Reasonable, fast and secure?

Virtual data rooms are being used more and more often - in the private equity sector, too

On June 3, CVC Capital Partners signed an agreement to purchase 25.01% of Evonik Industries AG for 2.4 billion Euro. Before the transaction, the financial investment company left no stone unturned during its rigorous examination of the conglomerate. A large part of this due diligence took place outside Evonik's company headquarters: thanks to a virtual data room, the investment managers of the British buyout firm, who were advised by Merrill Lynch and Rothschild, didn't have to leave their offices even once to proof the books of this former RAG corporation.

The Advantages are Clear

In order to generate lively competition during an M&A transaction, potential buyers should be kept in the dark about the other bidders for as long as possible. This is why, in a conventional data room, bidders must do their work consecutively, one after the other. By comparison, when several potential buyers can sift through digitalized documents at the same time, the process is speeded up. Alexandre Grellier, CEO of Data Room Services GmbH & Co. KG, located in Frankfurt, reveals a further argument that speaks for document digitalization: "A seller can track precisely which documents have been opened by potential buyers and in this way gains an insight into which processes and index numbers are important to a buyer."

What comes short is the personal contact with the bidders, contact that naturally occurs on an ongoing basis during visits to a physical data room. Grellier, whose company was awarded the contract by Evonik to create a virtual data room for them, sees no other disadvantages. Perhaps the most that can happen is an occasional power failure or wrongly assigned permissions. This means that people are granted access to information that they are not supposed to see. However, this kind of risk always exists when confidential data is digitalized. Grellier dismisses the idea that employees capitalize on the information entrusted to them, saying: "Our employees undergo regular checks and take compliance courses."

DVD As An Appendix to the Contract of Sale

It takes about six weeks to set up a virtual data room for a large company. During this time, documents are scanned - in the case of Evonik it was a 4-digit number of binders - and quality controls are carried out. "For the Evonik deal, 15 staff worked on digitalizing the documents. In addition, three project managers coordinated the process." Grellier emphasized. After a data room has been closed, the documents are downloaded to a DVD, labelled, and the DVD later becomes an appendix to the notarized contract of sale. The space-saving digital archive is, however, only one of the reasons why a data room saves money. Bidders save on travel costs but the sellers too save on space-rental costs and catering costs, and on cost of hiring the mandatory attendant to keep watch over the room. In contrast, a virtual data room can be set up for several thousand Euro. Grellier says a data room for a typical M&A transaction with around 40 binders can be set up for about 10,000 Euro.

Outlook

In the USA today, virtual data rooms are used for more than half of all due diligences. A 2008 survey of the merger market revealed that 87% of the heads of the European companies surveyed would consider using a virtual data room to facilitate an M&A transaction. Given this openness towards using them and the advantages they offer, virtual data rooms will continue their victory march and will be used increasingly even for smaller M&A transactions.

andreas.uhde@vc-magazin.de Venture Capital Magazin 10/2008Page 40