Virtual Data Rooms - Part 2

The previous write-up was about the importance of information for decision making, specifically in mergers and acquisition. Sensitive information can make or break the deal or tilt the scales either way. As mentioned, the confidentiality is of prime importance, given the fact that the target is laying bare his soul (literally). The dilemma is how to make information available, simultaneously, to a selected large group of individuals/experts, within the limited time and costs while maintaining control on the flow and the use of the information provided.

Virtual Data Rooms (VDRs) are online repositories, providing an infrastructure for uploading and sharing digitised data. These data rooms can contain documents — files, letters, records and transcripts —but may also include other relevant information in any form, from audiotapes to soil samples. The data in the data room are resources that represent legal proof of the target company’s asset value and reveal its earning potential and ultimately its value.

Before entering a data room, potential buyers typically have a good understanding of the target and its business, and have a preliminary opinion on the consideration they are willing to pay for the target. In these cases, potential buyers inspect documents to discover hidden earning potential that may be capitalised upon or to uncover hidden risks that are not publicly known. The potential buyer sends its team of experts to verify their known information about the target with the contents of the data room and to gather new information.

The prime objective of review is to act diligently and verify in detail the information presented by the target. In a well executed due diligence process, an expert in the field would inspect each document in the data room, regardless of whether the information is obvious.

A Virtual Data Room has several advantages over a Physical Data Room such as :

Offered by some VDR providers; allows text in scanned documents to be recognised by a computer program, effective for searching and spell-checking.

A key feature of a VDR; enables users to search documents for specific words and phrases, similar to Internet search engines. A significant improvement over PDRs, where document searches are done using the document index and are only document- level searches that do not allow for searching of specific words and phrases.

Q&A function :

Buyers are permitted to ask sellers, questions related to the data room and its contents, securely and efficiently. VDR users may ask questions through the VDR screen interface by clicking on a ‘Q&A’ icon; some VDRs may allow for routing of questions directly to the appropriate operations team member. While asking and replying to a question, both buyer and seller representatives may easily refer to the document in question by simply clicking on its icon.

The target can in real terms track the documents, including viewing access by frequency, date and user; enhances transparency of the data room process. This gives the target the ability to profile and rank potential buyers, based on their level of interest and indicates the most frequently accessed documents; this is important in ascertaining the buyers that should proceed to a second round of due diligence, which usually involves disclosing sensitive company documents. In the event of legal proceedings or misuse of confidential documents in the VDR, the audit trail provides proof that a certain user acceses specific documents. Alternatively, the buyer may use the same tool against the target if documents are not made available to the buyer.

Dynamic indexing :

Allows sellers to upload ‘late’ documents to the VDR by efficiently placing them in their appropriate position in the VDR index; allows the seller to quickly reorder documents in the index and to inform potential buyers through email or SMS of changes to the index and data room contents. A complete change of the index however may not be possible. This is a significant improvement over the paper-based, manual indexing system and filing of PDRs, which were prone to errors and sometimes resulted in buyers not being informed of updates to data room contents.

Restricted use :

In a PDR, the data room supervisor has to physically manage documents that may or may not be permitted to be copied; as against this, in a VDR, digital documents are flagged as restricted with respect to copying, printing, downloading or viewing. Further, restrictions may be placed on certain portions of documents, and may allow for contingent restrictions, such as allowing a legal expert to download only legal documents, but not financial documents. Viewing restrictions may be placed on sensitive documents available only during a second round of due diligence.

A security feature for digital documents in a VDR; watermarking is the printing of certain words (such as the user’s name) across the face of a document as identification and allows tracking of the document in the event of illegal distribution.

VDRs can usually store files of varying formats, including PDF, Excel, PowerPoint, Word, GIF, MPEG, JPEG, and TIFF, eliminating the need to convert files to a specific file type or the VDR system will transform the files into a specific format required by the system.

A basic SWOT analysis between the Physical & Virtual Data Room can be summarised below :

• Cost savings

• Time savings

• Comfort

• Transparency

• Fair playing field

• Additional work

• Competitive price

• Reading documents online

• System speed

• Non-digital information

• Simplicity

• Ease of setup

• Cost savings

• Competitive price

• Legal compliance

• Time savings

• Security

• Security

So the next time you are involved in a due diligence exercise, do make it a point to assess the positives and negatives highlighted in this write-up. Probably the next time you could add value by advising your client on how to manage risk in the process.

Article by Samir Kapadia Chartered Accountant