1. INTRODUCTION
The world is currently experiencing a rapid wave of digitalization, with artificial intelligence (AI) playing a key role in driving this wave's exponential growth. Day by day, professions traditionally carried out through conventional methods are encountering AI, and the process of integrating AI, whether consciously or unconsciously, is accelerating. As AI reshapes industries, it is also creating opportunities for strategic acquisitions and transformations for companies.
One of the sectors inevitably impacted by artificial intelligence is "law". AI is increasingly integrated into the legal sector, improving decision-making processes, speeding up document review procedures, and analyzing legal risks. With the advancement of AI, it is inevitable that profound changes will occur in traditional mergers and acquisitions (M&A) processes. Traditional M&A processes are evolving in a new direction with AI, gaining agility and flexibility. However, in the era of AI, mergers and acquisitions involve not only the acquisition of technology but also the assessment and management of new legal and regulatory risks related to AI. In this context, considering that AI has yet to replace human judgment, it is becoming increasingly important to define and understand the limitations of AI1.
Artificial intelligence has rapidly gained momentum in financial markets, positioning itself as a key area that has attracted the attention of strategic investors. Indeed, strategic investors, who are constantly pursuing strategic objectives, direct their efforts towards companies with digital transformation goals, thereby participating in mergers and acquisitions to advance their initiatives2. The financial technology (Fintech) market, in particular, stands out for its dynamic and growth-oriented nature. In Turkey, the fintech sector has emerged as one of the promising fields with significant growth potential. As of 2020, the fintech market in Turkey is reported to have an annual growth rate of 14%3.
This study will provide a general definition of artificial intelligence, evaluate its applications in the context of mergers and acquisitions, and focus on the impact of AI on mergers and acquisitions within the AI sector.
2. ARTIFICIAL INTELLIGENCE
There is no universally accepted or standardized definition of the concept of "Artificial Intelligence" worldwide. Indeed, in the Turkish legal system, the concept of AI has not been defined by lawmakers. One doctrinal view defines AI as "a discipline aimed at imparting human-like abilities, such as reasoning, generalization, interpretation, and learning based on past experiences, to a computer"4.
The rapid changes and developments in artificial intelligence, coupled with the variety of approaches to AI, make it difficult to establish a common definition of the concept. Nonetheless, we believe that the legalization of AI should be brought onto the agenda in Turkish law, and lawmakers should provide a clear definition of AI.
2.1. ARTIFICIAL INTELLIGENCE CODE
The regulation of the market introduction, deployment, and prohibition of certain applications of Artificial Intelligence is governed by the "Regulation (EU) 2024/1689 of the European Parliament and of the Council of 13 June 2024 Laying Down Harmonised Rules on Artificial Intelligence and Amending Regulations"5) (the "EU AI Regulation"), which was published in the Official Journal of the European Union on 12 July 2024 and entered into force on 1 August 20246.
The EU AI Regulation does not provide a definition specifically for "artificial intelligence", but instead offers a definition for "artificial intelligence system" (AI system). According to Article 3(1) of the EU AI Regulation, an "artificial intelligence system (AI system)" is defined as "software developed with one or more of the techniques and approaches listed in Annex I, which is capable of producing outputs such as content, predictions, recommendations, or decisions that influence the environments with which it interacts, to achieve specific objectives defined by humans".
3. THE APPLICATION OF ARTIFICIAL INTELLIGENCE IN MERGERS AND ACQUISITIONS PROCESSES
2.2. Traditional Mergers and Acquisitions Process
One of the key areas that both the investor and the target company should focus on in mergers and acquisitions processes is "data". A significant portion of the M&A process involves the examination of this data7. However, this M&A cycle has been criticized due to factors such as uncertain costs, lengthy review processes, and data deficiencies8. It has been reported that the average time required to complete a merger or acquisition has increased by more than 30% over the past decade9. One of the reasons for the extended timelines is the increased scrutiny of M&A processes by regulatory authorities.
3.2. Effect of Artificial Intelligence On Mergers and Acquisitions
The rapidly advancing artificial intelligence software can automatically review thousands of documents and scan for key provisions such as exclusivity, non-compete agreements, and indemnity clauses that are crucial to the spirit of merger and acquisition projects. This not only allows human resources to be directed towards more strategic areas, but also minimizes potential errors and omissions, thereby increasing the reliability of the transaction process.
3.1.1. Due Diligence
Due Diligence is a comprehensive investigation and examination process conducted by individuals, organizations, or legal entities to assess and evaluate various aspects of a specific venture, situation, or issue (such as a business opportunity, investment, transaction, or legal matter). It involves gathering relevant information, analyzing data, evaluating risks, and making informed decisions based on findings. The review of the target company's economic, financial, legal, and tax aspects is at the core of the due diligence process. This type of review is critical, particularly when considering partnerships, acquisitions, or significant investments. The due diligence process varies depending on the size and functionality of the transaction, and includes numerous subcategories such as financial analysis, legal analysis, operational review, market and industry analysis, human resources evaluation, and customer and sales analysis. A thorough and diligent due diligence process lays the groundwork for a smooth and efficient merger and acquisition process, as well as for the subsequent integration phase.
In mergers and acquisitions processes, cloud-based virtual data rooms (VDRs) have been widely adopted for due diligence processes, depending on the nature and scale of the transaction. In recent years, AI-powered tools specifically designed for virtual data rooms have been developed to more efficiently review and analyze the information and documents uploaded to these virtual environments, as well as to identify, categorize, and extract relevant data related to the transaction. These tools can be used to extract and organize key provisions such as "change of control", "indemnity", and "exclusivity", and assist in understanding the jurisdictional scope of target agreements and identifying problematic contract clauses10.
At this point, artificial intelligence is evolving to optimize the due diligence process by automating data processing and analysis, compliance and risk management, and operational efficiency analysis, with the goal of ensuring maximum efficiency both during the pre-transaction phase and the post-transaction integration. In this way, AI can create value not only during the due diligence phase but also throughout the post-transaction compliance process.
3.2.2. Post-Closing Process- Integration
The post-merger and acquisition period requires the integration of different business cultures and employees. Since the focus here is on cultural dynamics and human relationships, the application of this technology may be limited in this context. However, beyond this, AI's contribution to the post-merger process cannot be overlooked in areas such as improving operational efficiency, developing and integrating the target company's IT infrastructure, and enabling continuous improvement through AI-driven analysis and feedback. AI can play a key role in optimizing these aspects of the post-closing cycle11.
3.2.3.< Key points
When using artificial intelligence in mergers and acquisitions processes, there are several key points that must be considered. As mentioned above, AI lacks reasoning abilities, at least, with current technologies, and therefore, the use of AI systems for making ethical decisions, interpreting documents correctly in specific contexts, and providing negotiation tools carries risks. Therefore, human judgment must always be applied when using AI. From a legal perspective, judicial differences in legislation also present challenges for AI. Data security is also one of the most critical points to consider. Leaked information can severely damage a proposed agreement, and the interests of the parties involved.
4. MERGERS AND ACQUISITIONS ON ARTIFICAL INTELLIGENCE INDUSTRIES
Due to the strategic importance of artificial intelligence technologies, mergers and acquisitions in the AI sector have gained significant momentum. This, in turn, necessitates a comprehensive due diligence process specific to the mergers and acquisitions within the AI sector.
Due to the complexity and unique nature of artificial intelligence technologies, elements such as representations and warranties in mergers and acquisitions agreements are increasingly becoming more tailored to the specific characteristics of the target company. For instance, issues such as data privacy, intellectual property, and cybersecurity are significant risk areas for AI companies, and buyers may conduct more detailed investigations in such areas, potentially requesting additional representations. These representations serve to mitigate legal and operational risks that may arise in the specialized areas of AI technologies.
Buyers may limit the target company's ability to make changes to its AI policies or implement new AI applications during the period between signing and closing. Such provisions are among the measures taken to protect the value of the target company post-transaction12.
The buyer, through such measures, aims to ensure the target company's strategic alignment post-transaction while more effectively managing potential risks during the deal process.
5. CONCLUSION
The rapid development of artificial intelligence technologies is creating a significant turning point in mergers and acquisitions processes. As part of digital transformation, AI not only accelerates and simplifies M&A processes, but also enhances efficiency in stages such as data analysis, due diligence, and post-transaction integration, thereby supporting strategic decision-making. Detailed reviews, especially in sensitive areas like data security, intellectual property, and cybersecurity, are crucial for mitigating legal and operational risks in the sector.
In the future, a deeper integration of artificial intelligence into mergers and acquisitions processes will enable transactions to be faster and more reliable. However, the ethical and judicial challenges that such technology may bring, which must be supported by human judgment, should not be overlooked. The AI sector, with its own dynamics and high-risk elements, requires more targeted and tailored strategies in M&A transactions, while buyers' efforts to preserve the target company's value post-transaction should also be supported by new regulations.
Footnotes
1 Kavya Sanjay Singha, "The Transformative Potential of Artificial Intelligence and its Impact on M&A Transactions", Jus Corpus Law Journal, 2023 Access Date: 08.10.2024
2 Deipenbrock, Gudula, M&A and Financial Markets in the Agre of Artificial Intelligence – Critical Observations from the Perspective of Law, Forum Mergers & Acquisitions 2023, Access Date: 15.10.2024
3 Aktuğa, Semih Serkant, "Development of Fintech Sector in Turkey", Accessed Date: 29.10.2024
4 Diri, Feyza, Yapay Zeka Teknolojisi ve Beraberinde Getirdiklerinin Türk Sağlık Hukuku Kapsamında Değerlendirilmesi, 29 May 2024, Access Date: 29.10.2024
5 To access the full text of the EU Artificial Intelligence Regulation, please refer to the following link: https://eur-lex.europa.eu/eli/reg/2024/1689/oj
6 T.C. Dışişleri Bakanlığı Avrupa Birliği Başkanlığı, https://www.ab.gov.tr/ab-yapay-zeka-yasasi-yayimlandi_53836.html,12.07.2024, Access Date: 28.10.2024
7 Kavya Sanjay Singha, 2023
8 Bruce C. Doeg, 'Rethinking What is Possible in Mergers and Acquisitions' (Baker Donelson, 28 July 2020) https://www.bakerdonelson.com/rethinking-what-is-possible-in-mergers-and-acquisitions, Access Date: 27.10.2024
9 Justin Lavelle, Gartner Says the Average Time to Close an M&A Deal Has Risen More Than 30 Percent in the Last Decade, GARTNER, Access Date: 29.10.2024
10 AI in the M&A context, https://www.dentons.com/en/insights/articles/2023/july/7/ai-in-the-manda-context , July 7, 2023, Access Date: 29.10.2024
11 Legal AI will transform post-merger integration. Here's how, https://www.legadex.com/news/96/legal-ai-will-transform-post-merger-integration-here-s-how , Access Date: 29.10.2024
12 Chrisptoher M. Barlow, Ken D. Kumayama, Sonia K. Nijjar, Yingchuan (Grace) Mo, M&A in the AI Era: Key Deal Terms To Watch, Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates, June 2024, Yavuz Akbulak tercümesi, 29 July 2024, https://legal.com.tr/blog/yapay-zeka/yapay-zeka-caginda-birlesme-ve-satin-almalar-dikkat-edilmesi-gereken-onemli-anlasma/ Access Date: 29.10.2024
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