions that could lead to immense good or equally bad repercussions if not handled tactfully and accurately. There are nearly endless moving parts to consider. Senior management needs to focus all its energies on restructuring entire business systems, setting new strategic goals and objectives and ensuring seamless transitioning of new staff through easy process streamlining. Moreover, with large mergers and acquisitions, one of the most important parts and often most overlooked, is the hundreds and thousands of ‘contracts’ – the foundation of all business and financial transactions. If these get neglected, they can introduce immense risk and threats to the business.
Hence, before any merger or acquisition goes through, there is a lot of contract due diligence legal teams have to carry out. Any disparities and inconsistencies in contracts need to be dealt with before the merger or acquisition can go through. With thousands of contracts in the place, it is a huge challenge to tackle all contracts and thoroughly investigate them for any irregularities, manually. Artificial Intelligence powered contract management solutions handle these challenges with speed and accuracy and get organizations ready for a smooth and risk-free merger or acquisition.
Challenges faced pre-mergers or acquisitions:
- Financial risks/payment terms
During mergers and acquisitions, companies need to pro-actively monitor all the financials and payment terms as any wrong move could affect the shareholder trust in the company. During this time, the legal and sales teams are under constant pressure to produce detailed records of payment terms and important accounting records, which is made easy by CLM solutions by generating all necessary reports and maintaining all documents in a centralized repository. Reviewing all contracts also ensures that payments don’t fall behind, and an ideal cash flow is maintained. Any differences in payment terms can thus be resolved and updated in contracts as required.
- Legal/compliance risks
Contracts that are at risk of non-compliance or are breached due to non-fulfilment of any obligations can hold high legal risks for the acquiring firm. An acquisition cannot be completed before contracts are all reviewed for their compliance with all state and federal regulations and contract clauses including the ASC 606 standards. Contract Management solutions through pre-configured alerts and triggers, can easily identify any non-compliant contracts and help remedy all compliance issues before they can cause any problems.
- Business risks
If the business getting acquired has some non-compete clauses or other similar restrictions, they can thwart the performance or ability of the acquiring business. This can have a direct bearing on the overall value of the merger or acquisition and often postpone or halt the same.
- Contracts related risks
Every company has a different set of clauses and obligations to be followed for all contracts. And these most often differ from company to company like the acceptable risk percentage, payment terms i.e. 6 months credit or 3 months credit or the standard contract language and policies. Hence, for all incoming contracts from the company getting acquired, performing a due diligence in advance to ensure all contract clauses are in line with or are acceptable to the purchasing company is a must to ensure quick remediation of any non-compliant contracts.
- Complications in contract transactions
Some contracts have complex clauses that restrict the contracting party from transferring the contracts to another party or need an advanced notice to follow the clauses. In such cases, prior to any merger or acquisition, companies need to find an alternative to remain compliant while not losing any business.
Post mergers and acquisitions, there is a separate set of protocol, diligence, and follow-up to be performed for contracts to assimilate in the new business environment without causing financial threats or inefficiencies:
- Addressing a large volume of incoming contracts
Once a merger or an acquisition is complete, there are many contracts that need to be integrated with the already existing contracting system. Doing a preliminary, pre-acquisition due diligence does not suffice if contracts get misplaced or lost during the integration. A robust contract management system can seamlessly upload and integrate all new contracts and related documents in the system and ensure easy traceability and visibility of all contracts.
- Updating all required documents
During the pre-transaction contract analysis, legal operations and finance teams often identify documentations and additional paperwork that needs to be updated in the system to maintain records and ensure smooth assimilation. Post acquiring, timely follow-up and closure of these tasks can ensure no documentation is missed all contract related records are collated in the contract repository for an accurate audit trail.
- Diligent contract review process
With any migration or change of surroundings like with mergers and acquisitions, it becomes critical to be extra vigil with all new contracts coming in and integrating with the contract processes in order to avoid any mistakes or errors. Even with a robust reviewing process in place, with thousands of contracts migrating, slip-ups like missing a contract deadline or neglecting a redundant contract can easily take place. An additional set of reviews at the beginning phases of a merger/acquisition can catch any missed obligations or risks and give an additional layer of security to the companies.
As iterated above, as contracts play a key role in mergers and acquisitions, handling them right during these transactions is critical for the overall success of M&As. A manual, rudimentary contract system can only hinder this process due to the lack of visibility, trackability, standardization or a centralized system for all contracts, amongst others.
An AI enabled integrated, automated enterprise contract management solution ensures all contracts are integrated smoothly, all new as well as legacy contracts are easily tracked and monitored through a centralized repository and dashboards, contract language is standardized through pre-approved templates and clauses, all compliance is met, and any incoming risk is handled quickly through predictions and intelligence analysis.