Why It Is Easier to Complete Mergers and Acquisitions with Virtual Data RoomsAuthor: Kathryn Gaw
Off the back of Amazon’s recent bid to buy out Whole Foods, the words ‘mergers and acquisitions’ or M&A are being thrown around websites like there’s no tomorrow – 30 years ago this wasn’t the case. The rise in the frequency and volume of large-scale mergers and acquisitions can be largely attributed to similar meteoric rise in the popularity of virtual data rooms in the deal making process.
A virtual data room is an online platform that facilitates document sharing and collaborations between buying and selling parties in a variety of transactions, including mergers and acquisitions. Their simplicity and ability to cut costs and expedite the deal process hasn’t always been a luxury afforded to businesses, however.
30 years ago, big businesses such as Amazon would have to have flown its executives in and out of multiple cities so that sensitive information pertaining to the seller’s company could be analyzed and discussed and so that negotiations could start taking place. Typically, this sort of interactions would have involved a physical data room. A physical data room is the arcane predecessor to the virtual data room and does exactly as its name suggests – it is a secured room that houses sensitive company documents that can be viewed by bidding parties.
Where physical data rooms fell short was in their cost and time inefficiency. Having a physical room meant bidders had to make the effort to fly to you just to see what they were bidding on – how odd? The whole process had to be monitored and even guarded in some cases and the physical data room prevented bidding partied from viewing documents simultaneously.
The rise of the virtual data room
Virtual data rooms came at a time when email was quickly becoming the most popular form of document sharing and the whole world was starting to feel the push towards becoming fully digital. Virtual data rooms filled the widening gap between prehistoric physical data rooms of the past and the easy-to-use yet unsecured email servers of the present.
Their ability to house and facilitate the sharing of information in a highly secure and protected environment propelled them to the forefront of all deal making and allowed business, big and small, to grow their potential by taking on more deals.
The process behind how a virtual data room facilitates a merger or acquisition is fairly simple. The selling party would set up a virtual data room on which they would upload certain sets and subsets of documents that would be relevant to the type of transactions they are seeking. Contracts, board minutes, patents and audited financial statements for example, would be uploaded through secure servers onto the virtual data room platform where they would then be stored in physical data centers owned by the virtual data room providers.
Management can then start accepting bids and can grant access to pre-determined users through the use of secure identification and two-factor authentication passwords. Access permissions can range from once-off access to declassified information to full blown access to contracts and patents depending on the stage of the deal and who you are dealing with.
The online data room allows selling parties to control the release of information so as to protect the confidentiality of the firm while also meeting the needs of bidding parties to have access to documents needed for them to formulate and finalize bids. The entire process can be monitored so that the selling party can see who has had access to which documents as well as how often they viewed them and when they viewed them.
Being online also allows the procurement to involve multiple parties that can have simultaneous access to the site and can involve parties that are overseas and that may not even speak English thanks to some data rooms built in translations features. This greatly expands the potential market for firms looking to sell or merge as they can take on more bids in more countries, all while reducing unnecessary costs such as flights and office space rental associated with traditional physical data rooms. Without these limitations, businesses can reach their full potential and ensure that they are getting the best deal possible when entering the M&A process.