The Hindu Business Line : Virtual data-rooms — the new transaction backbone

In line with global trends, over the last few years the Asian and Indian markets have seen an increase in the number of M&A transactions supported by data-sites.

The global financial press over the last few years has been replete with news relating to the quantum leap in the number and value of mergers and acquisitions (M&A) undertaken by corporates and private equity firms. An associated change that is often unreported relates to the environment in which activities supporting these mega M&A transactions are carried out.

Any M&A transaction or a private equity investment involves several steps, including initiation of a financial, tax and legal due diligence that indicates a more serious interest by the parties to the transaction. A due diligence generally involves a detailed analysis of the financial position and legal status of the acquiree.

The backbone supporting the successful completion of any transaction is information relating to the financials and operations of the acquiree that is relevant, accurate and provided on a timely basis to the participants to the transaction. Anyone who has been involved with the due diligence process will vouch that substantial time is spent in reading documents to establish the content and quality of information available.

Evolution of due diligence

The increase in M&A experience of market participants and significant technological advancements, particularly the use of the Internet, have assisted in the evolution of the due diligence environment through different phases, starting from the initial years when due diligence was performed at an acquiree’s premises to the establishment of offsite/physical data-rooms and finally to the establishment of online information banks, that is, virtual data-rooms or data-sites which have altered the dynamics of the transaction lifecycle.

This evolution has also been driven by an increase in the number of suitors for target companies resulting in simultaneous due diligences being performed by multiple buyers. Though at present due diligences are performed at acquiree’s offices as well as through physical data-rooms; of late the use of data-sites has become the primary mode of supporting due diligences in the US and Europe.

In line with global trends, over the last few years the Asian and Indian markets have seen an increase in the number of M&A transactions supported by data-sites. Though all three environments present their own set of advantages and disadvantages, as more market participants gain experience of transactions through data-sites, it is likely that even in India, the use of online data-sites would multiply.

At acquiree’s premises

In the initial years, the due diligence was generally performed at the premises of the acquiree (the corporate office) with professional advisers having access to detailed financial and operating information. A typical due diligence involved a team of 5-10 analysts/accountants and equal number of lawyers descending on the acquiree’s premises for a period of 2-4 weeks. These teams had an ongoing interaction with the senior and operating management of the target company with interactive exchange of information.

Offsite, physical data-rooms

The advent of data-rooms was necessitated by the increase in the number of suitors for companies, the necessity for better organisation of the information supporting the due diligence process, the need to complete the diligence within the shortest possible time and above all the need to minimise disruptions to the operations of the acquiree company.

A culmination of these factors resulted in the creation of data-rooms at offsite locations, that is, a location outside the corporate offices of the acquiree. Information in these offsite data-rooms is generally better organised with a detailed indexation of the available data.

A data-room manager also acts as a co-ordinator for the due diligence process. While the offsite data-room provides a more organised information flow, on the flip side, the access of professional advisors to management is generally limited to specific question and answer sessions (Q&A sessions) as compared to the easier access available in instances where the due diligence is performed at the acquiree’s premises.

Virtual data-rooms, data-sites

Advances in technology, the widespread use of the Internet by businesses over the last five years and increase in cross-border M&A have resulted in the emergence of virtual data-rooms or data-sites. Data-sites are online Web sites which host the information required for a due diligence in electronic form as contrasted to physical data-rooms where the information is largely available as documents.

Creation of data-sites involves capturing information in electronic form and organisation of the information in a logical structure through the use of folders.

Several US and European service providers offer the infrastructure and services required for hosting of a data-site. Probably the same factors that resulted in the oblivion of the typewriter once the personal computer made its appearance have also been responsible for the creation of data-sites.

Data-sites have been a blessing for cross-border mergers which involve teams from several countries working on a deal as all teams can have the same levels of access to information irrespective of geographical location. The savings on travel costs and logistics are added advantages

Another advantage is the 24/7 availability of information as compared to physical data-rooms which generally have fixed operating timings.

Data-sites also offer the ability to track updates to the information posted on the site so that transaction teams can easily understand the additional information that is available.

As with most computing technology, the ability to organise and process several thousand pages of information is enhanced in the case of data-sites as compared to physical data-rooms. ‘Search’ features also enable users to identify and access the most relevant information.

Most data-site service providers also advertise a unique informational advantage to the sell side teams — the ability to better “control” the transaction. As any transaction professional will vouch, nowhere is the age old axiom “knowledge is power” more relevant than in the transaction battle field.

Data-sites confer the ability on sell side teams to offer different access levels to the transaction teams, for example, access to confidential information could be restricted to senior members of the buy side team or restrictions could be enforced on copying or printing data.

However, a fact that is not well known is that data-sites also enable transaction teams on the sell side to monitor the activity levels of the buy side teams. For example, a quick look at the number of times a document has been viewed, the seniority of the person who has viewed the document, the number of users from the buy side transaction team provide useful insights to the sellers. These insights can range from understanding potential areas of interest of the buyers (that is, potential transaction issues) based on the number of times a document has been reviewed to an overall idea about the buyers’ interest level in the transaction based on online activity levels.

Given the precession of computer technology, sell side teams can know the precise minute a particular document was viewed and the person by whom the document was viewed.

As data-sites provide a trail of the information made available for the due diligence, subsequent disputes regarding information availability (adequacy of disclosures) in the due diligence are minimised. In the West, demands for holdback of consideration due to non disclosure of key information are sometimes raised by buyers at the transaction consummation stage. This is minimised by the documentation trail available on data-sites.

The drawbacks

Though the role played by data-sites in facilitating the transaction life cycle is evident, there are some associated drawbacks, in particular for the buy-side teams:

The biggest disadvantage of data-sites is the limited interaction with members of the seller’s management and operating teams. Most transaction professionals gather deep business insights and identify potential deal issues through formal and informal discussions with the people who run the business. In the case of data-sites, the due diligence gets restricted to the documents loaded on the data-site and limited sessions with management.

Other disadvantages relate to more mundane matters such as missing documents and lack of clarity of documents loaded on the data-site. The inability to copy or print information is also a hurdle for the transaction teams which offsets some of the time savings conferred by data-sites.

Further, listing information on the Internet and enabling access to sensitive information such as contracts to third parties poses legal challenges relating to confidentiality of information which may need further examination as the use of data-sites increases.

Future trends

At present, data-sites form a small proportion of the transaction environment in India, with due diligences primarily being conducted at the acquiree’s premises or through physical data-rooms, particularly where the transaction involves few suitors. However, as in the West, it is likely that in the next few years with the maturing of the Indian transaction space, data-sites would become an important mode of supporting due diligences.

In India, even for transactions that are conducted through data-sites, Q&A sessions are almost always handled offline. Over time, this may also go the western way where Q&A sessions are at times managed online through the data-site.

Further, in addition to hosting information supporting due diligences, data-sites are also used by companies in the US and Europe to assist in preparing for an initial public offering (IPO) by stockpiling the financial information required for an IPO. Data-sites can also help corporates create a permanent database of relevant financial and operating information as compared to physical data-rooms where the hard files used are generally relegated to the archives post transaction completion.

In sum, while it is likely that the use of data-sites for conducting transactions in India would increase over the years, physical data-rooms would remain an important mode of supporting due diligences in the near term. Moreover, while the transaction environment may change, the objective of both data-rooms and data-sites will continue to be dissemination of relevant information to all transaction teams to facilitate informed deal making.

(The author is Associate Vice-President, Transaction Advisory Services, Ernst & Young.)

More Stories on : Advertising & Marketing | Mergers & Acquisitions

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Crucial input for farmers

Virtual data-rooms — the new transaction backbone

Beefing up the nation’s finances

‘Lean’ is more than a cost-cutting tool

Should ATM usage be encouraged through incentives?