M&As are a permanent element of the economic world. Their goal is to achieve strategic and financial benefits by expanding markets, diversifying products and production processes, providing economy of scale, etc. Another indispensable part, which is prior to this type of strategic investment is the Due Diligence procedure.
The main aim of the DD is to assess the risk of the planned transaction and indicate the direction of new business development. In order to do that, the company which is the subject of sale is obligated to provide the potential investors with access to its internal documentation, while the investor performs an comprehensive financial, legal and organizational analysis on the basis of which valuation of the company and decision on the acquisition are made.
Due Diligence – traditional approach
Until recently, the Due Diligence analysis was carried out in a traditional way. It was conducted manually in the physical premises, where all the company documents (often hundreds or even thousands of binders) were piled and laboriously analysed by teams of advisors hired by the investors interested in purchasing the company.
Conducting the analysis in this way is time-consuming, cost-intensive and troublesome for all parties of a transaction, especially when investors come from different parts of the world and company’s documentation is scattered across a number of departments. It is easy to imagine the costs that might be generated by companies involved in the transaction when they are thousands of kilometers apart and the teams need to travel across the globe. The number of documents to view, such as agreements, statements or strategic plans, is simply enormous, and the engaged delegations – large. Imagine several-to-over-a-dozen investors, each one hiring a considerable number of specialists responsible for the analysis of documents and providing advice, like lawyers, analysts, financiers or Corporate Finance advisors, all of them working in distant locations. Not to mention the risk of losing control over documentation or sensitive data leakage.
Virtual reality – digital Due Diligence
In order to streamline the process, Virtual Data Room (VDR) applications were developed – they allow to organize research in an electronic form by providing access to electronic versions of documents from anywhere on earth, at any time of day or night.
This solution allows to enhance the process (once a document is scanned, it can be reused many times without the need for reprinting or photocopying), increase its competitiveness (the possibility of conducting research by several potential investors simultaneously) and provides a much higher level of security (access to documents using a secure encrypted connection, only for authorized users, full control of the process thanks to reports of investor activity and more).
VDR is offered in a SaaS model (Software as a Service) which basically means that in order to use the application you need only a computer and a web browser. The entire IT responsibility (infrastructure, data, software, security) is on the service provider.
Virtual Data Room guarantees the level of security of information flow equal to the security of electronic banking services. This can ensure that confidential data does not fall into the wrong hands. It is a tool that allows the necessary, often sensitive documents to be made available to all the involved parties in a structured and – most importantly – safe way.
To maintain control, strict access rights are being established, e.g. information from the finance department can only be made available to specialists in this field. Moreover, the system allows more advanced restrictions, such as: blocking the option of saving documents on hard drive or printing them, or applying a watermarks on the files, which in case of taking a screenshot will identify the user who has committed the system abuse. The Digital Rights Management model also eliminates the risk of unauthorized removal or modification of documents.
What about effective communication and process control?
This is only a fraction of VDR capabilities relevant from the point of view of Due Diligence analysis and the needs of its participants. Equally important are the functions that enable communication between two sides of the transaction (dedicated “Questions & Answers” forum, which ensures confidentiality of the discussion) or advanced user activity reports that allow to evaluate which areas of company activity are most popular with the investors or which user is the most interested in the transaction. The reports can also be used as an evidence in case of any potential disagreements or claims in the future.
Data Room with support included
Unquestionable advantage of Data Room is the fact that it is offered along with support for proper organization of Due Diligence process. It is this expertise that makes this system incomparable to any other file sharing solutions (such as ftp). A dedicated customer service team can assist clients in managing the system itself and uploading documents, so the client can focus on transaction and negotiations. Opinions of companies working on M&A transactions prove that Virtual Data Rooms are currently the crucial part of Due Diligence, guaranteeing transparency and user friendly management of the purchase/sale process. Successfully conducted transactions confirm that it is a great replacement for physical rooms filled with paper documents. They significantly shorten the time of the company’s audit, increase its effectiveness and provide complete security of confidential data. They also enable to extend geographical range of transactions by inviting a larger number of foreign Investors to participate in the process without incurring any additional costs.
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