M&A: Setting Up A Virtual Data Room

With the increased usage of Virtual Data Rooms – also simply known as VDRs – in Mergers and Acquisitions (M&A), there is a rising necessity in understanding their roles and functions, especially on what they can do for the entire M&A process. There is also a need for those who are directly engaged in M&A activities to know how to properly set up these VDRs in order to make the most of them.

It is a reality that all business face today that technology is needed for them to carry out major business transactions, and M&A transactions are among them.

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In this article, you will learn about 1) virtual data rooms in M&A, as well as 2) how to set up a virtual data room in an M&A transaction.

VIRTUAL DATA ROOM IN M&A

A VDR – or a virtual data room – is basically an online “warehouse” or “repository” where information is stored and distributed through documents. This method of document sharing and storage solution is designed primarily for legal due diligence, M&A, initial public offerings (IPOs), bankruptcies, corporate restructuring, licensing, intellectual property rights, and other applications involving sensitive information.

In the M&A context, VDR serves as a storage for all information essential to the M&A process. Data or information related to the companies, units, or divisions being sold or acquired in the M&A process are stored in a VDR. All parties involved in the M&A will be granted access to the information, while keeping unrelated parties out.

In the past, the traditional method would entail having a physical storeroom – often referred to as the “physical data room” or PDR – to store information and documents that are to be distributed in the future. As time passed, however, and technology advanced, many have transitioned from physical data rooms to online methods, with the VDR eventually claiming center stage.

Advantages of VDR in M&A Transactions

We can break down the reasons why VDRs are now the preferred option over the traditional physical data rooms that were originally utilized by businesses by looking at their advantages.

Cost Reductions

Maintenance of a physical data room costs money; there is the maintenance of the physical location itself, and there are also the salaries and wages of people involved in maintaining it. You have to pay the wages of those who will keep it clean, and those who will provide security for it. Even those who will be moving or transporting, and copying and printing the documents, will also have to be paid.

With a VDR, these costs can be cut down into one or two key staff or personnel to maintain the repository. There is no longer a need to rent a physical space or location for your PDR or, if you’re not renting, the room originally used as a PDR may be used for something else.

Similarly, going to and from the physical location of a data room also costs money in transport, as well as accommodations and meals, especially if the PDR is located out of town or even out of state. The costs are even higher if the companies are engaged in a cross-border merger and have to cross international lines in order to get access to data inside physical data rooms. With VDRs, this is significantly reduced.

Efficiency

In a traditional environment, getting permission to access and view the information, then having them copied or printed, takes a lot of time. The process of looking up the information you want in a roomful of documents is time-consuming and tedious. If two or more parties are in need of information, there is no longer a need to tolerate waiting times, as simultaneous access is possible.

Since VDR is online, pulling out the information you are looking for takes no more than a few clicks. Copying and printing them, as well as distributing them to the concerned parties, also takes a very short time – minutes, seconds, even – so that is definitely saves a lot of time. This speed of access, which is attributed mainly to its online feature, is one of the key reasons why VDRs have become increasingly popular over the past few years.

VDRs are also designed to be accessible on a 24/7 basis. A physical data room may not always be able to grant this level of accessibility due to physical constraints.

Security

VDRs are designed with data security features so event sensitive information are kept and maintained in them. Therefore, confidentiality and controlled access are enabled. Only authorized personnel are given access to the data inside the data room, and various levels of access and permission are granted, depending on the degree of involvement of the people or parties.

Tracking and monitoring is also easier in an online environment, since it can set time limits on logging and viewing.

A VDR guarantees a controlled environment, where you get to keep full control over what information will be shared, how they will be given to those who need them, when they will be revealed, and, more importantly, to whom they will be revealed.

Process transparency

VDRs often have an audit trail feature, where all the actions of the parties are tracked and recorded electronically, so everyone knows who logged in, who accessed and downloaded what, and even how long they stayed logged inside the VDR. Easy verification is enabled in a VDR, whereas it is more difficult to keep track of these access info in the case of a PDR.

The feature where buyers and sellers are allowed to directly communicate through the VDR interface also adds to the transparency advantage. This means all their communications and interactions are recorded for future reference.

Comfort and convenience

Who would want to be travelling back and forth to the physical location just to retrieve a specific piece of information? With the VDR, accessing can be done within the comforts of one’s office, without physically leaving the room. For the sellers, the simplicity and ease of setup of a VDR is also to their comfort and advantage.

This isn’t to say, however, that VDRs offer only good things. It also has its disadvantages, particularly to the seller.

• Security issues: Security is a double-edged sword when it comes to VDRs. On one hand, they can ensure that all sensitive information is revealed only to those who are qualified or authorized. On the other hand, as technology advanced, so did security threats. There is always a risk of information being leaked or misused when multiple users are allowed access to the VDR. This calls for proper risk management and ensuring that security features of the VDR, as well as the parties allowed access to the VDR, are managed properly.
• Difficulty in adapting to modern technology: Let’s face it: not everyone is subscribing to the digital way of doing things. Many businessmen still prefer reading paper documents. They prefer signing contracts on paper. They want to read details in print instead of reading it on a computer or laptop screen.
• System performance: In some ways, the VDR will still be dependent on hardware. For example, it takes longer to transition from one page to another when accessing pages in a VDR. If the user has a slow system, the speed will also be affected. Therefore, there is a need to ensure that the system is always updated.

Trends in M&A VDRs

VDRs have come a long way from the initial versions, which was primarily used for due diligence processes. There have been many updates, adding more capabilities to VDRs, until they have become these powerhouses that serve as a medium for conducting entire M&A transactions, from beginning to end.

Rising number of VDR vendors

A 2014 market research report showed that, in the US alone, there were more than 240 VDR vendors in the market, resulting in a whopping $880 million revenue industry. Presumably, a large percentage of these companies provide VDRs for M&As, as well as IPOs.

Wide variety of technology-based functions and features

VDRs are becoming increasingly advanced, with many features that are geared towards performing due diligence with higher degrees of efficiency and accuracy. Examples of these features are:

• Dynamic Indexing: This is useful when it comes to uploading late documents. It becomes easier to add the late documents to the VDR just by putting them where they are supposed to be in the online index. This is also useful when the users belatedly realize that some documents are out of order and have to be rearranged.
• File Format Flexibility: If there is only one file format, then there would be no problem. However, there are now a lot of file formats and a VDR can now accommodate this wide variety of file formats to store, such as Excel, Word, PDF, PPT, JPEG, GIF, TIFF, MPEG, and many others. This certainly saves time, since it does away with the need to convert files using another program just so the VDR will be able to store it.
• Q&A Function: This definitely comes in handy when users, particularly the buyers, have something to verify with the sellers about the contents of the VDR. Usually, they would have to contact the sellers separately, via phone or email, to make their inquiry. However, they can course their inquiries directly through the VDR, saving them a lot of time. It is also easier to reference the specific document in question when the interaction is done within the VDR interface.
• Restricted Use: Security is one of the best features of VDR, and the restricted use feature is simply one of its components. Through this feature, it is possible for one document to have certain parts restricted while the rest are unrestricted. Contingent restrictions on access and permissions may also be allowed. For example, one user may be allowed to view it, but not to print or copy it. Another example would be a financial expert being able to download only documents that are financial-related, but are off-limits to legal documents, and vice versa.
• Search Function: This is, quite possibly, one of the most appreciated added features in VDR. It certainly cuts down a lot of time having to scroll through everything just to find the document or item that you need. Just by keying in specific keywords or key phrases, you can find what you are looking for in seconds.

SETTING UP A VDR IN AN M&A TRANSACTION

A VDR can be set up in two ways:

• Internal, where the selling company provides the VDR and oversees the setup; or
• External, or outsourcing, by hiring VDR providers or vendors

In many cases, businesses resort to either partial or full outsourcing. Here are the steps involved in setting up a VDR for M&A purposes, on the assumption that the target company has already gathered and compiled all the necessary data and documentation.

What are the documents and information that must be compiled? They include, but are not limited to, the following:

• Financial reports and financial statements
• Corporate books
• Contracts and agreements
• Employee paperwork
• Insurance policies
• List of properties and capital assets
• Legal documents

The steps are essentially the same, whether done internally or externally. For purposes of discussion, however, let us assume that the company is availing the services of an external VDR vendor.

Step 1:  VDR Instruction

The client and all the VDR participants (or those who will be directly involved in the use of the information to be stored in the VDR) from the target company gather together to be instructed on how to use the VDR. This is often accomplished through a seminar or a conference call.

Step 2:  Needs Assessment

The needs of the client are assessed. The most notable details evaluated in this stage include:

1. The number of pages to be uploaded to the VDR;
2. The pages that require scanning;
3. The number of buyers that are invited and allowed to have access to the VDR;
4. Duration of the VDR process

This stage will give the VDR provider an idea on the storage capacity that will be needed as well as the number of users expected for the VDR.

Step 3:  Contract signing

Often, there is a standardized service contract that will detail all the responsibilities and other details of the contract between the client and the VDR service provider.

Step 4:  VDR creation

The VDR vendor will now create the VDR, depending on the information obtained from the client’s needs assessment.

Step 5:  Scanning and uploading

This is where the pages, which have been gathered and compiled beforehand, are scanned and subsequently uploaded to the VDR. Once everything has been uploaded, indexing follows. The online index will also be created by the VDR provider.

Have a set of guidelines in place when it comes to naming, numbering and structuring the documents. This is for purposes of uniformity. It could be alphabetical, or numerical, or even chronologically arranged, where applicable.

It is also recommended by many experts that the files be optimized, or the their file sizes reduced in order to save storage space.

Step 6:  Maintenance and quality control

In this stage, all issues regarding maintenance are reviewed and addressed appropriately.

This is actually an ongoing process, since there is a need to conduct security checks regularly. The participants are expected to have questions that need to be answered every now and then, and it is also almost always expected that there are some documents that need to be scanned and uploaded later.

Setting it up seems simple enough, but here are some more tips that will help ease the process even more.

• Compile all documents prior to VDR development: Consider this as the first step of the development process, or the step that must be performed even before you start setting up a VDR. Ideally, the setup period of a VDR takes o more than two weeks, whether set up internally or outsourced. If you are outsourcing it, compile the documents before getting in touch with the VDR vendor or provider. If the documents are not compiled early on, it will take even more time. Choosing the pages to be scanned and uploaded already takes a considerable duration, and by being unable to compile them all beforehand will only waste even more time.
• Keep it simple: Set up a VDR for the purpose that you actually need it. Remember that the users may not have the same understanding or familiarity with navigating online systems, so keeping it simple – with an easy to use and understand interface – is to everyone’s favor.
• Use state-of-the-art platforms when you can: The more useful features or functions you can incorporate – without turning the VDR into a veritable maze – the better. The Search function and the Q&A features are two of the most important features, according to many users, that a VDR should have.
• When delegating, choose your provider wisely: Fortunately, there are a lot of VDR vendors and providers today that you can choose from. The top VDR vendors include iDeals, Citrix ShareFile, Firmex, SecureDocs, V-Rooms, Caplinked, RR Donnelley, HighQ, and SmartRoom.