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BySamuel Honkala

VDR for mergers & acquisitions

Mergers & Acquisitions (M&A) are a type of deal that is increasingly reaching the countries around the world. It is, indeed, a global thing. The number of transactions in which medium-sized companies are involved is growing steadily. It is not just the importance of so-called M & A procedure that is increasing, but also the professionalism, frequency, and speed of such SME transactions. 

Besides, a new market segment is emerging, specializing in corporate sales during the crisis. The term “M & A” includes the translation “mergers and acquisitions” as well as the upstream and downstream processes. Typically, an M & A process goes through five stages and concludes with the sale. These are difficult to separate in time and sometimes even run parallel.

Possible challenges in succession planning and during the crisis

Basically, the success of an M & A project depends on the current operating result and, if applicable, the crisis status of the company to be divested. The more advanced a crisis stage is already, the more complex the investor or successor search. Depending on the economic situation, different challenges have to be mastered. A professional and structured process is indispensable in dealing with these challenges.

Virtual Data Room

The virtual data room (VDR) is a web-based electronic safe in which documents of all kinds can be set. It keeps these documents safe because only authorized persons have access via the Internet. Some providers guarantee this security telling that they setup VDR in the respective high-security areas of the commissioned providers with certified server landscapes.

Since access is via an Internet browser, there is no need to install software or invest in hardware.

The setup of the data space takes over the respective provider, without that it requires a considerable time lead. Once the data room exists, the user receives an e-mail message that allows logging traditionally. A virtual data room should have the same basic data structure for each property in the portfolio and lead to lower levels of aggregation below it. This facilitates surfing through the information offered and greatly enhances the willingness of the experts in charge of viewing the data to deal with the portfolio.

Talking about the positive moments, VDRs save a considerable amount of time for both the seller and buyer who decided to set up vdr and protect critical data. The second important thing is that information transfer can easily be controlled. Many users already estimated the feature that allows one to set up individual rights of inspection, on the one hand, and the individual property rights per document, on the other hand. 

Practical people who love details and reporting would appreciate the fact that all the actions are documented. Besides, VDRs let the users evaluate the prospective customer activities, assess the interests, view spatially unbound equality of all interested parties. A virtual data room enables a structured approach to the complexity of M & A processes and speeds up the entire process. Of course, the company itself has its own access to the virtual data room with access to all documents. Upon completion of the M & A Transaction, the Company will be provided with a volume of information about all actions in the Dataroom.

As it always happens, there are some pitfalls as well. With all the advantages of the system, however, a certain disadvantage of the virtual data space should not be concealed. According to the current state of the art, it is impossible to prevent the computer surface from being photographed and a usable image of the user interface being recorded. Since the user of the virtual method is not sitting in a monitored room, but in his own office, there is, therefore, a slight risk of abuse. 

Therefore, if you want to prevent any individual documents from going outside at all costs, the conventional physical data space should continue to offer a bit more privacy. However, anyone who has ever participated in a due diligence process in a physical data room knows that deliberate abuse cannot be ruled out. After all, why else will documents that have been made available disappear again and again, without it being possible to clarify afterward who is responsible for this?

However, at least as important is the function of the data room as a highly secure communication platform for complex real estate transactions. Because the exchange of information and the inspection of stored documents takes place within a secure and encrypted Internet connection. This considerably reduces the risk of espionage compared to the usual sending of e-mails with attached draft contracts.

The versioning function of some vendors also ensures that every changed version is stored automatically and unalterably during contract negotiations. Also, a history display usually ensures that every minute touch of a file is recorded, so that it is comprehensible at any time who has done what with which document or is currently doing it. 

The establishment of a so-called watch list results so that the user will receive a notification when other users are processing one of the documents on the watch list. If a multi-party bidding process is to be negotiated at the same time, this can be organized within a single data room by granting different access rights to different subsections. This can also be concealed without further ado, that even with other interested parties or with whom negotiations are conducted.

BySamuel Honkala

VDRs, virtual and physical data spaces

In order to review the documents, prospective buyers will usually put together a team of experts, each of which will concentrate on individual sections of the data provided. Typically, both internal employees from the buyer company, as well as external consultants, such as lawyers, tax consultants, auditors or strategy consultants. For international teams, the difficulty is often to bring all members together in the same place for a limited time. 

This problem is eliminated in virtual data rooms, since the access to the information via the Internet. In addition, virtual data rooms allow multiple prospects a simultaneous and even longer examination. The problem of scheduling is thus eliminated, but also the direct communication of the audit team is limited.

• Another advantage of using virtual data spaces is the ability to index documents so that you can use different tools such as: B. search functions certain topics, keywords or phrases in documents can be found easily and quickly.

• data volume

• number of users

• Period of use

For a medium-sized company may be incurred here monthly costs in the amount of several thousand euros.

And yet, a virtual data room can tend to increase the efficiency of the vendor by providing support and data maintenance on the central platform. Conversely, if only a handful of prospective buyers are involved in the transaction process, a physical data room will generally be more cost-effective and moreover ensures more direct contact between the seller and the buyer. This point should be given corresponding importance in terms of the sales aspect of the transaction.

• An increase in transparency is an advantage for both sides. In addition to the exceptionally required provision of the Dataroom content as an annex to the sales contract, all actions in the Dataroom (uploading or deleting of documents by the Seller, viewing, copying, downloading of documents through the prospective buyer) electronically documented advantage. Accordingly, it can be reconstructed when documents were in the data room and who looked at them. In case of later disagreements between the buyer and the seller regarding the disclosure of relevant documents, it is thus easy to clarify the situation.

• In certain situations, the electronic records of the prospective customer’s data room activities may also provide the seller with insight into how each party is doing. The content conclusions, the prospective buyers draw from their audit work, remain unknown, yet show the particularly high activity of all users in one or more areas where the audit focus. This can be an advantage for the seller, especially during subsequent contract negotiations.

• Also in terms of communication, there are differences between physical and virtual data spaces. If questions are collected in forms in physical data rooms and then answered in writing or question-and-answer sessions, there is usually a so-called Q & A function (Questions and Answers) in a virtual data room. It is an electronic messaging system where questions are asked and automatically sent to the seller. The seller’s answers are then sent back to the prospective buyer and the entire process is documented.

Advantages of the physical data space

From a “traditional”, communicative point of view, the technical and procedural advantage of the virtual solution can be detrimental, as the physical data room shows its strengths: It offers the possibility of personal support for the prospective buyer through the seller’s advisors.

As a matter of urgency, questions may be clarified, or due diligence findings must be placed in the right context – before they develop momentum on the part of the prospective buyer, which may be more complex, but it may well be worthwhile: from our practical experience, often an early objection treatment prevents the escalation of possible problems.

The communicative disadvantage for the buyer in terms of communication in virtual data rooms is also the isolated operation of the due diligence team:

  • The team members are not sitting here just like in a physical data room together. So can questions or critical
  • Points are not discussed directly in the team. In virtual data rooms, the buyer’s due diligence officer must ultimately ensure communication.
  • Last, but not least, the topic “security” mentioned above represents a not insignificant risk in the use of virtual data rooms. Although it is basically the case that one can break into a physical data room and steal data, the technical possibilities are one virtual data space for data theft or abuse much larger (copying data, screenshots, etc.) There are probably a variety of security devices (restriction of copy, print and download options), but unfortunately, there are also electronic tools to bypass these security devices.
BySamuel Honkala

The importance of virtual data rooms

As the corporate transactions and M & A processes are made, one of the most important steps is to carefully deal with all the information regarding the company that is being sold. The basis for this examination is the compilation of a meaningful and complete “data room” by the seller and the examination by the interested party or buyer. What is important about data rooms?

One of the key tasks of the seller is the production of transparency to the sales objective. The job of the buyer is to check all the information. Both parties have to work carefully to complete a transaction successfully. This process is also referred to as due diligence.

Goal and Process of Due Diligence

A due diligence process gathers information about what the company to be acquired is. Due diligence processes can be very different and vary greatly in scope. Typically, they cover the legal, tax and financial sectors, but also more and more areas such as IT, insurance, environment, production processes, and human resources. The relevant information is disclosed in the form of corresponding documents in a data room and by answering supplementary question lists.

From the point of the buyer’s view, it is about examining the opportunities and risks associated with the acquisition and how the company can be integrated as quickly as possible into its structure. The result of the test procedures has accordingly the purchase decision itself, the transaction structure and/or the amount of the purchase price. If risks are identified in the due diligence, prospective buyers usually derive general and specific guarantee requirements in the purchase agreement.

Physical and virtual data spaces

Indeed, just a few years ago, there were physically protected spaces where the seller (or his lawyers and/or advisors) provided relevant information in the form of paper documents. Such a data space may well be compared to a shop window in which the seller can place the goods that are to be sold.

In other words, it is the company that is going to be sold, is presented to a very limited circle of prospective buyers for the introduction. For this purpose, the relevant documents are sorted and put together according to the main areas. 

The documents are recorded in an index, which later helps the prospective buyer or the authorized auditors to orientate themselves in the data room. These types of data spaces are also referred to as “physical data spaces” because the provision of corporate information is physical.

For some years, standardized processes of preparing, providing and retrieving information via the Internet have been used to map data spaces to electronic media. These computer- or Internet-based solutions are called virtual / electronic data rooms.

Confidentiality

At the beginning of each sale process, sellers and prospective buyers make a so-called confidentiality agreement, which is intended to protect both the company being sold and its employees and shareholders, as the information provided is very sensitive. In addition, prospective buyers must sign a further explanation, the so-called Datraumbegehungsregeln. 

This agreement governs whether and how copies of documents may be made. If questions arise from the due diligence process, they should generally be submitted in writing and transmitted to the seller or his advisor. 

Thus, complete documentation of the examination process is possible for both sides. As with the physical Dataroom, only those persons “entering” the virtual dataroom who have previously signed the privacy agreement and the Dataroom Rule Rules, or who have accepted online, are allowed to enter.

Access Control

In the long run, virtual data rooms are nothing but servers in a high-security IT environment where data or information is stored digitally. Access, provision of data, and exploitation of the Dataroom are managed by a Dataroom administrator previously designated by the vendor. This task is usually assigned to the assigned M & A advisor or the attorney accompanying the transaction. 

The members of the due diligence team get access to the data via the internet. You have to register for this using an individual identifier and with the help of a password on the website of the Dataroom Provider. Naturally, the highest safety standards apply here to prevent unauthorized access. Often several security levels in the form of PIN and TAN numbers are given.

In addition, it can be determined in advance who will be allowed to see specific data or documents at what time, accordingly.  Importantly, less critical or public documents, which are also referred to as “green-level documents”, are already made available at the beginning of the due diligence process documents with sensitive data.

Sometimes, last, highly sensitive data, such as. For example, product cost estimates or personnel files are only made available after signing as part of a so-called “confirmatory due diligence” (confirmatory due diligence).