Years ago the idea of using a virtual data room (VDR) seemed like it would never be accepted. The concept of taking paper due diligence materials and placing them ‘online’ seemed too far fetched to work. People felt the internet would never have the level of security or the speed required to display sensitive corporate information to outside parties.

Once internet connection speeds increased and security measures improved so did the idea of people reviewing information on a computer screen from the comfort of their own office. Today, VDR awareness is still growing and the adoption rate continues to move further downstream from Fortune 500 companies to middle market companies. Additionally, VDRs were primarily viewed as tools for divesting assets by auction. Today the use of virtual data rooms has expanded to acquirers in two party (one buyer, one seller) transactions.

As deal flow returns, many companies will look to grow within their space by add-on or bolt-on acquisitions and as a part of their process they include a virtual data room to help reduce expenses, add a level of security, prove disclosure, reduce transaction time and provide a better experience for them and the seller. One M&A industry professional in the bio-pharmaceutical field they stated that, “using virtual data rooms as an acquirer in conjunction with the face-to-face meetings keeps the team busy working at our office and allows us to facilitate negotiations in person”.

In one-on-one transactions, more buyers are taking the lead to set up and pay for third-party virtual data rooms. After a target is identified the buyer typically issues the seller a due diligence request list. At this stage many first time sellers do not have advisers or the resources to efficiently handle the preparation and oversight of the diligence materials during the transaction. Even though buyers used to be reluctant to make suggestions to a target on how to effectively handle this process they are now more willing to present the option of a virtual data room, even if they are one picking up the cost.

By supplying the seller with a virtual data room during a transaction a buyer is able to receive access to diligence materials faster then they could move their review team onsite. In addition, the buyer can provide access to multiple parties (accountants, lawyers, etc.) who could then review the information concurrently rather then going through binders one at a time. The VDR allows the seller to retain a high level of security on their corporate information during this review process by allowing them to set up various secure access levels and monitor each individual’s activity. If new information needs to be included during the review process the seller can easily make the additions to the VDR rather then making multiple paper copies to distribute. The virtual data room format also allows for quicker sorting of the information through the utilisation of a built-in search feature. This can be helpful for both the buyer and the seller as they try to locate key information during the transaction.

Below are four acquisition scenarios from the buyers’ perspective.

Scenario 1
The first time seller uses their own internal document hosting system to provide access to the due diligence materials. They are located in California and the buyer and their advisers have locations and personnel in several places across the US (Ohio, Michigan, New York and Chicago). Strains in the negotiation start early. The review is delayed because the seller’s firewall makes setting up permissions to outside users more difficult than anticipated. Once permissions are granted, only a limited number of IT personnel within the seller’s organisation are available (sensitivity reasons) to help with questions, troubleshooting and loading additional documents requested by the buyer. There are miscommunications on what information has been made available and reviewed.

Scenario 2
The buyer is located in the US and has found a prospective target in the UK. The target initially chooses to run the deal using a traditional paper deal room held at a law firm in the UK. In order to complete their due diligence the buyer spends approximately $25,000 a week in T&E before suggesting a virtual data room be implemented to expedite the process. More important than the reduction in travel cost and expense, the 24/7 access provided by the virtual data room versus a paper deal room condensed the review time and helped the seller monetise their asset faster.

Scenario 3
The buyer uses outside auditing teams once the transaction closes to review the acquired information during the transition period. The virtual data room allowed the buyer to quickly add the auditing teams to the site and permission them as unique users to see only the necessary information (e.g., not HR materials.) This allowed them to begin the integration process almost immediately upon closure of the transaction. Buyers who utilise a virtual data room will no longer have to wait for a truck full of boxes to arrive or receive volumes of unsecured emails before integrating the new business into their current operation.

Scenario 4
It is two years after an acquisition and a dispute arises in part over whether the seller disclosed certain information. To complicate the matter, many of the professionals who worked on the subsidiary’s acquisition team are no longer with the company. Because the transaction was handled with a traditional paper data room the parties had to go through a long and drawn out process of determining what information was made available pre-purchase. The internal legal officer recognised that with a virtual data room there would have been an electronic record of all documentation disclosed during the transaction. The parties would then be able to search through the electronic files and quickly determine which documents had been reviewed, what information had been disclosed and what parties did the reviewing. This quick access would help settle or reduce their dispute.

Virtual data rooms have become one of the most necessary tools today for the efficient and legally defensible purchase of another company. It’s not surprising that more than 30 percent of the M&A deals done worldwide using a VDR are mandated by the buyer. We expect that trend to accelerate as more people take advantage of technology and services to reach a valuation and buying decision.

Paul F. Hartzell is Senior Vice President of Merrill DataSite

For more information Tel: +1 (212) 367 5950; Email: Paul.Hartzell@merrillcorp.com; www.merrilldatasite.com