To borrow a phrase from a bygone pre-digital era, virtual data rooms (VDRs) have become a sine qua non for any M&A deal of substance. Put simply, a VDR is a secure digital repository for sensitive company information and documents which are required by buyers and investors carrying out due diligence during an M&A process. Due diligence can be carried out remotely without the need for people to travel to examine physical records and documentation. And the cumbersome process of gathering large volumes of documents and records into one physical location is obviated.
“An M&A process involves the exchange of thousands of pages of information on the company being sold,” explains BDO partner Rory O’Keeffe. “The data can include legal agreements, customer and supplier contracts, employee matters, detailed historical and projected financial information on the business and much more depending on the company’s size and operations.”
“When I started in M&A first everything was handed over in paper folders,” says Grant Thornton head of corporate finance Paddy Dillon. “You went into a room and looked at the documents. It’s completely different now. Everything is online and everything is done through the virtual data room. Everything you need is in the data room, it’s a very neat way of sharing information.”
VDRs enable M&A due diligence processes to be conducted in a structured, efficient, collaborative manner where parties can analyse and access matters on the deal, O’Keeffe adds. “The users of a VDR can include potential investors and buyers, legal, financial, tax and other advisers and indeed the sellers and other stakeholders.”
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A well-populated VDR can provide the prospective investors with the information they require to evaluate the business in full and allow the transaction to progress in an orderly manner, he continues. “From the seller’s side, it allows the exchange of sensitive company data in a controlled and secure manner to the authorised parties at the appropriate time in a transaction.”
There is no set template for a VDR, and O’Keeffe advises business owners to look at the particular circumstances of the proposed sale process before deciding on the approach to take. “For sellers, preparation is key to a successful transaction outcome. A well-populated data room provides the necessary information to those evaluating the opportunity in an efficient manner. M&A advisers have knowledge of multiple VDR providers and the benefits of one over the other. The right VDR to use on a particular transaction will come down to cost, data sensitivity, deal structure and the market in which the investment opportunity will be targeted — local versus international, for example. Sellers need to discuss the transaction objectives with their M&A adviser, before moving forward to setting up a VDR. "
User security
And then comes the vitally important question of confidentiality. How can a seller ensure that sensitive data contained in the VDR remain confidential? “VDRs can provide strong controls and management capability over who has access to and what they can do with the documentation in the platform,” notes O’Keeffe. “User security and documentation protection settings can be applied to individual documents, if needed, restricting individual users from accessing, downloading, editing, and altering documents. And at all times tracking and managing the activities of users accessing the VDR.”
Companies can also be selective about what they put in the VDR in the first place, according to Dillon. “Every party signs non-disclosure agreements,” he notes. “You have to look at what information you are comfortable sharing. Certain material can be redacted if it is deemed too sensitive. Key contracts with prices and margins contained within them will be redacted, for example.”
He explains that such information will probably remain redacted until the deal has reached the exclusive stage or even further down the line.
Given their advantages in terms of process and cost efficiencies, the only real question is why we weren’t using them sooner.