Private Equity: Negotiations and Tech with Virtual Data Rooms

data room

You won’t find a bidding process for mergers and acquisitions that don’t make use of a virtual data room. Their rise in popularity is largely due to their superior value proposition over more traditional data solutions such as physical data rooms or company intranets, driven by their intuitive ease-of-use and government-grade security.

However, virtual data rooms’ impact on financial transactions is not limited to the passive adaptation of deals to fit the structure of online data rooms. Instead, virtual data rooms have played an active role in changing how transactions are initiated, prices negotiated and deals completed. The biggest effect they have had is in their ability to ‘widen the casting net’ of many companies looking to sell or to engage in funding rounds because of being virtual by nature.

Deals can now be carried out remotely, across borders and across language barriers, all the way into crucial stages of the deal to the extent that transactions can even be closed without any physical interaction. It would be hard to argue that any of these changes has had a negative effect on businesses as the main theme is larger deal volumes, greater efficiency and lower costs. At the same time, providers of virtual data rooms have been basking in profits, despite having to fight off stiff competition from newer firms looking to get a slice of a corporate data pie.

As with any technological advancement, it takes time for the broader, deeper changes to be felt and the same can be said of the M&A and private equity sectors. Only now companies are starting to realize trends in negotiation and bidding that have arisen as a combination of the effects of virtual data rooms and the changing business world. The most noticeable differences can be seen in how business sales are initiated, how negotiations take place and the effect this has on the pricing of companies.

Recent survey data on a large range of M&A deals have found that the process by which deals are sourced and therefore initiated has changed since the introduction of virtual data room in the sector. Sell-side sourcing in particular has moved away from broad auctions, where the main goal was to attract multiple bids in order to drive up sale price, towards negotiated sales. Counter-intuitively, you may be lead to believe that broad action sales are optimal on the sell-side because bidding parties have the potential to drive up prices, but research has shown the exact opposite.

Negotiated sales are far more discreet and allow sellers to develop more in-depth relationships with the bidder, without having to worry about entertaining multiple simultaneous bids. Negotiated sales have resulted in optimally priced deals on the sell-side because it has become far easier for bidders to perform diligence on the target (seller), resulting in more accurate bids, absent from the winners curse which tends to always deliver bids above the actual value. Virtual data rooms have allowed for this increased transparency and higher level of information, which has led to more negotiated sales.

Another effect of virtual data rooms that is a continuation of their ability to expedite diligence on target buys is that the number of unsolicited bids has increased. In the same survey, 75% of respondent stated that they had sold to an unsolicited buyer in the last 5 years – the most notable being the German acquisition of Monsanto for $66 billion. Unsolicited bidding has been facilitated by technological advancements resulting in an abundance of information on potential companies, allowing potential buyers to make informed decisions without solicitation with sellers. Once again, this has proven to be an attractive option for sell-side companies (although not exactly a strategy) due to the relative anonymity of parties.

While virtual data rooms have been shown to greatly expedite the due diligence process, the changes mentioned above have actually resulted in an increase in the time between deciding to sell and completing the sale. More negotiated sales and a larger number of unsolicited bids are behind this phenomenon, but companies are yet to complain about increased deal times as prices have been on an upwards trend since such changes started.