The use of virtual data rooms (VDRs), secure digital repositories for sensitive company information and documents, has now become the norm for significant M&A transactions. So what exactly are they and what benefits do they offer buyers and sellers during a deal process?
In simple terms, a VDR is an archive consisting mostly of sensitive documents and information that can be accessed online or via the internet. Virtual data rooms play an important role in M&A transactions and the subsequent due diligence process that usually accompanies them, which involves poring over potentially thousands of pages of documents in some cases.
They are vital for securely sharing sensitive information during M&A processes. They enhance efficiency by centralising documents, facilitating collaboration and allowing controlled access for all parties. In practice, VDRs are usually provided by external IT service providers, with a number of specialists providing services in this field.
“For sellers, VDRs provide a professional platform to present the business, while buyers benefit from streamlined due diligence. The audit trail functionality also ensures compliance and transparency, which is hugely valuable in creating a record for legal disclosure processes,” notes Freddie Saunders, director of corporate finance at PwC Ireland.
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Prior to VDRs, information was shared in a physical format, typically located in a solicitor’s office. This required buyers to travel to where the information was located and review the information in a controlled environment. A precise record was then made of who had physically inspected which piece of information or document in the data room. All in all, this made the due diligence process, which was usually time-consuming anyway, even more arduous.
As Saunders notes, this limited the number of parties that could access the information. “VDRs remove the need for buyers to travel and allow for multiple parties to review the information simultaneously. This helps create competitive tension in a process,” he says.
Virtual data rooms offer many advantages, among them security, and generally offer higher levels of confidentiality than their physical counterparts. Encryption, access logging and other security measures can be used to ensure greater levels of data protection.
Strict usage rules for the VDR should first be agreed between the parties. For example, it should also be specified whether printing restrictions will be set up for the documents made available in the VDR. This can serve as an additional safeguard ensuring confidentiality of the information available in the VDR.
Experts agree that the VDR should be intuitive and user-friendly to make it as easy as possible for everyone to use and should include a clear and well-organised folder structure, and a simple search function to make it as easy as possible for users to quickly find the information they need
When deciding what documents the VDR should contain, companies need to consider data-compliance issues concerning the storage and sharing of sensitive information such as employee data, for example.
Another practical advantage of using a VDR is costs as it reduces the need for physical rooms, printing costs and any other expenses relating to the setting up and maintenance of a physical data room.
They also facilitate simultaneous access where several parties interested in the acquisition can conduct a due-diligence process at the same time without the necessity to set up parallel data rooms in different locations.
Given the global nature of mergers and acquisitions, time- and location-independent access are a further advantage. VDRs enable users to access documents and information at any time from almost anywhere as long as they have an internet connection.
Experts agree that the VDR should be intuitive and user-friendly to make it as easy as possible for everyone to use and should include a clear and well-organised folder structure, and a simple search function to make it as easy as possible for users to quickly find the information they need.
Another advantage is the possibility of varying degrees of access control. For example, it is possible to define which users are authorised to access which documents and to provide traceability by providing detailed tracking of individual user activities. A vendor, for example, can see the documents that a potential acquirer is focusing on which might prove helpful in inform final discussions before the completion of a transaction.
If the VDR is to be provided and managed by a third-party provider, care should be taken in selecting the provider so that these aspects are sufficiently taken into account. The VDR should be compatible with different file formats to facilitate different users’ ease of access and regular backups should be created to counter technical problems that could arise.
