Mergers and acquisitions activities have already become a common thing for the international corporate environment, and the transaction volume keeps on increasing. Given technological advancements and stricter security requirements, due diligence process has turned out to be a leading determiner of the potential arrangement’s benefits and general strategic fit for both the sell and buy sides. In order to contribute to the overall negotiation’s success, a lot of documentation is to be considered, and here is where traditional (also known as physical) and virtual data rooms play a significant role.
In simple terms, their main objective is to provide secure and timely access to any documents, related to the deal. The two allow conducting an organized assessment of the acquiring company for the investor. Location, format of files to store, and form of access — these are the key differences between PDR and VDR. What solution will help you take most out of the future transaction? Stay tuned to check that out.
A Traditional Due Diligence Data room is often more expensive with few advantages over the Virtual Due Diligence Data rooms price, flexibility, and features.
Here is a collection of the Good and the Not-So-Good as related to Traditional Data Rooms (those in a lawyer’s office or conference room) and Virtual Data Rooms (those accessed via the Internet).
Traditional Data Room Overview
On the one hand, the fact that this VDR predecessor is far from gaining momentum today is self-explanatory. Sequential access to files prevents a few teams to work simultaneously on the offer, and the alternative PDR solution allows different companies participate in audit and further bidder auctions without knowing about their competitors. Prospective buyers have to send their due diligence experts to check the documentation provided by the target organization, and that means detailed inspection of non-public and sensitive information will require more effort and resources.
On the other hand, some of the papers may simply not exist in any digital form. Considering the corporate records, describing the previous years’ activities is in need, so scanning of dozens of files is far from time-efficient. That’s one of the reasons that attorneys may discover more materials on the topic in PDR than VDR. Unlike PDR, online services aren’t protected from virtual issues and risks for 100%, and it may be troublesome if the solution is to be installed — you will need your equipment to be super quality not to limit the VDR performance.
Virtual Data Room Analysis
In the case of this due diligence tool, there are advantages for both sellers and buyers. Interested parties highly appreciate this service for transparency among the deal’s participants, time and cost savings, simplified legal compliance, and simplicity of use. Here are some more benefits you will achieve with profound virtual data rooms:
- Instant intelligence — the system is designed to promote fast update of the available documentation, changing, deleting, or editing files if necessary.
- Service feedback — VDR providers guarantee 24/7 support of the storage work and will help you increase the overall access security. With the ability to create reports, track entries, and limit access for authorized users only, the due diligence is more informative, controllable, and intuitive.
- Data protection — the sell side is welcome to apply modern technologies like file encryption and back-up to ensure the chances for potential illegal distribution of information are eliminated.
- Speed — those companies who prefer virtual data rooms will be able to operate the files for mergers and acquisitions at the highest speed possible, while allowing several users from different parts of the world to have a simultaneous view over the documentation presented.
Main points of having Traditional/Virtual Data Room
|#||The Pros & Cons||Traditional Data Room||Virtual Data Room|
|1||Typical data room location||Lawyers Office||Online|
|2||Effort to create data room||Moderate||Low|
|5||Ability to record bidders activities||None||Yes|
|6||Ease of access to data room||Low||High|
|7||Speed to securing an offer||Longer||Faster|
|8||Ability to lower investor risk||No||Yes|
|9||Ability to add a “Last Minute” bidder||No||Yes|
|10||Ability to document who reviewed what||No||Yes|
|11||Multiple bidders in the data room||No||Yes|
|12||Ability to notify all bidders of “New Info”||No||Yes|
|13||Ability to restrict document access||No||Yes|
|14||Impact on the final offer||Neutral||Increases|
The following is a more detailed explanation of the information listed above:
Location – a Traditional data room is usually not at the company offices. You should not have buyers or potential competitors walking around your offices. You may onto want your employees distracted by the constant parade of bidders. A traditional data room is usually located at a nearby lawyer’s office to increase security. This also increases costs. A Virtual data room is located on a secure server at a third-party data center. Since the data is encrypted and accessible via the internet the location is not important as long as it is accessible 7×24.
Effort – The creation of a Traditional data room usually involves indexing and photocopying vast amounts of paper. You cannot risk putting the only Original copy of an important document in a data room just to have it damage or worse yet, disappear. The creation of a Traditional data room also will require the printing and indexing of many electronic documents, financial spreadsheets, and contracts. While many paper documents must be scanned to create the electronic images for a virtual data room all of the electronic documents can be processed online. Assuming you have selected a service provider or software solution that makes indexing and data room creation easy the total effort is lower with a virtual data room.
Security – With a Lawyers office the security is only as good as the paralegal who is in the room taking care of the documents. The document can disappear. One advantage is that with a traditional data room you do have control over physical access. You know who enters the room. This level of physical security can be achieved with the right Digital Data Room software. While most providers have limited security some offer highly secure solutions. If implemented correctly a virtual data room can be more secure than a lawyers office. You can restrict who sees what documents and who can copy what documents.
Cost – A Traditional data room is not cheap after you add up the labor to copy and index all the documents plus the legal office space to manage a multi week data room effort. A Virtual data room requires less effort to create (with the correct software) and the cost for the virtual data room is usually measured in 1) users who need access, 2) pages of documents in the data room, or 3) weeks data room is active. Usually, it’s a combination of these factors. The bottom line is that the total cost will be less!
Record Activity – Using a Traditional data room you cannot record who sees what document. With a Virtual data room, however, (assuming you hire a solution provider that uses good software) your investment banker can review daily reports of which bidders looked at which documents. he can see who is interested in future revenue opportunities, who is interested in a specific partner contract, etc. Information is POWER. A wise investment banker can use this power to leverage additional value during the bidding process. Ease of Access – Some potential bidders will refuse to bid simply because they are too busy to travel to the data room
Ease of Access – Some potential bidders will refuse to bid simply because they are too busy to travel to the data room. Having a Virtual data room allows them access 24 hours a day 7 days a week from anywhere in the world.
Speed to Offer – A traditional data room usually takes weeks to manage as one bidder after another schedules access to the room. With a virtual data room everyone has access on day one and most are finished reviewing the documents in a couple days. This means the deal time is shortened significantly.
Lower Investor Risk – Being able to look at documents 7 x 24 gives the investor more time to review documents. The more he becomes comfortable with the documents the fewer questions and concerns he has. Your objective is to LOWER his RISK CONCERN. The more comfortable he is with your company’s ability to perform the lower risk he will place and the higher his offer will be.
Last Minute Bidder – It is almost impossible to have a “last minute” bidder with a traditional data room. with a Virtual data room is is not only easy it can be a well scripted tactic. If one company ids about to purchase you you could offer you competitor an opportunity to bid. You might not want to include him early in the process as you may expose too much to a competitor in the event you do not accept any offers.
Document Reviewers – On advantage a Virtual data room offers is an electronic record of who reviewed which documents (assuming you use good software). This could be invaluable to your lawyer if a potential buyer cry’s “foul” because there was something in the data room that he says we was not allowed to view. You can show him who within his company viewed it and on what day.
Multiple Bidders – A Virtual data room by its nature can allow all users to access the same documents concurrently and in private.
New Info Distribution – Bidders will often submit questions and request additional data. Your investment banker will manage this to minimize the work but additional data will likely be required. With a Virtual data room is is very easy to add new documents to the data room and notify everyone of its posting.
Restrict Access – With an online data room you can let one company see detailed responses to specific questions he requested without sharing that information with everyone.
Impact on Final Offer – A well manage Virtual Data Room can not only reduce expenses but help increase the final offer for your company. This is done by reducing the time you spend on task other than running the business and providing the investment banker with information to help him drive the price up.
The Bottom Line
All the things considered, it will be an exaggeration to say virtual data rooms are infallible: the process of their modification and development is on the go. Given the lists pros and cons of both methods, it is up to any particular company to decide which one is more functional for their objectives in the long run.