All business professionals can probably agree that computers and the internet have had an immense impact on their business. In the investment banking world, the advent of the online or virtual data room (“VDR”) has had a significant impact on how we conduct our business.
Simply speaking, the VDR is an online file storage where electronic files can be shared in a controlled, organized, and secure fashion.
As investment bankers, we help our clients manage the process of buying, selling, or recapitalizing a business. Part of this process includes managing due diligence, where a buyer seeks to learn everything there is to know about the business before completing a transaction. The due diligence process is very complex and involves a review of virtually all aspects of the business: financial history, accounting policies, tax, sales, customer base, environmental history, HR, insurance, contracts, taxes, intellectual property, legal, IT systems, etc.
20 years ago, M&A due diligence was conducted in conference rooms with boxes of documents. While you got to meet a lot of interesting people, this method was very impractical if you wanted multiple parties to compete for a deal. Today, most investment bankers use a VDR to share information with qualified buyers. The VDR in an M&A transaction is commonly populated with information pertaining to finance and accounting, employees, legal, insurance, contracts, operations, and systems.
There are many advantages of using a VDR designed for M&A:
Access – All parties invited to the M&A transaction process can quickly get controlled access to the information, which expedites the transaction process. Most VDRs allow the administrator to tailor the access level for each user. For instance, we may block competitors from seeing particularly sensitive information, such as customer contracts and pricing. Also, VDR users get notified when new documents are available for review.
Monitoring – The administrator of the VDR can monitor each user and see what documents they are viewing, and for how long. This tool provides great insight to the investment banker, who can see what different buyers are focusing on and if there appears to be any particular concern related to certain information.
Security – Quality VDRs utilize the latest encryption and security technology to keep the information safe. Sharing information through a VDR is considered to be much safer than e-mail or a file server. Also, most VDR services incorporate security features such as:
- Watermarks unique to each user (if you print a document it has the user's name on it)
- Screen only viewing (preventing documents from being printed or saved)
- Electronic leash (allows the administrator to “pull back” documents if VDR access is revoked or expired)
However, as with any tool, if not used correctly it provides limited value. This is very true for a VDR. If you do not plan and set up the structure of the VDR properly, the benefit of using the tool quickly diminishes, and the already complicated due diligence process becomes even harder to manage.
Many business users are familiar with online file sharing services such as Dropbox and Google Docs. While these services are great for sharing and collaborating on files, they are not suitable as M&A data rooms. These file sharing tools are designed to enhance collaboration and allow multiple users to simultaneously edit the same document. A VDR designed for M&A purposes is very different. It is not designed to allow for collaboration, but rather, allow users to securely share information and maintain confidentiality.