Do Virtual Data Rooms Add Value To The Merger And Acquisitions Process?

DO VIRTUAL DATA ROOMS ADD VALUE TO THE MERGERS AND ACQUISITIONS PROCESS? by Christopher Kummer Vlado Sliskovic Institute of Mergers, Acquisitions and Alliances (MANDA) Zurich & Vienna, Oktober 2007 www.manda-institute.org TABLE OF CONTENTS EXECUTIVE SUMMARY 1 TABLES AND FIGURES 3 1 INTRODUCTION 4 Trends in Mergers and Acquisitions 4 The M&A Process 6 2 UNDERSTANDING DUE DILIGENCE 9 3 PHYSICAL DATA ROOMS 10 3.1 Information in Data Rooms 10 3.2 Providing and Using Data Room Information 11 4 VIRTUAL DATA ROOMS 12 4.1 Concept 12 4.2 Evaluating the Effectiveness of Virtual Data Rooms 16 4.3 Advantages to the Buyer 16 4.4 Advantages to the Seller 19 4.5 Disadvantages to the Seller 21 4.6 Disadvantages to the Buyer 22 4.7 Virtual Data Rooms and their Value-Add to the M&A Process 24 5 CONCLUSION 29 APPENDIX A: DATA ROOM INFORMATION 31 APPENDIX B: LIST OF SPONSORS 32 APPENDIX C: DISCLAIMER 33 EXECUTIVE SUMMARY Three significant trends have emerged in today’s corporate environment. First, advancements in technology play a major role in redefining how companies do business, from allowing employees to telecommute to the proliferation of e- procurement activities. Second, although mergers & acquisitions (M&A) activity is not new to the corporate environment, recent years have seen a dramatic increase in deals, with global M&A transaction volume increasing on average by 37% per year between 2003 and 2006. M&A are key tools for corporate executives in achieving their short- and long-term strategic objectives. Third, with the increasing trend towards globalization, cross-border M&A activity has also increased and cross-border transactions accounted for 28% of all transactions during 2006, up from 18% in 1996. Given these trends, M&A transactions — whether acquisitions, auction processes, or mergers — are using technology to increase the efficiency and success rate of deals. The virtual data room (VDR) has emerged as a technology-based due diligence tool whose objective is to facilitate access and use of the data room in M&A transactions. Our study examines the role of the VDR in due diligence and attempts to ascertain its contribution to the overall M&A transaction process. For all transactions, the objective of due diligence is to assist a buyer in determining whether to acquire a target, if so, for how much, and to allow the buyer to ascertain the target’s risks, potential combination benefits, and overall strategic fit. To help a buyer answer these questions, information related to a target company are made available in a data room during the due diligence stage of a transaction. Thus, the data room is an integral part of the due diligence process. Almost 20% of all executives involved in an M&A deal consider due diligence to be crucial to the success of a deal. Other factors contributing to the success of a transaction cannot be standardized or systematically improved using technology or other methods. After recognizing the importance of due diligence in realizing higher values in M&A transactions, M&A professionals have begun to introduce modifications to the data room that take advantage of today’s technological advancements. These modifications, gradually developed over time, have ultimately resulted in the introduction of what is known today as the virtual data room (VDR). VDRs reflect the trend towards digitalizing almost anything that exists in physical form. A VDR is similar in many ways to its predecessor, the physical data room (PDR). Both allow the buyer to conduct an organized assessment of the target. 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). Therefore, documents in a VDR are presented more efficiently and effectively in digital format. Moreover, 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. Through a VDR, multiple buyer teams may access the same data at the same time. The features of a VDR vary among VDR providers, but most offer a few key functions. VDRs provide text recognition functionality and enable users to search for 1 specific words and phrases throughout the entire data collection. Many VDRs allow buyers to securely ask questions online through a Q&A function, enhancing communication between the parties. The audit trail function of a VDR allows for tracking of documents accessed by specific users, and allows 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. A target’s primary objective is a successful sale at the highest possible price. The acquirer’s objective is to determine whether to purchase the target, and at what price. With these conflicting objectives, VDR-related advantages to a buyer may be disadvantages to a seller, and vice versa. Table 1 summarizes these advantages and disadvantages, which are discussed in detail in this report. Table 1. VDR Advantages and Disadvantages to Buyer and Seller To Buyer To Seller VDR Advantages Cost savings Simplicity Time savings Ease of Setup Comfort Cost savings Transparency Competitive price Fair playing field Legal compliance Time savings Security VDR Disadvantages Competitive price Security Reading documents online System speed Non-digital information Although a VDR benefits its users in many ways, our conclusion today is that we cannot categorically confirm that VDR usage increases the overall efficacy of the M&A process. 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 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. As technological advances continue to change the way we live and work, we expect that VDRs will become the accepted and most widely used data room tool for M&A transactions. 2 TABLES AND FIGURES TABLE OF TABLES Table 1. VDR Advantages and Disadvantages to Buyer and Seller 2 Table 2. Overview of M&A Process from the Perspective of Buyer and Seller 8 Table 3. Relative Characteristics of VDRs and PDRs. 13 Table 4. Popular Features and Functions of VDRs. 15 Table 5. Advantages and Disadvantages of VDRs to Buyer and Seller. 16 TABLE OF FIGURES Figure 1. Number of and Value of M&A Transactions Worldwide, 1995 to 2006 5 Figure 2. Cross-border M&A Deals as a Percent of Total Worldwide M&A Deals (by Number and Value) 1995 to 2006 6 Figure 3.