The Evolution of M&A Data Room Technology

During 2018, the international M&A volumes reached about $3.35 trillion. This was the highest level since the popular M&A record-breaking year of 2015. As the market for M&A deals is expected to remain healthy in the near future, the ability to complete M&A deals quicker and more efficiently is more critical now. As a result, there is a need to reduce the period of time allotted for M&A due diligence in the deal cycle. 

Therefore, market players are seeking improved technology and service firms to help lower the time, risks, and typical costs associated with M&A transactions. The widespread adoption of technology over the last decade has caused a radical shift in how numerous legal and finance functions are carried out.

 

And no technological advancement has had a more profound impact on the way M&A due diligence is performed than the virtual M&A data room.

What is a Virtual Data Room (VDR)?

An online data room, also known as a virtual data room, is an online database or repository of information that’s used for the storage and distribution of important documents about a company. You can organize, share and track these documents all within the virtual data room administrators’ control and discretion. 

Specifically, VDRs are most effective in dealing with M&A due diligence. An effective data room can expedite the transaction and also assure the security and confidentiality of critical business documents. Data rooms are also used in Initial Public Offerings (IPOs), auditing operations, fundraising activities, and facilitating strategic partnerships.

Today, online data rooms have replaced traditional data rooms, where hard copies of company documents were stored in an attorney’s office or another secure environment.

Virtual data rooms are usually populated with the selling company’s crucial documents, such as financial statements, intellectual property information, contracts, employee information, and capitalization table, among others.

Online data rooms are suitable for supporting complex business processes and projects that require the sharing and disclosure of confidential documents with various third parties beyond the firewall. Once a virtual data room has been set up, all the relevant stakeholders, as well as potential investors, receive their unique login credentials, allowing them to securely access, analyze and review due diligence documentation from anyplace in the world. You can also implement specific rules for each team and project, respectively. 

 

Traditional Methods of Collecting Due Diligence and Emergence of VDRs

Before the cloud and Software-as-a-Service took the world by storm, M&A data rooms were physical rooms where companies stored and shared due diligence documents, like financial statements. Physical data rooms are also called due diligence of data rooms. Sellers established this physical location in order to store key documents that are required during M&A transactions. The physical data room was part of the M&A due diligence process; it was accessed by buyers and buyers’ attorneys before closing the transaction.

However, here’s the catch. Anybody working on a deal who wanted to see pertinent documents would need to book specific times in advance to physically visit the data room. And that’s not all; in large M&A transactions involving several bidders, the sellers required potential buyers to fly into their country and also be available throughout the entire process. 

The cost of running a conventional data room was often high as the process entailed hosting a large number of buyers as well as experts. This is how virtual data rooms came around. A majority of sellers are now transitioning to online data rooms to better manage costs. This allows buyers and their legal experts to access all the documents remotely. Virtual data rooms are considerably less expensive than physical data rooms in terms of cost and time. Online data rooms emerged in the early 2000s as document storage and sharing moved online.

Modern Data Room Features

Modern data rooms have some impressive features. Some of them are discussed in the next section.

1. Watermarking 

An online data room can automatically apply dynamic watermarks to every page of protected documents on the basis of the security policy you have defined. Customizable watermarking is available that allows you to embed dynamic information, like a user’s IP address and email address, indicating to the reader that the document is confidential.

2. Document Approval Updates

You can now automatically publish the documents when they have been approved. 

3. Multilingual User Interface

One of the important and latest advances in VDR technology is the new multilingual user interface, which can be helpful during cross-border transactions in which different parties may not be fluent in the same language. 

4. Document Control

At the core of most virtual data rooms is the ability to control and secure sensitive documents, like earnings reports, while sharing them with relevant third parties. A good and secure virtual data room often utilizes enterprise-grade security. You should choose a data room with features, like multi-level encryption, advanced document permissions, information rights management (IRM). SSL encryption is often used to protect sensitive data over the Internet.

5. Read Only

You can set documents to be “read-only,” and this prevents buyers from saving or printing.

6. User Activity Tracking

The ability to monitor and track user activity in online data rooms is very useful in gathering valuable deal intelligence. This is why you should go for a virtual data room that uses page-level tracking of who has seen what documents and for how long. 

Note that this information gives you insightful information regarding your users’ review process, and it also generates in-depth audit trails needed for compliance.

Other Security features include:

• Viewing restrictions for specific company documents by either individual users or groups, allowing administrators to release sensitive content on a piecemeal basis rather than all at once
• Optional click-through user-definable agreements with detailed audit trails

Final Thoughts

Since the 2000s, online data rooms have evolved into highly specialized and mature services for sharing and storing confidential files online with high-grade security and control. As traditional physical data rooms are becoming obsolete in the deal-making world, you should familiarize yourself with the advanced security and functionality of virtual data rooms to streamline M&A deals.

 

As all online data rooms are created equal, differences in feature sets and architecture can have a huge impact on efficiency, performance, and how well they adapt to your specific processes and support your unique and dynamic business needs.

 

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