The Darker Side of Record-breaking M&A Numbers

Corporate deal-making reached new highs in 2021, with a record 63,000 M&A transactions worth $5.9 trillion (yes, that’s trillion with a ‘t’). The United States accounted for $2.6 trillion of global deal value, an increase of 82% over 2020 figures.  

With all this deal action, it seems timely to highlight a potential risk facing companies whose growth is fueled by large doses of M&A. The risk in question is contract risk: things lurking in the fine print of revenue contracts, supplier contracts, and various other business agreements. When a business is acquired, the new parent typically inherits the contracts of the acquired company, including the good, the bad and the ugly provisions those contracts contain.  

Some agreements will have been scrutinized during due diligence. But not every risky term will have been checked, and many “non-material” contracts will have been skipped. So, you can almost guarantee that somewhere in the portfolio of acquired company contracts are risky provisions waiting to show their ugly heads: a toxic indemnity; a leakage of important IP; unlimited liability exposure; unexpected exclusivity or restraint provisions; termination rights that create revenue and supply chain uncertainty. These are just some of the more obvious examples. 

Until recently, this “dark risk” hidden deep inside opaque legal agreements was something we all learned to tolerate and deal with. Because the cost of human review was so high, it simply wasn’t realistic to assess every possible risk. But with machine extraction now reaching a tipping point of maturity and effectiveness, it’s finally possible to shine a light on many of these dark risks without breaking the bank.  

Of course, you need to choose carefully. Not all contract analytics and AI machines are created equal. Be sure to challenge any potential supplier of contract AI to a “blind test” so you can verify their capabilities for yourself. At Catylex, we’re up for the challenge.