A virtual data room 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

Due diligence

"Due diligence" is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations...

 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

Data room

Data rooms are used in many different types of transaction where the vendor or the authority wishes to disclose a large amount of confidential data to proposed bidders typically during the due diligence process...

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.

Introduction

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 physical data room, only one bidder team can access the room at a time. This becomes time consuming.

A virtual data room has 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 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
• Expensive
• 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.
• 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.
• Resulting 20%-30% higher bid values.
• 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

External links

• The Data Room: Article at The Boston Globe (2006)
• The Emergence of Virtual Data Rooms Mergers & acquisitions from A to Z (2006)
• Due Diligence, Quick and Clean CFO Magazine (2006)
• Study on Virtual Data Rooms for M&A Manda (2007)
• Webopedia Virtual data room definition