VDR’s: a new reality of data rooms or an overhyped phenomena?

What is a VDR (Virtual Data Room)?

Most people have an idea of what a VDR is or have worked with it in the past. The Wikipedia definition of a VDR is an online repository of information that is used for the storing and distribution of documents.

We are active in the field of M&A and would describe a virtual data room as an environment to present all relevant company material and documents to interested parties. These parties are mostly possible buyers (or investors) for a company. The material ranges from legal, financial or general documents on the company and can be very extensive.

When is a VDR being used (in the M&A field)

In most cases, a virtual data room is used to facilitate the due diligence process during a M&A transaction. This can also be the case in private equity and venture capital transactions. During the process company, often confidential, data will be presented to interested buyers. In this way these possible buyers can deepen their knowledge of the company for sale and can check crucial items where they see possible risks. Interested buyers can get access to specific areas of the company and perform various type’s of Due Diligence (legal, tax, operational, financial, etc).

Is the physical data room loosing it’s existence?

In a physical data room information is made available in the form of files and documents that are placed in binders, folders and boxes. Investors, prospective buyers and potential bidders have their due diligence teams go to the physical location and analyse the available information. A physical data room is secure, as no documents are allowed to be copied or permitted to leave the room unless authorized by the appropriate individuals. Having people travel to a physical location seems something of the past. Hence, we see physical data rooms loosing it’s position to the virtual data room. Currently we expect that between 10% and 25% of all M&A transactions still use a physical data room. Which percentage do you believe still uses a physical data room?

The transition from a physical data room (DR) to a virtual one (VDR)

The 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. Below we give some more information around these advantages and the reasons why virtual data rooms (VDR) are being preferred above physical ones (DR). Do you believe the physical data room will continue to be used in the future?

What are the advantages of a virtual data room compared to a physical data room?

We see many advantages of a virtual compared to a physical data room. All though the VDR in practice is far from being perfect yet, we think the due diligence process via data rooms has come a long way. Due Diligence processes can and are being optimized. However, the VDR is still nothing more than a technical environment. The full project management of a Due Diligence project run in a VDR needs to be done by people. Possible advantages of a VDR to the Buyer:

  • Time savings (no travel required)
  • Comfort (study of the material in the data room can be done in own time)
  • Fair playing field (all buyers have the same information)
  • Reading documents online

Possible advantages of a VDR to the Seller:

  • Cost savings (needs to be set-up only once, no physical availability)
  • Ease of set-up (access to documents can be regulated per buyer)
  • Transparency (activity of individual buyers can be traced)
  • Parallel process (more buyers van visit the data room simultaneously)
  • Security (if the system is set-up correctly)

Of course there are also possible issues or disadvantages of VDR’s:

  • Risk of security (if the systems fails or gets hacked)
  • System speed can be low
  • Legal compliance
  • Non-digital information is difficult to show or needs to be scanned first

Who are the suppliers of VDR’s

A large number of VDR’s exist in the market and all provide different solutions around the virtual data room. Some suppliers of virtual data rooms are:

  • iDeals
  • DRS
  • Caplinked
  • Ethosdata
  • Intralinks
  • Merrill Datasite
  • Abobe VDR

If you are missing some providers of VDR’s please add them below. Please also give your thoughts on your preferred VDR solution. Let us know your comments on their strengths or weaknesses of your favourite VDR?

What are the advantages and disadvantages of each supplier?

All different VDR’s have advantages and their specific strong and weak points. Some are suited for very large, complex deals. However, this often also means these VDR’s have a higher price. Very specific functionality is not always really required for each M&A project. In this article we don’t want to go in depth on each specific VDR supplier and its offering as this would probably be part of a more extensive study that we can publish in a later stage.

Which supplier do you prefer and which advantages do you see?

Would you be interested in a detailed study and overview of the suppliers of VDR’s in the market?

Pricing of the different Virtual Data room Providers (VDR’s)

Regarding the pricing there is VDR’s that charge a fixed amount combined with fees per usages. Other VDR’s we see are charging only for the number of pages that are being added in their VDR system. One has to think about various (tens of) cents per page used in the VDR. At this moment it is still a market where VDR’s try to win market share and want to become the preferred supplier. What is your experience with pricing of VDR’s?

What is important in organizing an efficient DR (data room) process?

VDR’s provide normally only a technical infrastructure. Structuring the data and managing the process of a Due Diligence project is a completely different story. If you are dealing with a business sale of a significant size where a large number of documents need to be presented to possible buyers it is important to structure this in an efficient way.

Important is to think in advance of a structured approach. You have to determine which different sections of business data you want use in your data room before you start populating the technical environment. We have people who only manage data room processes on a daily basis. To get feedback on how to structure a data room process feel free to get in touch with us. What do you think is important in organizing a good data room process?

What are common failures in VDR (data room) processes?

We have seen many different data room processes where we had serious questions. Examples range from using an own, non secured , environment to a lack of management and leadership. During a 250M Euro transaction we saw a company use an own virtual environment that had no real structure and was not secured. All documents could be downloaded without security and the structure of the data room was lacking. Further, the data room was not populated before the start of the project and new documents kept on being added during the process which made it an inefficient project.

Sometimes we also see companies make a secretary responsible for the management of the data room. Although this doesn’t necessarily need to be a bad thing, it is important that the manager of the data room (Due Diligence) project has experience with managing a data room. Saving on resources for a data room can be an expensive choice in the end if the project fails or gets delayed. If a serious and qualified buyer drops out of the process due to low quality of the data room process the loss might be higher than the cost savings achieved.

Have you seen any funny or failures in a data room process that you want to elaborate on?

The future of VDR’s

There are quite some new developments in the area of VDR’s. The industry is still very much in development. We expect VDR’s to extend their functionality and focus on a niche of the market. This can either be smaller and simpler solutions at a lower price (sometimes we see advisors use dropbox as an example). We expect the larger players to focus on more extensive solutions with more functionality that have a higher price. Which new developments do you see? Where do you see the market going? Please let us know your thoughts below.


Comments

Safiya Merrique | Thursday 16 October 2014 | website: venue.rrd.com/
I am a representative of RR Donnelley who are globally the 3rd largest VDR provider. Our "Venue" virtual Data Room platform is bundled together with our extensive framework of regional and global hubs offering financial printing, translation, dedicated project management, 27/7/365 customer service and data room management services.

As an extension of your team responsible for administering the data room, our full-service offering addresses issues in terms of global user support in the local language, additional support to prepare the data room in-time for the go-live date and easing the burden of administration no matter the size, location or nature of the transaction.

Similarly, I am interested in the future of VDR's and look forward to some insightful feedback on price, functionality (too much)?, security (is the server location paramount for you/?), project management (is it important to speak to the same project manager throughout your deal?).

Cesareo Goyanes-Duran | Saturday 25 October 2014 | website:
Dear Govert,

Thanks for this very interesting post on a key issue in M&A.

With thecnological evolution it seems every year you get 2-3 new VDRs launched, especially in the USA.

Another VDR I discovered recently was Citrix.

I have tested both, Intralinks and Merril Data Site, and found them to have about the same features. However, there were differences in user-friendliness. This might be the tipping factor for some, less-technology adept sellers.

In terms of service, these two and the above Venue have similar offerings as well.

By the way, in Pharma, VDRs are also used beyond M&A. Ppharmaceutical companies also use VDRs for product licensing to other laboratories or third parties as the same information / confidentiality needs arise in such cases.

Kindest regards,

Ekaterina Liashenko | Thursday 30 October 2014 | website: www.idealscorp.com
As a manager of the iDeals Solutions, I would like to emphasize on offering next-generation cloud services for secure corporate data exchange and dealing with document workflow platform as a kind of our company’s business card. The iDeals has used the Windows application which allows synchronizing data room with files on computer what is very convenient while working with documents. Also iDeals offers advanced functionality for protecting, online viewing, and manipulating data in Excel spreadsheets. This Secure Excel Viewer could give one’s Due Diligence team an ability to convert one virtual data room into a strong analytical tool. Along with graphical reports a visual representation of user’s activity, thus accelerating analysis and decision making can be occurred. One can identify which pages by which users in a document were viewed and how much time was spent viewing them. iDeals also offers free product ''Myshare'' to existing clients in order to share securely and in advanced fashion files from outlook or webbrowser without having to invite to the dataroom such as sharing of teasers etc...iDeals has thus differentiated dataroom with complementary features.

Claudio Messina | Monday 13 April 2015 | website: www.rrdonnelley.com/venue/it/
Nine one. For a virtual data room, we are the best brands to provide services worldwide.

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