Virtual data room
A virtual data room (sometimes called a VDR) is an online repository of information that is used for the storing and distribution of documents. In many cases, a virtual data room is used to facilitate the due diligence process during an M&A transaction, loan syndication, or private equity and venture capital transactions. This due diligence process has traditionally used a physical data room to accomplish the disclosure of documents. For reasons of cost, efficiency and security, virtual data rooms have widely replaced the more traditional physical data room.
An alternative to the physical data room involves the setting up of a virtual data room in the form of an extranet to which the bidders and their advisers are given access via the internet. An extranet is essentially an Internet site with limited controlled access, using a secure log-on supplied by the vendor, which can be disabled at any time, by the vendor, if a bidder withdraws. Much of the information released is confidential and restrictions are applied to the viewer’s ability to release this to third parties (by means of forwarding, copying or printing). This can be effectively applied to protect the data using digital rights management.
In the process of mergers & acquisitions the data room is set up as part of the central repository of data relating to companies or divisions being acquired or sold. The data room enables the interested parties to view information relating to the business in a controlled environment. Confidentiality is paramount and strict controls for viewing, copying and printing are imposed. Conventionally this is achieved by establishing a supervised, physical data room in secure premises with controlled access. In most cases, with a physical data room, only one bidder team can access the room at a time. This becomes time consuming.
A virtual data room is designed to have exactly the same strengths as a conventional data room: controlling access, viewing, copying and printing as well as setting time limits on viewing and logging. It has none of the disadvantages of being in a standard, physical location, needing couriers to move documents or transporting of key staff and personnel back and forth. It is also accessible 24/7 over the allowed period. With a virtual data room, documents reach the regulators and investors in a more efficient and timely manner. Due to improvements in efficiency and speed, a virtual data room typically pays for itself in a single M&A transaction.
A virtual data room is quick to set up. Scanned data and existing electronic files can be mixed, information can be added or eliminated at any time (the changes could be logged if required) and any or all information can be restricted to any or all registered viewers at any time.
Disadvantages of a physical data room
- Time consuming
- Narrow bandwidth
- Cost of travel
- Paper intensive
Benefits of a virtual data room
The largest financial benefits accrue to the seller although buyers also benefit. For the former, advantages include:
- Improvement in the number of bidders, opening the sale up to more bidders and therefore potentially better sale prices.
- Increased bid throughout (and time zone access) if the virtual data room is accessible 24/7 over the allowed period.
- Increased control and understanding of bidders.
- Reduced cost of the due diligence process overall by eliminating the need to travel, copy multiple physical binders and rent several dedicated physical due diligence rooms.
- Resulting 20%-30% higher bid values.
- Usually more cost effective than physical data rooms.
- Increased speed of transactions owing to improved accessibility.
- Enhanced information secures more deals at higher prices.
- Conventional physical data rooms restrict the bidder or buyers’ ability to get the correct people to the room simply due to the physical location. However, Virtual Data Room opens up global markets for M&A, takeovers and property deals compared with purely face-to-face and hardcopy document transactions (i.e. business letters).
- Information cannot be downloaded and taken away in a true Virtual Data Room - only viewed by a user with the correct permissions.
Virtual data room vendors
There are 241 virtual data room vendors active in the market in 2014. The industry has grown at an estimated annualized rate of 16.7% over the five years through 2014. Below are a selection of virtual data room vendors:
- The evolution of virtual data rooms in M&A Oct-Dec 2014 issue
- Do virtual data rooms add value to the mergers and acquisitions process? December 2007
- The advantage of virtual data rooms July 28, 2011
- Virtual data rooms in the US: Market research report September 2014
- Virtual data rooms in the US industry market research report now available from IBISWorld September 11, 2014
- Study on Virtual Data Rooms for M&A Manda (2007)