VDRs taking over from PDRs in M&A transactions

Since the Millennium, the business world's way of thinking seems to have been characterised to a large degree by globalisation and the merging and convergence of companies

Despite an international economic slowdown, both the number of M&A transactions and their value have both continued to rise each year. Global M&A transaction volumes increased on average by 37 percent per year between 2003 and 2006, with cross-border transactions accounting for 28 percent of all transactions during 2006, up from 18 percent in 1996.

Along the way, M&A transactions - whether acquisitions, auction processes or mergers - have used modern technology to increase the efficiency and success rate of deals. At the very heart of this process, the virtual data room (VDR) has emerged as a technology-based due diligence tool which facilitates access and use of the data room in M&A transactions.

The VDR is essentially an internet site with limited controlled access, featuring a secure log-on supplied by the vendor (which can be disabled at any time by the vendor if a bidder withdraws), to which bidders and their advisers gain access electronically. Much of the information released will be confidential, and restrictions must be applied to the viewers’ ability to release this to third parties by forwarding, copying or printing.
 
Success or failure
About a fifth of all executives involved in M&A deals consider due diligence to be crucial to the success or failure of a deal, and, after recognising the importance of due diligence in realising higher values in M&A transactions, professionals have introduced modifications to the data room which have utilised today’s technological advancements. These modifications, gradually developed over time, led to today’s widely-used VDR.

Naturally, a VDR is similar in many ways to its predecessor, the physical data room (PDR). Both allow the buyer to conduct an organised assessment of the target company. Several differences between a VDR and PDR exist, such as their location (online versus physical location), document format (digital versus paper), data storage (central storage versus physical location), and form of access by several potential buyers (parallel versus sequential).

It is accepted that documents in a VDR are presented more efficiently and effectively in digital format. In addition, access to a PDR is typically sequential, while access to a VDR is exclusively parallel. In a single PDR, only one buyer team may access the information and multiple physical data rooms must be set up at added effort and expense if a process is to be accelerated with several potential buyers participating. With VDR, multiple buyer teams may access the same data at the same time.

The features of a VDR vary among providers but most offer some key functions. VDRs provide text recognition functionality and enable users to search for specific words and phrases throughout the entire data collection. Many VDRs allow buyers to securely ask questions online through a Question &Answer function, improving communication between the parties. And the audit trail function of a VDR allows for the tracking of documents accessed by specific users, and permits sellers to monitor and profile buyers to determine the most serious participants.

Dynamic indexing allows more flexible and immediate updates to the data room index, compared with paper indexing. VDRs also come with security features, such as allowing the administrator to restrict viewing of certain documents to only the second round of due diligence, or to restrict printing and downloading of certain documents. Obviously, a target company’s prime objective is a successful sale at the highest possible price, while the prospective buyer‘s objective is to determine whether to purchase the target, and at what price. With these conflicting aims, VDR-related advantages to a buyer may be disadvantages to a seller, and vice versa.

Competitive price
Advantages to the buyer include cost and time savings, comfort, transparency and a level “playing field.” For the seller, advantages range from security to simplicity, ease of set-up, time and cost savings, competitive price and legal compliance.

VDR benefits its users in many ways according to a number of experts. In a report to the Institute of Mergers, Acquisitions and Alliances (MANDA) last December (2007), Dr Christopher Kummer and Vlado Sliskovic wrote: “We have determined that certain VDR-related process changes may add value to the M&A process, including the transition from sequential to parallel inspection, improvements in process quality, reduction in the duration of a transaction, and theoretical benefits such as greater information utility to a buyer, potentially definition of optimal price, and lower increases in marginal costs.

“We have also determined that a VDR demonstrates concrete advantages over a PDR for specific types of transactions: larger transactions, auction-type processes with many potential buyers, international and cross-border transactions, and transactions with limited due diligence period. These types of deals benefit the most from the use of VDRs’ ability to allow parallel access to the data room by multiple buyers, and in reducing travel-related expenses by offering continuous and ubiquitous access to a buyer regardless of location.

“In summary, the practical and theoretical benefits to using a VDR are convincing.” The Kummer/Sliskovic report concludes: “Fundamental to a VDR is that the essence of due diligence is not altered by its use. Although a VDR is in many ways better and more economical than a PDR, its fundamental purpose is unchanged compared with PDR.

“VDRs, being very similar to PDRs in this sense, have not replaced PDRs overnight, although the benefits of migrating to new technology have been recognised. In comparing VDRs and PDRs, a VDR demonstrates concrete advantages over a PDR for several specific types of transactions: larger transactions, auction-type processes with a large number of potential buyers, international and cross-border transactions, and transactions in which a limited period exists for due diligence.

“These types of deals benefit from the use of VDRs because the key advantages of a VDR over a PDR are its ability to allow parallel access to the data room by multiple buyers, which also eliminates the costs associated with setting up multiple data rooms, and the decrease in travel-related expenses by offering continuous and ubiquitous access to buyers regardless of location.

“Other theoretical benefits to using a VDR exist, such as potentially higher final offer prices and increases in information utility through a longer due diligence period. However, these additional theoretical benefits are difficult to quantify in today’s environment. The prevalence of “old timers” and their involvement in M&A transactions will continue to result in a growing acceptance of the VDR as a standard tool for due diligence in M&A transactions. However, as technological advances continue to contribute to our professional and personal productivity and change the way we work and live - and are able to resolve some of the current disadvantages related to using VDRs - and with an ever-increasing number of cross-border transactions being undertaken in today’s trend towards globalisation of the business community, we expect that VDRs will become the accepted and most widely used data room tool for M&A transactions.”

Deal flow
In America, a recent survey of 357 corporate dealmakers by ACG Merrill revealed that 65 percent said they used VDRs in 2006 (nearly the same number that reported they had not two years earlier) and 20 percent said they used VDRs in up to 75 percent of their deals. Paul Stewart, chairman of the Association for Corporate Growth, said: "VDRs help grease the skids on how a deal works and facilitate deal flow."

In Australia, Sydney-based company Ansarada began using VDRs in favour of PDRs in 2005 and has won a number of blue-chip corporate clients, such as lawyers Gilbert &Tobin, Blake Dawson Waldron and Deacons, and investment banks UBS and Caliburn. The company’s facility aided $21bn worth of transactions, including the $5.5billion recapitalisation of Publishing and Broadcasting Ltd’s Nine Network and Australian Consolidated Press businesses. Biotech firm Acrux Pharmaceuticals has also used the system to broker sales - and estimates that it is 20 to 30 times more efficient to do business through a VDR than to fly its executives to America. “The savings are especially highlighted when you have a competitive bidding process.” says Ansarada managing director Sam Riley.

“If you have six parties bidding on one asset, you often don’t want them to know about each other. That means you either have to have one physical data room and stagger the time people can go in there, or you have to set up multiple data rooms in multiple locations with multiple copies of paper. This can be a logistical nightmare.”