Why Is a Virtual Data Room Necessary for a Successful M&A Process?

Before you investigate the importance of data room for M&A, it is necessary to understand basic notions. Mergers and acquisitions are a deal when a certain business entity aggregates another business entity or purchases interest. During this process, due diligence is one of the essential and most time-consuming stages. Obviously, the buyer wants to analyze the quality of the project and understand liabilities, obligations, and risks before signing the papers.

The merger and acquisitions industry broke records in 2021. As of May, it is up 158% compared to the same period last year. Despite that, according to Harvard Business Review, between 70% and 90% of M&A deals fail. 

What are the reasons for such high failure rates? There are many risk factors and conditions that can cause an M&A to go wrong. At the same time, one of the problems is involving both the buy and sell-side M&A in the process.  

To avoid this negative outcome, more and more companies choose deal room software for their activities. What are the benefits of such a solution? How does one prepare a company for using a VDR for M&A? Keep reading to learn more.

What is an M&A data room?

A virtual data room (VDR)  is a secure cloud database used for storing and sharing valuable information between interested — and authorized — parties. To enhance and expedite the process, companies use the services of data room providers for M&A due diligence.

Businesses may need a VDR for all types of M&A deals. Why? Because it provides a bank-grade level of security for huge amounts of information, meanwhile providing access to potential buyers only. Moreover, an M&A virtual deal room can move the process along much faster than a physical data room.

Virtual data rooms vs physical data rooms 

Traditionally, a data room was a physical place that stored sensitive and confidential documents. However, such an M&A data room incurs a significant amount of additional expenses. 

That’s why a virtual data room is a more cost-effective alternative. An ever-growing number of companies have started using data rooms M&A for their activities. As a result, recent research forecasts the value of the VDR market will reach $2.7 billion by 2025.

To proceed with the deal, both parties should be involved and have access to documentation. A few years ago when M&A virtual data room was not yet presented, people used physical rooms where potential buyers could find sensitive and confidential information, estimate it and make some conclusions. It is necessary to highlight that the traditional form of the deal room and the overall experience was not only time-consuming but also expensive as partners frequently had to come from different parts of the world in order to meet and discuss the details of the deal.

Why do businesses choose virtual data rooms instead of physical spaces? 

  • Increased data security

Using virtual data rooms for mergers and acquisitions allows you to see every step of a document’s interaction without allowing changes or amendments. Moreover, only people authorized by administrators have access to the documents, greatly reducing the risk of third parties gaining access to your sensitive information.

  • More reasonable maintenance expenses

The traditional way of running a data room is costlier. First of all, a company will incur expenses such as rental rates and around-the-clock security. Moreover, the bidder’s travel and accommodation expenses will drive up fees associated with a physical data room. With reliable M&A data room providers, you save on the cost of security and travel, lowering overall expenditures. 

  • Global accessibility

Authorized parties can access the data from anywhere with an internet connection. Day or night, both sell and buy-side M&A have immediate access to needed information. This helps companies find the best buyer worldwide. 

  • Accelerated transaction processes 

Traditionally, bidders had to schedule an appointment to access the data room and accommodate for travel time. With a VDR, it doesn’t matter if there are dozens or hundreds of bidders, all of them have access to documents simultaneously. Moreover, deal room software helps potential buyers with searching for concrete information, which also saves time.

Advantages of data room software for Mergers and Acquisitions

While the importance of a virtual data room for M&A cannot be denied, it is inevitable to maximize its use. The modern market is filled with vendors offering various features, up-to-date conveniences and unique specifications of VDR. Cooperating with a trusted and reliable provider is the first step to a successful and flawless M&A. Besides, it is your guarantee of your sensitive documents being safely stored, confidentially viewed and exchanged. Learn the reviews about the VDR provider you want to choose, test the demo version (if possible) and make sure the platform corresponds to the needs of your project and specifications of your business.

Generally, a time-tested and reputable VDR provider guarantees a full pack of opportunities during mergers and acquisitions, especially:

  • Corporate information is safely kept with advanced protocols and digital tools;
  • The seller gets maximized the value of the deal;
  • Several potential bidders can simultaneously get access to documents;
  • Screen blocking and watermarks protect data from being copied or downloaded;
  • Document evaluation during M&A is fast and easy;
  • Complete compliance with international and local regulations;
  • The seller can track the activity of every bidder within the data room;
  • Increased deal efficiency;
  • Better team coordination.

Once introduced on the market, a virtual data room became an immediate hit, as it is a convenient and indispensable tool that simplified M&A transactions and a range of other processes. Using the digital data room, the owner of the company can safely distribute information among other parties involved in the process. The main advantage is the ability to control all the actions of partners, including the time they access the data room, how often they view specific documents, and others. The highly controlled access is the feature that makes data room M&A inevitable for due diligence, which is not limited to VDR providers, but also during various legal proceedings in order to protect confidential data and intellectual property.

How to prepare a virtual data room M&A for transactions? 

1. Take care of documents 

Usually, an M&A deal involves hundreds of files. Unless you analyze and organize all of your documentation, the following steps can be a mess. Consider what documents are essential for buyers, digitize them, and prepare a clear plan.

2. Decide on administrators

Even if the data is well structured, it’s important to choose the right people to supervise the data room M&A during the process. There are a large number of tasks, like uploading necessary information, managing folders, and assigning users permission, so having several administrators can be very helpful. 

3. Organize your filing system

Having a clear folder structure will considerably speed up the process of transactions or interactions within the M&A virtual data room. For example, such steps as including categories to the main folders or giving specific names to subfolders will simplify the process for both sides. 

4. Upload relevant documents

While digitizing documents, double-check if they are relevant to the deal. Except for historical financial documents, unnecessary files hold not only little value but also incur additional storage expenses.

5. Maintain and keep the M&A data room updated 

Make sure that your team keeps engaging with the data room throughout each M&A deal. If you keep only up-to-date documents, delete unnecessary ones, and omit duplicated or unneeded old files, it will help to streamline the whole process.

m&a virtual data room

The main 5 stages of the M&A process using VDRs

Stage 1: Document preparation

Every deal starts with file preparation, so all documentation should be well organized, including business plans, contracts, financials, etc. An M&A deal room provides a simple structure that maintains documents for immediate access. 

Stage 2: Marketing

The more companies that know about your deal, the better chance you have of receiving an acceptable offer. For that, you need to reach a huge number of contacts, which is resource- and time-consuming. Using an M&A deal room, you can send marketing documents to any number of potential buyers simultaneously. Moreover, you could check who has seen them and who is interested. 

Stage 3: Negotiations

As soon as you have informed all potential buyers, your main tasks are to be in touch with each of them, track their interests, and be ready to answer their questions. M&A virtual data room provides you with tools that will help you to deal with this. 

Stage 4: Due diligence

This stage is of central importance to the whole deal, so an M&A data room plays a major role. It ensures bank-grade level of security at each step from data storage to file exchanges. Also, it provides simultaneous access to all the documents for each person from both the buy and sell-side M&A.

Stage 5: Closing

The time needed to close a deal is increasing. Compared to 2010, it has risen more than 30%.  An M&A virtual data room, on the contrary, streamlines the closing process significantly. It helps with creating and sharing drafts of final documents, so bidders have immediate access to them.

Effective ways to save money with M&A data room

When you compare the use of traditional and data rooms for M&A, the very first thing you will put an emphasis on is saving. It is not merely about time but also money and effort. It is known that a quality VDR offered by a trusted and dependable provider is the guarantee of a highly confidential, secure, and effective experience.

But, anyway, it’s inevitable to remember about potential cost reduction that becomes available due to a range of factors, including:

  • Travel expenses of investors and bidders are eliminated, as information is stored online in the cloud. Thus, there is no need to travel to perform due diligence;
  • The overwhelming majority of data room mergers and acquisitions providers offer instant launch of the platform, incremental rollout, and simple setup;
  • Travel cost and possible delays are limited, as parties start learning the materials right after the data room is set;
  • New bidders and other parties can be added during the M&A process;
  • There is an optimized ability to have parallel due diligence fulfilled by several parties.