M&A in the Age of AI: A Buyer’s Guide
As artificial intelligence (AI) continues to reshape the business world, companies looking to acquire businesses that leverage AI must approach due diligence with a specialized focus. Understanding the nuances of AI development, deployment, and regulation is critical for mitigating risks and maximizing the value of these acquisitions.
Assessing and Allocating Risk
One of the first steps in acquiring an AI-driven company is thoroughly assessing the risks associated with its AI technologies. This involves a deep dive into several areas:
- Third-Party Contracts: A review of existing contracts is crucial. Buyers need to understand how liabilities are allocated, including warranties, limitations of liability, and indemnification clauses related to the AI technology.
- Potential Liabilities: Buyers must consider potential liabilities related to AI-generated content, such as copyright infringement, and understand that AI malfunctions could lead to breaches of commitments or other harms.
- Insurance Coverage: Analyze existing insurance policies to ensure adequate coverage for potential claims related to AI usage.
Protecting Proprietary AI Technology
For companies with proprietary AI, protecting intellectual property (IP) is paramount. Buyers should:
- Review IP Strategies: Scrutinize the target’s approach to protecting AI technologies, including patents, copyrights, and trade secrets. A robust IP strategy protects the unique value of the acquired company.
- Assess Security Measures: Thoroughly analyze the target’s security measures to confirm that strong information security policies and non-disclosure agreements are in place to safeguard the secrecy of AI models.
Cybersecurity and Data Privacy
Given the dependence of AI on data, cybersecurity and data privacy are major areas of concern. Buyers should:
- Data Protection Practices: Assess compliance with applicable privacy laws and regulations, including those related to data transfer requirements.
- Vendor Contracts: Ensure that all third-party vendor contracts include appropriate obligations for data privacy and cybersecurity.
Navigating Regulatory Compliance
AI regulation is a rapidly evolving field. Purchasers need to ensure the target company is prepared to meet present and future compliance requirements. Buyers should:
- Systems for Oversight: Examine the target’s internal systems for overseeing AI use and addressing regulatory challenges such as minimizing bias and ensuring transparency.
- Organizational Support: Evaluate the resources the target company has in place to deal with compliance issues related to AI.
Implications for M&A Buyers
Successfully navigating the unique challenges involved in acquiring AI-driven companies requires careful planning and thorough due diligence. By focusing on the key areas discussed above, buyers can accurately assess potential liabilities, ensure a smooth integration process, and position themselves to successfully leverage AI technologies for future growth. Diligence in these areas helps protect investments today and ensures a strategic advantage for the future.
