Mergers and acquisitions are mainstays of the corporate world, but how much do you really know about what makes them tick? The virtual data room, or VDR, is critical to the behind-the-scenes heavy lifting of modern M&A.
Although they typically go overlooked in M&A news reports and analysis, VDRs represent a huge industry in their own right. Here’s what makes the two fields so inseparable.
What Is a Virtual Data Room?
VDRs are more advanced online versions of the data rooms historically employed to store records and exchange relevant transaction information. Unlike their physical-world predecessors, they exist primarily in the digital arena, and this gives them many unique advantages.
VDRs let negotiating parties and other stakeholders disseminate vital information more rapidly even if they’re separated by vast distances. The chance to go paperless is also a godsend for legal teams that would otherwise drown in a sea of hard copies. Modern technologies further improve on these features by instituting access controls and authentication protocols that ensure heightened security and information privacy. With market revenues in excess of $800 million, annual growth rates in the double digits and some 218 providers as of April 2016, the prevalence of virtual data rooms isn’t going to fade anytime soon.
Why does VDR and M&A go hand-in-hand? VDRs provide unique advantages for M&A dealmakers. The complex due diligence and discovery requirements associated with transactions make connected data rooms the perfect solution.
What Is Due Diligence?
Due diligence is a huge aspect of M&A deals. In short, buyers spend significant time and effort on thoroughly investigating the businesses that they plan on purchasing.
Before signing the contracts that finalize their transactions, companies want to know exactly what kinds of obligations and liabilities they’re taking on. A given company's financial state can also impact the viability of business deals. From enumerating assets and liens to quantifying different types of working capital and accounts receivable, buyers and their legal advisors use various methods of discovery to gain a solid understanding of their prospective acquisitions.
How VDRs Improve Discovery
VDR users can share their documents in hierarchically arranged structures. The ability to use digital mechanisms like semantic tags instead of folders and crosslink specific line items and terms to other paperwork makes it much easier to furnish a transaction partner or legal team with information that they can easily browse and navigate.
Due diligence may require that specific documents, like profit-and-loss or compliance histories, be replicated or referenced at multiple locations in other records. VDR’s compatibility with robust digital organization schemes facilitates the maintenance and rapid sharing of complex data repositories.
Exercising Your VDR Options
The contemporary VDR landscape is rife with competing providers, and your selection approach should be appropriately nuanced. For instance, companies like Merrill, Donnelly, Firmex and IntraLinks all offer VDR solutions, but these firms’ diverse backgrounds mean that their products are markedly different.
Merrill and Donnelly both have their origins in the world of print, and they eventually migrated from providing physical data rooms complete with guards to more flexible digital implementations. IntraLinks, which is widely believed to have pioneered one of the first VDRs, seems to have fallen behind since its heyday in the early 2000s. Newer players, such as Firmex, while offering less experience have the freedom to start fresh without being beholden to a legacy platform.
What the M&A Market’s Imminent Upswing Portends for VDR
The tail end of 2016 looked very good for M&A, and experts predict that 2017 will continue the trend. Massive Asian conglomerates that expressed earlier interest in investing in European and North American holdings and brands are likely to keep pushing for acquisitions. Going into the new year, financial institutions and executives alike expressed optimism about the M&A boom.
For data room providers, these trends mean big business. Even in light of uncertain political developments in the U.S. and the U.K., multinational companies will continue their pursuit of lucrative M&A opportunities. Providers that can offer secure, internationally-compliant facilities are sure to profit.
Exciting Times for VDR
The VDR space hosts its fair share of M&A activity, and market watchers have long taken notice. For example, IntraLinks was acquired by Synchronoss Tech to the tune of $821 million in January 2017, but the deal only closed after about a month of uncertainty.
In previous years, deals like the Citrix-Sharefile merger, Rim’s buyout of WatchDox and NOVACAP’s investment in Firmex were also the subject of media speculation, undisclosed final sums and market hubbub. If there’s a key takeaway from all of this, it’s that many VDR enterprises are just as worthy of outside investment as the purchase-seeking companies they serve.
What Could the Future Hold?
Data rooms are currently in a state of flux. Unlike other sectors that are characterized by constant ebb and flow, however, developments in the VDR arena usually move in a positive direction.
As the capabilities of IT deployments and infrastructures evolve, so are the innovative features that VDR providers offer. The major difference is that sales, marketing and support standards seem to be improving to match. The era of aggressive outbound sales culture, late nights and overbearing representatives is giving way to products that are inherently easier to use and staff that you actually won’t mind interacting with.