DATA ROOM 101
A data room is a physical or virtual space where one party can disclose confidential information in a controlled manner to a number of other interested parties.
Data rooms are used frequently during mergers and acquisitions (M&A) where a seller and their advisors need to reveal information about their company or asset to several interested buyers at the same time.
A virtual data room (VDR) is a virtual space that acts much like a physical data room except that all data is hosted securely online.
In the days before virtual data rooms, M&A potential buyers would need to visit an actual room in person to review stacks of critical documents and paperwork.
Today multiple potential buyers can access confidential information simultaneously online.
Data rooms make the entire M&A due diligence process easier, more efficient and safer for everyone involved. They allow the sell side party to keep full control over how and when information is revealed and to whom. The sell side can also manage all communication with their bidders through the data room. When the deal is done, they offer a full audit trail of disclosure through a single digital archive of all activity.
Due diligence, as it relates to M&A, involves the disclosure of information by the sell side to prospective parties. It is the process to ensure each party involved is exposed to all relevant facts before making any final decisions on the deal.
The term originated in the United States Security Act 1933, where any broker accused of inadequate disclosure was protected from liability if they could demonstrate that they had performed due diligence. Naturally to avoid risk this practice soon became the industry standard.
It is now the norm for companies to make legal and voluntary disclosure of all sorts of information to help potential buyers form a clear picture of their current operations and future prospects. Interested parties are then able to make informed and intelligent business decisions.
Documents concerning the past, present, and future prospects of the business are made available to each bidder. The aim is to be as open and transparent as possible, while still protecting the interests of the business.
Care needs to be taken, as interested parties could include the seller's direct competitor or perhaps a new company entering the industry. Equally, the deal may at any time fall through or be called off. In the case where the deal does successfully go through, there is a duty of care to ensure that unsuccessful bidders aren't left with information that could be used against the new owner.
For this reason, extremely sensitive information may be held back until the final stages of negotiation when it is clear which bidders are serious about making a deal.
Yes! There are many products on the market that often get labelled as 'data rooms' but are in fact more like simple file sharing. When it comes to M&A, they are ill-equipped to offer the level of security and flexibility needed in the critical due diligence process.
Products can vary from the very basic, with minimum security and rudimentary filing structure and navigation, to more sophisticated, highly secure and at times very complex set ups.
Basic data rooms are great for individuals sharing photos or a company sharing files between offices.
However, during M&A when a seller wants greater control over who sees what and when, with greater visibility over potential buyer behaviour in the data room, it pays to invest in a data room built with the specific M&A process in mind.
At first glance, it might seem that a simple secure environment is all that is needed to share documents during your deal. However, beyond document storage you need to consider how easy it is to upload and download documents, to set security for different users, to change access quickly if the mood changes during negotiations, to shut down access in an instant if the deal is called off, and to restrict access to some parties and not all, for instance if a close competitor is in your data room. Even seemingly simple things like how documents are able to be opened and viewed can have a huge impact on the user experience.
Simple systems are intended for simple usage. They can fast become a headache when used for anything more. Limited functionality can cause a huge waste of time and potential security issues for all involved.
By using a specialist data room, you will find features built specifically to make the M&A due diligence process easier and more secure. What you won't find is a bunch of stuff you will never use cluttering up the page and slowing down the system.
That means potential buyers accessing your data room will see a professional looking system where they can find the information they need to make their decision fast.
Great news if you are the one selling!
During M&A, once your data room is up and running, your ability to keep the deal running smoothly will largely revolve around due diligence Q&A. Q&A (questions & answers) is where interested buying parties ask the seller and their advisors a number of questions to decide on the value and attractiveness of the company to be sold. Questions typically relate to documents that have been made available for review through the data room.
Some people choose to run Q&A outside the data room using complex Excel spreadsheets passed back and forth over email. On each buy side team, long lists of questions are compiled and sent to someone on the sell side. That person then has to review the list and send out clusters of questions to different people in their team to review and respond to. When they receive answers bit by bit from different people they have to continually update their spreadsheet and forward the relevant answers to the relevant buyers. If this sounds like a chore, then you would be right! It's the single, most time-consuming part of the M&A process. This is where 'M&A' can equal 'Misery & Angst'!
This method is complex, laborious and risky, with question and answers often getting duplicated. There's the continual risk of sending the wrong information to the wrong person, potentially outdated spreadsheets being in circulation and the creation of an understandably complicated audit trail across numerous email accounts. It can be overwhelming...
Thankfully there is a better way. With all Q&A-related documents being held within the data room, it makes sense to run Q&A here as well. ansarada offer a Q&A process designed exclusively for M&A to help centralise Q&A workflow and make life easier and safer on both sides of the deal.
- How easy is it to open and view documents?
- Do you need to download any sort of viewing software?
- Can you and your potential bidders access the data room from all operating systems and devices with the same ease or are there any restrictions/caveats?
- How fast and easy it is to change access by user or user group if needed?
- Can you change who sees what, or do blanket security settings apply?
- Do you have flexibility on watermarking, document access, printing, saving, revoking access by user?
- Is the system easily scalable to suit any size deal?
Ease of use
- How fast and easy is it to get the data room up and running?
- How easy will it really be for multiple users to log in from different time zones and operating systems?
- How intuitive is the system to navigate around?
- What systems are in place to help save time, such as bulk upload and download?
- How much control can the data room offer over workflow?
- How easy is it to get a clear overview of all activity within the data room?
- How sophisticated is the search facility?
- Can you search within documents as well as across headlines?
- Can you search for terms within PDFs as well as Microsoft Office documents?
- What reporting tools are available?
- What format will reports come in?
Q&A for M&A
- How easy would it be to run Q&A through the data room?
- Does the data room offer 24/7 support if needed?
- Where is the support based geographically?
- What kind of support is available - just technical, or is more strategic expert support available?
- How fast will they respond to your enquiries? In what format?
- How is the cost of your data room calculated?
- Are there any additional fees that could potentially be added as the project moves forward?
- What happens if your deal gets delayed or even cancelled?
- What independent security accreditation does the provider have?
- What other security measures are in place to keep data from falling into the wrong hands?
- How foolproof is the audit trail?
- What experience does your provider have in the M&A space?
- Have they ever worked on a deal like yours before?