virtual data room

If you go to Wikipedia and look up "virtual data room" you'll read an excellent summary of the use of such software products during M&A transactions. Increasingly however, virtual data rooms are being used for a variety of situations and as an ongoing resource separate to M&A deals.


The origins of the virtual data room stem from the traditional physical data room that companies would put in place during a diligence situation. Typically organized by lawyers and bankers this would be a dedicated room at the selling company's offices, at the lawyers offices or even in a hotel room. The prospective buyer(s) and their advisers would then travel to the data room to spend whatever time they needed to trawl through the documentation. This was a massively time consuming and expensive process. Security of the documentation was ensured by a lock on the door, sometimes cameras in the room and it was not unusual for the selling company to have a representative in the room, even looking over the shoulder of the document reviewer if there was proprietary data on view.


The advent of the virtual data room has made the diligence process considerably easier and, potentially, a lot less expensive. A virtual data room is an online software service that provides a highly structured and controlled environment where documentation is secured and then carefully shared with outside parties based on what the seller wants to expose and what the buyer needs to see. Detailed levels of access are available (for example some folders are blocked, some can only be viewed, others might be available for downloading and printing) along with click through NDA's, watermarking on the documents and an audit trail of activity by all users. In this way a company can retain control over it's document record, reduce exposure, reduce the cost of the transaction and have some legal recourse should proprietary information suddenly appear in a competitors product.


Increasingly companies are realizing that the exposure of their proprietary information, their intellectual property, their secrets, is a daily challenge, not just during M&A transactions. Due diligence in varying levels of detail is a reality of many common business transactions such as venture capital raising, debt financing, joint ventures and licensing deals. Litigation, bankruptcies and restructuring projects may also require the sharing of large quantities of documentation that companies may want to keep careful track of and ensure that they retain control. In addition why have a team of auditors fly out to your company if they can work from their desk?


Many companies are also looking at the cost of preparing the document record each time a use case comes along. If you have to engage a law firm or consultants to assist in corporate clean up it's probably going to be expensive. Typically someone, or a group of people, in the finance or legal departments is responsible for organizing the document record, it always takes longer than expected, it often comes down to the wire, many CFOs will have stories of pulling an "all-nighter" to get prepared!


Savvy executives are realizing that having an organized document record, and a process for continually maintaining it, has significant merit. The documentation that will have to be shared outside the company walls from time to time is secured, organized, ready and waiting. Ultimately the value of the company is represented in the document record, missing or misappropriated documentation can put a big hole in that value, so why take the risk? Like most technology the cost of a virtual data room subscription has been dropping steadily with time, they are no longer luxury items used by big companies and investment bankers, any company can protect themselves for a modest and predictable outlay.