By Francisco Lorca
Published in the October 2009 issue of PLC Magazine
Virtual data rooms (VDRs) have become the norm in the due diligence stage in most transactions, substituting the traditional paper-based data rooms (see Know-how article “Virtual data rooms: the due diligence evolution”). However, in the last two years, the use of VDRs has changed dramatically: they are now being increasingly used in most of the transaction stages of a deal, not only during the due diligence process (see box “Engaging a VDR provider”).
We believe that this shift in the role of VDRs is driven by the positive experiences that advisers and clients have had with the convenience, simplicity and functionality of VDRs and with their satisfaction and trust in the level of service provided by VDR specialists. As a result of this change, in the near future, we believe that VDRs are likely to be called virtual deal rooms rather than virtual data rooms.
Using VDRs in the overall deal flow There are several trends driving a broader use of VDRs beyond the due diligence stage, in particular:
More complex transactions. Transactions are becoming more complicated and are often changing their nature during the deal process, so they are taking longer to complete. For example, in the last 18 months, we have seen a number of projects that started as initial public offerings turn into private placements, and then into asset sales or company sales. This continuous change in the nature of a deal, with more bidders being added, more data being disclosed and timelines being stretched more than ever before, increases the administrative burden and makes the co-ordination of information much more difficult. Using a VDR as a virtual deal room makes it easier to manage the constant evolution of a deal.
The need for efficiency. In the current economic climate, firms and clients are continuously looking for ways to improve efficiency and save costs. Clients, in particular, want to ensure that legal and corporate finance professionals focus on content and critical process tasks rather than the administration of documents or e-mail traffic. VDR platforms can save a lot of administrative time and work.
Technology familiarisation. Users have become accustomed to using VDRs to conduct due diligence and distribute documents online. As they adjust to the convenience of carrying out these processes on their desktops and experience the resulting increased productivity, they tend to become evangelists for using VDRs. Our experience has shown that users are the best source of innovation: bankers, lawyers and companies have now started leveraging the use of VDRs for the circulation of confidential information such as teasers (material produced to generate interest and enquiries), information memoranda, management presentations and board minutes, instead of having to e-mail them to multiple parties.
Increased functionality. VDR providers have, in the last couple of years, introduced a number of features and services that are instrumental in the different stages of a transaction (see below). At EthosData, we apply our team’s experience in mergers and acquisitions and other corporate areas, and aim to think beyond the technology.
Using VDRs beyond due diligence There are a number of ways that VDRs can be used beyond the traditional sphere of due diligence, for example:
Internal document preparation. The preparation of documents for any transaction, such as offer memoranda, business plans and letters of intent, usually requires a significant level of work and exchange of documents. This creates a large administrative workload as multiple parties, such as auditors, legal counsel, investment banks, strategic advisers and the company itself, have to interact in the creation and amendment of the documents. Many of our clients use our VDR platform as an internal workspace to optimise this process.
Building interest. Many of our clients have used VDRs to build interest for their transaction. Using a VDR to distribute the deal teaser makes it more feasible to reach out to a larger number of potential investors or buyers and provide them with more detailed information than is possible with traditional emailed documents. On the one hand, clients feel comfortable that the information they circulate on the teaser cannot be printed and that access can be revoked at any time, on the other hand, the tracking tools that some of the leading platforms provide allow the client to see which parties have looked at documents and follow up accordingly.
Negotiating and exchanging drafts. Clients are increasingly using VDRs to turn around drafts of deal documents with the other side. The versioning system allows the parties to know which version is the latest, see previous versions and add new versions, including redline and comments. This avoids the confusion and administrative headache of using e-mails to large groups of people.
Deal bible. After closing a transaction, clients usually receive a copy of the VDR (usually on a DVD) as a deal bible. An alternative that is now widely used is to keep the VDR open for the parties to refer to in the future. This is very useful as it provides a secure, always accessible, storage for the information that is hosted by a third party.
These are just a few examples of how VDRs are becoming more embedded into the overall transaction flow. It will be very exciting to see what the next few years bring to the VDR industry. We believe that VDRs will become as important during a transaction as spreadsheet or word processing software and e-mail.
Francisco Lorca is the Chief Executive Officer of EthosData, a global provider of VDR services with offices in Asia, Europe and the US. EthosData has recently established joint ventures with Millnet and Vintage Filings. Francisco Lorca can be contacted at Francisco.Lorca@EthosData.com.
This article first appeared in the October 2009 issue of PLC Magazine.
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