The Merger and Acquisition Due Diligence Process

For M&A investment bankers on the sell-side, getting the mandate means representing a client in a deal, while for buy-side bankers, the key is finding the right company to purchase or the right buyer for a portfolio company. In either case, the real work of due diligence, valuation, and negotiations starts once the green light is given. As a deal gets larger and/or more complicated, information management can easily become a task in and of itself.

The Traditional M&A Due Diligence Process – Cumbersome and Unmanageable

With the number of documents that need to be exchanged, collaborated on, reviewed, edited, and finalized, the fact that the information management aspect of the M&A due diligence process is awkward shouldn’t surprise anyone. Consider a scenario: a client firm, based in Atlanta, engages a New York-based investment bank to acquire a publicly-traded target company based in St. Louis. To complicate things further, suppose the investment bank’s managing director running the deal is based in Chicago, and the counsel for either the acquiring firm or the target is based in Nashville. Once the potential buyer makes an offer, the target can either accept it, or put itself up for auction to see if another firm will make a higher offer. If that happens, multiple potential buyers will need to examine the company’s financial records, vendor and customer contracts, other legal documents, etc. With multiple firms potentially making a bid, managing the due diligence process, keeping everyone in the loop on every relevant aspect of the deal, and making sure that everyone has all the latest copies of the M&A due diligence documents on their own hard drive or office server is going to be very complicated. As any investment banker knows, information management on an even slightly complicated deal can easily consume a tremendous amount of everyone’s time and resources.

The traditional method for providing mergers and acquisitions due diligence information to parties that require access to it has been via use of a hardcopy data rooms. However, paper-based data rooms carry a number of significant logistical limitations: mergers and acquisitions transactions frequently involve multiple firms, and visits to the data room have to be scheduled so that members of only one firm is in the room at a time. In addition, whenever a document is revised, edited, or otherwise changed, it’s got to be either emailed to all parties concerned (which carries its own security risks), or sent in hardcopy if the file is too large to be emailed, etc. Bankers or lawyers carrying out extended periods of due diligence also get to experience the joys of hotel living and being away from home.

Virtual Data Rooms – Increased Convenience and Security, Reduced Costs

Virtual data rooms overcome virtually all of the logistical and security limitations inherent to paper data rooms. A virtual data room is a secure, online repository for electronic files that can be accessed using a web browser. By using a virtual data room, mergers and acquisition due diligence can be provided to authorized parties with increased security and convenience, and often at a lower cost, than traditional methods of emailing and overnight mail.

Increased Security

In a paper-based data room, security comes mainly from the fact that all the documents are on the premises of the firm providing them. In a virtual data room, security is multifaceted: administrators use a system of usernames and passwords to control access to the virtual data room itself, as well as access to individual files on a per-user basis. In other words, users must enter a correct username and password in order to access the VDR, and once in, each user is able to access only those files that they’ve been granted permission to access by the room administrator. In a mergers and acquisitions due diligence scenario, this could mean that a potential deal participant would initially have access only to public documents such as 10-Qs, 10-Ks, etc., and once an NDA was signed, access to additional material, such as financial projections and contracts, would be granted.

Reduced Logistics

Virtual data rooms also make the job of information management much easier. In a paper-based data room, all of the documents are on the premises of the firm providing them, so anyone who wants to actually view the documents has to go to where they are. In a virtual data room, however, anyone who wants to view the documents has only to go to their computer and use their web browser, where the documents will be available for viewing 24 hours a day, 7 days a week.

Also, in a mergers and acquisitions scenario, due diligence documents, as well as term sheets, financial projections, and proposed contracts are subject to frequent change or revision. Using a virtual data room eliminates the need to constantly send out emails (which are a well-known security weakness) with the newest version of a document attached. Virtual data room providers can enable emails to be automatically sent out whenever a document is changed, ensuring that no one is ever left out of the loop, and that everyone views the most recent copy of a document when they access the virtual data room.

Virtual data rooms provide another benefit to the firm being acquired in the form of a potentially higher price. Because potential bidders don’t have to spend time and money to schedule a time to view the due diligence files and then travel to them, firms that might otherwise not have taken an interest in the deal may decide to participate. While every deal is different, a wider pool of bidders often translates to an ultimately higher sale price.

Due Diligence Data Solutions Summary

Mergers and acquisitions due diligence is often an unwieldy process. The number of people involved, the amount of information that must be collected, distributed, and managed, and the short amount of time often allocated to the process all make it a difficult process for even very experienced practitioners to navigate. Like many other aspects of finance, technology has made the information management process vastly simpler. The reduced time, money, and hassle involved in using a virtual data room means greater freedom for parties to a merger or acquisition transaction to focus on the substance of the deal, and less need to focus on managing its process.