Advanced analytics and social media are fast becoming mainstays in the M&A tool kit, but many companies are struggling with how to leverage these new tools to create competitive advantage, according to Deloitte’s 2013 Corporate Development Survey. Over 40% of the 435 companies responding to the survey are currently using data analytics in their deal process, and 17% are considering it. Those companies not using data analytics yet in their M&A process cite complexity as the top reason.
Meanwhile, one-third of the companies surveyed are using social media channels as part of their various M&A activities. The primary uses for social media are target identification (56%), due diligence (30%), negotiations (7%) and valuation (4%).
JR Reagan, leader of the Deloitte Analytics HIVE (Highly Immersive Visual Environment) and principal, Deloitte & Touche LLP, discusses how deal professionals can use data analytics, visualization and social media to enhance their evaluation and pricing of a target and to gain a competitive edge in business case forecasting. At the HIVE, visitors can examine the latest analytics technologies and approaches themselves, using their own data.
Q: How are deal professionals using data analytics in the M&A process?
JR Reagan: We see companies using data analytics throughout the M&A spectrum of activities—from the vetting process where they dive in to see whether or not the information is useful and what they can find out about the target company, to being able to use big data to compare against industry trends, all the way through the stage where the deal is announced. Companies are increasingly turning to analytics to address such needs as how to gather information internally, how to develop a database to compare various aspects of the deal, such as financials and other issues. M&A is an area where data analytics can play a valuable role, particularly given the time constraints that deal professionals face in an M&A situation.
Q: How can data analytics and visualization tools support deal professionals?
JR Reagan: Conceptualizing and putting a deal together requires an incredible amount of information and analysis and an understanding of historical patterns, as well as the ability to forecast. While spreadsheets can help capture data, they are less effective when it comes to showing patterns. When you’re dealing with millions and billions and even trillions of rows and columns of information on companies, with conditions and hypotheses that support or refute a business case for a deal, visualization becomes very important. This becomes particularly so with big data, which is not just about what is in our four walls and what we may get from the other company through due diligence. Put on top of that the many relevant data points—be it social media activity, census information, weather information, on and on and on—and the combined data starts to tell us different things about the transaction. These are all pattern-based things we’re trying to sum up in our heads, and it gets really hard to do that because there’s so much information.
Research shows that as human beings we can recognize patterns and pictures 60,000 times faster than a page of text. When we multiply the amount of text on a spreadsheet model, it becomes overwhelming. This is where visualization can help, not only in understanding patterns, but also in producing richer insights than those we can obtain from the purely financial model we normally go into transactions with. And visualization can help make the decision process easier, but more effective.
So visualization, analytics, big data, social media—they all come into play to provide greater predictive capability than we’ve had in the past.
Q: What types of analyses can be visualized in the M&A context?
JR Reagan: On the simplest basis, visualization can be used for depicting what could happen in various “what-if” scenarios. “If I do X or conditions are Y, what might the stock price do based on these variables?” In one example, numerous parties came to the table with 50 different spreadsheets and 50 different ways of modeling, but they wanted more of a common starting point to look at everything. Visualization tools helped them get to that point.
We’ve created other models that look at geography and resources. Take this scenario for example: “We expect the price for this particular mineral to be higher, it’s coming from this region but going to that country, how does that affect share price? And what if that declines, where else would we get the rare earth minerals?” Visualization is a useful tool to help gain insights into what could happen in such an event.
When it comes to M&A, the key is to focus on those analyses, data and insights that could influence the M&A decision rather than on the broader universe of data. Sometimes data analytics is merely interesting; other times it can reinforce or change a decision. Good analytics focuses on what is relevant to the current decision. For instance, how does that uncertainty about rare earth minerals impact whether and how you do the deal?
Q: What role could big data and visualization play in forecasting for M&A purposes and what could they provide that might be different from other types of analyses, such as Monte Carlo simulations?
JR Reagan: An executive might be thinking, “I’ll run the Monte Carlo simulation, then I kind of know what is happening in that region because I read this, and then I have these meeting notes.” These are all factors we sum up in our heads; now we have the ability to take a more fact-based approach to what has traditionally been intuition-based.
Studies show that relying on intuition and heuristics for complex decisions like M&A typically results in poor decisions. Leading analytical and visualization methods synthesize models and data from multiple sources to provide a more defensible foundation for making big-bet decisions. The simulation model might tell us about the likelihood of achieving targeted synergies in a deal, and visualization of big data can then provide a way to investigate, challenge or reinforce the assumptions about achieving those synergies. Intuition, of course, can supplement this process.
Q: The survey showed that many people are concerned over the reliability of data from social media. How can you wade through the noise and find the right information?
JR Reagan: We hear that concern a lot, but people should keep in mind that social media is a lot about people’s opinions. As an information source, that can be valuable just as is the case with surveys. We see social media almost as real-time surveying. With targeted questions and targeted people, you can get real, raw, unfiltered commentary that may be very rich, and it can be on almost anything, from conditions in a particular country, to preferences for different products. What deal professionals need to keep in mind is that social media is an additional source of information; it’s not the source of information.