Before we hear about the latest M&A, joint venture, IPO or fundraising deal in the news, every transaction is clouded in secrecy. So much so that a special code name is used when referring to each deal.
Penta discusses with EthosData how a startup organizes a seed round. Penta is a German digital-only bank for startups and small and medium entreprises, raised early this year a €2.2M seed round.
Using a virtual data room for your transaction should free up time to allow you in the optimal execution of the deal. There are many options to manage and share documents in more or less secure ways. For any serious transaction you should always use a reputable data room provider. If you really want to “forget” about managing documents and be able to focus on other aspects of the deal, you should make sure that you choose a data room provider that as part of its services includes access to a dedicated team of experienced data room professional, not just a technical support team.
The deal coordinators, as we like to call them in EthosData, will draw from the firm’s deep experience and make the process easy taking the task of managing documents away from clients and eliminating the need for bankers or lawyers to administer the process.
1) Increased Exposure
A virtual data room gives you increased exposure to bidders in a number of ways, which means increased likelihood of closing the deal:
Increased M&A Litigation
The effect of the big economic downturn that we have experienced in the last few years is now being reflected in an increased number of lawsuits and litigation processes related to many M&A transactions. For example, according to a Reuters article, the number of M&A related court cases in the UK has multiplied X 6 in the last year. This only includes the number of cases that are actually taken to court, many are settled before that.
Sellers are suing buyers, buyers are suing sellers, investors are suing shareholders and management..
We believe that the main driver by this increase is that when things are tough, mistakes and disagreements gro stronger. As Warren Buffet puts it, when the tide goes down, you discover who has been swimming naked. However, from our experience, we also believe that a good dataroom can help sellers, buyers and investors to significant reduce the risk and cost of M&A litigation.
Dataroom Impact on Litigation
Different aspects of a dataroom can reduce the risk and impact of M&A litigation:
- Document organization. Anyone that has been involved in a M&A dispute will testify of the importance of a clear document structure with a solid numbering system. We strongly believe that the best way to organize a data room is by keeping the folder and subfolder structure that we are all so used to.
- Accountability. A good virtual data room can certify that the documents shared with investors have not be changed and that they have been available during a period of time. Moreover, some of the best datarooms offer auditing and reporting capabilities that provide detailed information and audit trail about all the documents and users in a virtual data room.
- Data Room as eBible. Historically, when a transaction closes, the participants receive a data room CD/DVD with all the documentation related to the deal including audits and reports. Although DVDs are useful, an online Deal Bible solution is much more effective as it provides assurances that the data has not been changed and cannot be lost.
How many passwords do you have? When was the last time you changed it? Do you use your daughter´s birth date or your name written backwards?
We all have an increasing number of passwords for all the websites we access on a frequent basis. Having a safe and easy system to set and maintain passwords is key to keep information secure. Keeping a secure but easy to remember password is key to keep a dataroom secure. Dataroom providers set password policies such as password shelf life, password length, as well as mix of characters to include, and words to avoid.
Paul highlights poor due diligence as one of the key factors that make M&A transactions fail. I cannot agree more. In the last 20 years I have participated in a number of transactions in which value was destroyed due to poor due diligence.
The main reasons that I see for poor due diligence are:
- Asking the wrong questions. Focusing on details before deciding what actually drives value for the acquisition.
- Disconnect between the deal team and the due diligence team. In many transactions, there is a significant gap between the deal team and the team executing the due diligence whereas the deal team just sees the due diligence findings as hurdles.
- No real business due diligence. Many DD processes turn into a legal/financial/risk audit too early into the process, ignoring the "real" business due diligence.
- Organization of information. Many data rooms do not take advantage of the great deal tools that most virtual data room provide such as organization of folders, Question and Answer, reporting.
What do you think?