Computer Interface
The previous write-up was about the importance of information
for decision making, specifically in mergers and acquisition. Sensitive
information can make or break the deal or tilt the scales either way. As
mentioned, the confidentiality is of prime importance, given the fact that the
target is laying bare his soul (literally). The dilemma is how to make
information available, simultaneously, to a selected large group of
individuals/experts, within the limited time and costs while maintaining control
on the flow and the use of the information provided. See picture 1.
Virtual Data Rooms (VDRs) are online repositories, providing
an infrastructure for uploading and sharing digitised data. These data rooms can
contain documents — files, letters, records and transcripts —but may also
include other relevant information in any form, from audiotapes to soil samples.
The data in the data room are resources that represent legal proof of the target
company’s asset value and reveal its earning potential and ultimately its value.
Before entering a data room, potential buyers typically have
a good understanding of the target and its business, and have a preliminary
opinion on the consideration they are willing to pay for the target. In these
cases, potential buyers inspect documents to discover hidden earning potential
that may be capitalised upon or to uncover hidden risks that are not publicly
known. The potential buyer sends its team of experts to verify their known
information about the target with the contents of the data room and to gather
new information.
The prime objective of review is to act diligently and verify
in detail the information presented by the target. In a well executed due
diligence process, an expert in the field would inspect each document in the
data room, regardless of whether the information is obvious.
A Virtual Data Room has several advantages over a Physical
Data Room such as :
Text recognition :
Offered by some VDR providers; allows text in scanned
documents to be recognised by a computer program, effective for searching and
spell-checking.
Search function :
A key feature of a VDR; enables users to search documents for
specific words and phrases, similar to Internet search engines. A significant
improvement over PDRs, where document searches are done using the document index
and are only document-level searches that do not allow for searching of specific
words and phrases.
Q&A function :
Buyers are permitted to ask sellers, questions related to the
data room and its contents, securely and efficiently. VDR users may ask
questions through the VDR screen interface by clicking on a ‘Q&A’ icon; some
VDRs may allow for routing of questions directly to the appropriate operations
team member. While asking and replying to a question, both buyer and seller
representatives may easily refer to the document in question by simply clicking
on its icon.
Audit trail function :
The target can in real terms track the documents, including
viewing access by frequency, date and user; enhances transparency of the data
room process. This gives the target the ability to profile and rank potential
buyers, based on their level of interest and indicates the most frequently
accessed documents; this is important in ascertaining the buyers that should
proceed to a second round of due diligence, which usually involves disclosing
sensitive company documents. In the event of legal proceedings or misuse of
confidential documents in the VDR, the audit trail provides proof that a certain
user acceses specific documents. Alternatively, the buyer may use the same tool
against the target if documents are not made available to the buyer.
Dynamic indexing :
Allows sellers to upload ‘late’ documents to the VDR by
efficiently placing them in their appropriate position in the VDR index; allows
the seller to quickly reorder documents in the index and to inform potential
buyers through email or SMS of changes to the index and data room contents. A
complete change of the index however may not be possible. This is a significant
improvement over the paper-based, manual indexing system and filing of PDRs,
which were prone to errors and sometimes resulted in buyers not being informed
of updates to data room contents.
Restricted use :
In a PDR, the data room supervisor has to physically manage
documents that may or may not be permitted to be copied; as against this, in a
VDR, digital documents are flagged as restricted with respect to copying,
printing, downloading or viewing. Further, restrictions may be placed on certain
portions of documents, and may allow for contingent restrictions, such as
allowing a legal expert to download only legal documents, but not financial
documents. Viewing restrictions may be placed on sensitive documents available
only during a second round of due diligence.
Watermarking :
A security feature for digital documents in a VDR;
watermarking is the printing of certain words (such as the user’s name) across
the face of a document as identification and allows tracking of the document in
the event of illegal distribution.
Variety of file formats :
VDRs can usually store files of varying formats, including
PDF, Excel, PowerPoint, Word, GIF, MPEG, JPEG, and TIFF, eliminating the need to
convert files to a specific file type or the VDR system will transform the files
into a specific format required by the system.
A basic SWOT analysis between the Physical & Virtual Data
Room can be summarised below :
Advantages of VDRs to buyer :
Disadvantages to buyer:
Advantages of VDRs to seller:
Disadvantages to seller:
So the next time you are involved in a due diligence exercise, do make it a point to assess the positives and negatives highlighted in this write-up. Probably the next time you could add value by advising your client on how to manage risk in the process.
