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Calm in the Chaos: The Case for Virtual Data Rooms (VDRs) in M&A

Philip Whitchelo, Vice President, Strategy and Product Marketing, Intralinks | Sept. 5, 2016
An insight on how M&A teams balance the requirement to close quickly with the need to ensure that the buy-side have enough time to conduct thorough due diligence on the assets they are acquiring.

This vendor-written piece has been edited by Executive Networks Media to eliminate product promotion, but readers should note it will likely favour the submitter's approach.

The Asia Pacific region is forecast to be the fastest growing market for Virtual Data Rooms (VDR) adoption, with a compound annual growth rate (CAGR) of 20.7 per cent between the period 2014 to 2018, according to a report by Global Industry Analysts. Most of the region's M&A deals are cross-border in nature, meaning merger and acquisition (M&A) teams need to navigate a multitude of complex logistical issues to successfully complete their transactions.

Furthermore, a Cass Business School study, 'When no one knows: Pre-announcement M&A activity and its effect on M&A outcomes', has shown that a shorter due diligence period is beneficial for the sell-side. The study clearly demonstrates that the longer the due diligence period, the lower the price will be for the asset. As such, sellers should be motivated to be well prepared and efficient in providing information to buyers and thereby keep the due diligence period to a minimum.

In light of this, how can M&A teams balance the requirement to close quickly with the need to ensure that the buy-side have enough time to conduct thorough due diligence on the assets they are acquiring?

Key benefits of using VDRs

Traditionally, physical data rooms are used during the M&A due diligence phase to share confidential information on the target being sold with potential buyers, but increasingly VDRs are replacing their physical counterparts. Here's why:

Cost savings: Physical data rooms require buyers to travel to a single location, which, if it is a cross-border deal, will involve flying. It also requires bankers and lawyers to be present from both the sell-side and buy-side of the deal. Travel expenses, banker and lawyer fees, administrative costs, and room rental costs represent just a few of the expenses incurred. Through setting up a VDR to host these documents, many of these costs can be eliminated. For example, IW Management Services saved $100,000s by using a virtual data room instead of a physical one.

Time savings: Along with cost savings, VDRs reduce the time spent in the due diligence process. In the past, bidders would have needed to go back and forth to access and review the information and documents required. This has become highly unfeasible especially when the deal is in another country. This can now be substituted by a more streamlined, interactive process, conducted in real time.

With VDRs, instead of having each interested bidder conduct due diligence within a timeframe, in a linear fashion, all bidders and their advisers can access documents simultaneously, allowing all parties to collaborate and interact with each other in real time. As for the sellers, they are able to facilitate and manage the flow of information, responding to the questions that bidders have within the VDR. 

 

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