What is a virtual data room for M&A, who needs it, and why
M&A deals can overwhelm buyers and sellers, burying them in an avalanche of paper, repeat requests, and wait-time. These slow, often unmanageable tasks, leave too much room for error, steal valuable company time, and can kill deals. However, virtual data rooms (or VDRs) designed with M&A in mind can allow stakeholders to work more collaboratively, effectively, and efficiently throughout the lifecycle of a deal. Consequently, more and more M&A practitioners are using VDRs to manage deals. Many claims that using the right VDR for M&A can help close deals faster.
So, what is an M&A virtual data room?
During an M&A transaction, specifically due diligence, investment banks, buyers, sellers, third parties, etc. need a place to store and share company information.
An M&A virtual data room gives everyone involved in the deal a secure place to request, share, organize, and store thousands of sensitive information. Virtual data rooms enable collaboration and come fully equipped with features that help speed up due diligence and streamline workflows.
Specifically, VDRs are useful for M&A because they:
1. Allow users to securely store documents - VDRs allow for documents such as financial statements and employee information to be kept in a safe, two-step required authentication space. The documents are not only encrypted but also carefully controlled by the room’s organizer. For instance, documents may be shared, restricted, or shared as “view only.” Finally, the best VDRs for M&A boast ISO 27081 compliance so you know your documents are protected from third-party thieves.
2. Allow stakeholders in different locations to easily collaborate - VDRs allow for collaboration between stakeholders near and far. This is invaluable as thanks to technology there is a two-way flow of information between parties, which results in improved communication and increased transparency. This also means there is a centralized hub of information rather than information and requests being in multiple emails, Excel spreadsheets, and Google Docs.
Additionally, the improved visibility between the deal’s key players helps the acquirer plan for integration during the early stages of the deal (and we all know the most successful deals begin integration planning during - or even before - diligence); items for integration in a VDR can easily be tagged for integration during discovery and/or diligence.
3. Eliminate work (specifically redundant work) - The more sophisticated VDRs designed for M&A often allow users to eliminate work through features such as automatic elimination of duplicate requests, bulk dragging and dropping of documents, full-text searches, and auto-indexing, as well as the ability to assign tasks, live link documents, and produce reports with the click of a button.
4. Allow users to easily analyze and organize files - Artificial Intelligence is used in VDRs for M&A in order to help analyze and organize files. This not only improves workflow and organization, but also offers the ability to adapt to new information and changes throughout diligence. Again, thinking ahead to integration, AI allows companies to accumulate valuable data that can offer business benefits in the future.
5. Reduce distractions - The previously mentioned features related to workflow and organization not only eliminate work, but also curtail hazardous deal distractions for overworked management teams.
6. Provide an overview of the entire process - Some higher-level VDRs for M&A allow for a bird’s eye view of the entire process. This takes the VDR into the realm of project management as this overview is very useful in terms of seeing where team members are spending the most amount of time, analyzing the buyer’s engagement, identifying and responding to potential problems or roadblocks, and tracking overall progress.
What are the M&A data room vendors on market right now?
What is the difference between main virtual data room providers?
The following are some of the main M&A VDR providers and a look at the industries they are built for:
- DealRoom - DealRoom was built by M&A practitioners specifically for M&A. While it hosts a VDR, it combines it with an Agile-based project management platform designed for the complexities of mergers and acquisitions.
- Firmex - Firmex if used for M&A and boasts strong customer support, though it does not have many additional features that make its design specific to M&A.
- Intralinks - Intralinks can be used for M&A, but is truly just a VDR. If you are looking for features specific to M&A and/or workflow, this would not be your top choice.
- Merrill - Merrill is top-rated due to its security features; however, like Intralinks, it does not have many other features that specifically help M&A practitioners.
*It should be noted that Intralinks and Merrill charge per page, which is not ideal for M&A (more on this below in “How Much Will It Cost?”)
- FirmRoom - FirmRoom is often used for smaller M&A deals; it is more aligned with a traditional VDR when compared to DealRoom, though it does contain some of the same features, just not the Agile ones.
- Midaxo - Due to its impressive pipeline feature, Midaxo is a strong fit for Corporate Development.
What are the benefits of using a virtual data room in an M&A process?
From the staging period, to document collection, to closing, all the way to post-close integration, M&A data rooms keep everything organized and manageable. It encourages collaboration between the management team and interested parties, allows for safe file sharing, and provides users with helpful data analytics. All buyer document requests and communication regarding the due diligence process can go through one platform. Everything is updated in real-time, so users don't have to worry about version control.
How to choose an M&A virtual data room vendor that best fits you
1. Scrutinize the VDR’s security - It goes without saying, you want a VDR that has top of the line security - if your documents are not secure, you do not have a deal. Specifically, you want a VDR that not only has customizable file access privileges, but also is ISO 27081 compliant and boasts strong encryption methods.
2. Ease of use - After security, ease of use should be considered because you do not want to spend time learning complex software when you should be focusing on your business.
3. Flat-rate pricing - The best VDRs for M&A will save you time and money. Consider your company’s budget and then look for a VDR in your range with a flat rate; again, any form of predictability is valuable when it comes to M&A. As with any new expensive purchase, you will also want to make sure you will not face any hidden fees or “surprise” costs.
4. Additional features that will help your team improve its practices - As you shop, consider how your team functions and where it could use support. Our team members often wasting time with redundant tasks or duplicate requests? If so, you will want to look for a VDR that also has features related to project management. Or, are project plan templates important to you? Perhaps you would like to move collaborators out of the back and forth email game - in this case, you will want the VDR to have a messaging system.
How much it will cost
VDRs are also appealing to M&A practitioners because some of them move away from the archaic per page pricing method, which in turn makes them cost-effective. Per page pricing methods are not only incredibly expensive, but also detrimental to the development of deals because stakeholders often become focused on the expense of scanning and uploading data and documents rather than on the data and documents themselves.
Traditional VDR that charge per page can easily cost over $100,000. However, more modern VDRs that charge flat rates typically cost less than $10,000 and help teams avoid overage fees.
You can find more information in the article How Much Should a Virtual Data Room Cost in 2019?
While every deal is different and one single playbook cannot always be followed, VDRs are a constant presence in today’s M&A practices.
The potential benefits are high in number, but, as always, it is how this tool is leveraged that makes all the difference. Ultimately, any old VDR will not transform your practice, but one specifically designed with M&A in mind might be able to.