Virtual Data Rooms are already in use for 70 per cent of North American M&A deals and the technology is rapidly expanding
It may sound like an oxymoron, but one of the fastest-growing areas in the printing industry is a paperless product that exists only in the world of cyberspace: the virtual data room. Until now, much of that growth has been driven by clients using the ‘deal rooms’ as secure online repositories for documents related to M&A due diligence.
The next wave of product innovation, however, will likely affect how companies share and produce documents internally, in ways that could directly affect how IROs do their jobs. Companies operating in this arena are also hoping to cash in on impending regulatory changes from the SEC that will require XBRL filing, as well as the continued migration into cyberspace by big business.
Among other things, deal rooms could be used to warehouse company documents such as financial figures, past earnings reports and shareholder and analyst information. They could also facilitate collaborative writing projects in a secure working environment that carefully tracks who is viewing a document and when and where changes are made.
‘Virtual data rooms (VDRs) are a very effective way to aggregate information,’ explains Mark Aiello, a vice president at RR Donnelley, the global printing services provider. ‘It’s a natural extension of our services. Documents that are online are already being managed for users inside the company for post-merger integration or IR.’
The old approach
Traditionally during due diligence, all relevant documents are physically placed in one room opened up for suitors. Teams of attorneys, accountants and analysts representing bidders are allowed in, one at a time, to pore over the documents under the watchful eye of a security guard, who is charged with making sure none of the papers are lost, taken or even accidentally destroyed.
It’s a costly and time-consuming process, as rival bidders are given different viewing slots and prevented from crossing paths. Travel costs can run to tens of thousands of dollars, with the paper cost for a $100 mn deal averaging $90,000.
With VDRs, bidders can log on remotely and view scanned versions of the documents at the same time as their competitors. They also leave a precise record of what they viewed and for how long, helping the company to discern which bidders are serious and which financial areas are attracting the most scrutiny. That record can also provide protection in the case of lawsuits should a bidder later claim key information was withheld or misstated.
‘The VDR provides lots of advantages,’ says Richard Martin, director of marketing for Merrill, which rolled out its DataSite product in 2004. ‘You can save a significant amount of time, which is critical.’
Bowne, which has produced a white paper on best practices in this type of web collaboration, estimates that VDR technology was in use for 70 percent of all North America-based M&A deals in 2007, and notes that the VDR is becoming more popular in Europe and Asia. The paper says the growth in demand is partly due to the expanding range of uses of the VDR.
Same technology, new applications
The next frontier is the use of internal data rooms for company documents. Craig Clay, an executive vice president at RR Donnelley, says VDRs have been migrating to internal company use for at least four years. One New Orleans-based firm, for example, has been using one to house critical company documents ever since Hurricane Katrina, in case calamity should ever strike the headquarters again.
Financial printers intend to offer their services as a possible solution to IR professionals grappling with new SEC regulations that require all corporations and mutual funds to file disclosure in XBRL within the next two years. The requirement, which is being introduced as part of a phasing-out of antiquated aspects of the EDGAR system, will allow users to view information and analyze it in new ways. Although this is expected to save companies money and make the preparation of disclosures easier in the long term, the transition will be costly and time-consuming.
Deal rooms offer one possible solution to the problem. IR professionals will be able to scan or upload relevant financial information into the virtual space, where outside contractors can access it securely, extract the necessary data and put it into the XRBL format required by the SEC. Documents can also be taken out of the VDR and translated into a range of spoken languages, a feature likely to appeal to dual-listed or global companies.
VDRs can come in handy for earnings calls and regulatory and legal issues, too. ‘Not only is all the information secure before you report it publicly, but IR professionals will also have a built-in library of the previous quarter they can easily access,’ explains Clay.
Perhaps the key benefit to online collaborative work spaces is that they offer a more secure space for editing and sharing data.
‘Exchanging such information by email, especially if it’s private, is not a good idea because email is not secure,’ says Steve Rocchio, an executive vice president at financial communication provider Imprima Management Services, which offers the iRoom product.
‘Also, you don’t have file-size limitations like you do with email. We typically host documents as large as 100 megabytes – you certainly won’t get that through an email firewall.’
