M&A is at the core of the Virtual Data Room industry. If mergers and acquisitions did not exist then I can confidently state that the Virtual Data Room industry would not be a multi-million dollar industry. I speak out of experience. I joined the industry in 2008 and have since then been involved in 249 virtual data rooms, 95% of which have been successfully concluded M&A transactions.
Here are three factors which make Virtual Data Rooms an integral part of the M&A process:
1. The number of Virtual Data Room Proposals sent are directly correlated to market conditions
When the 2011 crisis hit the global economy, the M&A market was hit hard. The negative scenario made companies run for cover. They slashed costs by letting go of employees, holding on to their investments and buckling down to survive the lean patch. All the companies that were considering an M&A process also found themselves at a stalemate with potential buyers who sensed an opportunity to get a good deal. Poor market conditions meant dampened sentiments because perceptions were pessimistic. Poor market conditions also meant lower valuations. The seller wanted the best price whereas the buyers wanted the best deal. Given the change in market scenario, when the buyers bid low, the sellers rejected their offers. All of the due diligence process, including the questions and answers from hired consultants, and the additions of supplemented documents on request were being conducted on Virtual Data Rooms. The secure platform enabled the sellers to monitor the activity of the buyers through easy to read graphs while maintaining the confidentiality of their data. Once the deal fell through, the Virtual Data Rooms were shut. What’s more, all the deals that already had signed term sheets and were going to start their Virtual Data Rooms decided to not proceed because sellers knew that they would have a tough time getting a price that they would be satisfied with.
Contrast that with 2014. The markets are picking up, the stock market indexes are hitting record highs, sentiments are positive and Virtual Data Room providers are sending proposals left, right and center to keep up with the flurry of M&A due diligence processes that would most likely conclude in record breaking transactions.
2. Investment bankers play a key role in M&A and the Virtual Data Room industry
Just like M&A is at the core of the Virtual Data Room industry, investment bankers are at the core of the M&A industry. They are the extremely driven individuals who act as middlemen to multi-million dollar transactions. Investment bankers turn to Virtual Data Room providers because they want the deal to happen as quickly and efficiently as possible. Why? Because the quicker a deal concludes, the quicker they get paid! They not only recommend which provider is the best according to their experience, but also negotiate and conduct the hiring of the Virtual Data Room provider on behalf of the client.
3. Sell side companies must rely on sophisticated technology when multiple bidders are involved
When a company is being run by founders who are not very comfortable with the use of technology, their first preference is usually to perform a physical due diligence process. In the case of an exclusive process where there is only a single buy side firm doing the due diligence, the founder usually has his way. However if there are multiple bidders then the company is usually persuaded by their advisors, usually the investment bankers, to opt for a Virtual Data Room provider who has experience in running M&A transactions. Often the investment banker has already run multiple transactions on the current Virtual Data Room platform to recommend its use to his client.
Conclusion
Virtual Data Rooms would not exist if M&A did not exist. Above 95% of transactions in this trillion dollar industry is dominated by stake sales from sell side companies that are wary of sharing their confidential information which includes intellectual property documents, trade secrets, employee pay structures, sales structures, and supplier rates; details which competitors would love to get their hands on. As long as there is an active market for mergers and acquisitions, the Virtual Data Room industry will continue to survive and thrive!
