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.
Technology is a critical piece of the business and all technological tools need to be operating at peak performance for a business to be able to maximize its operation, services and sales.
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.
The last few weeks have been very intense in the Virtual Data Room industry worldwide with in increasing number of transactions (finally). There has been a significant change in the make up of the data room users with private equity becoming much more important in the buy side.
Bloomberg has covered this in two recent articles from two different approaches. The first one argues that the increasing appetite of many funds is driven by the "deploy or return" situation that many funds are in. The second one (Pass the Parcel...) claims that the significant amount of rollover deals benefits funds but not so much LPs.
- Improve the target company’s performance
- Consolidate to remove excess capacity from industry
- Accelerate market access for the target’s (or buyer’s) products
- Get skills or technologies faster or at lower cost than they can be built
- Pick winners early and help them develop their businesses
There are other factors that are normally used as part of a "deal rationale" such as "We are Buying Cheap", "This is a transformation deal", "This is a key part of our roll-up strategy". The research shows that those reasons rarely create value.
In a recently published Market Watch report (read full report here) the FSA published its findings after 3 years of research on market leaks with recommendations to deal with communications with the media during a transaction. Among other things, they include recording all calls and documenting any email exchanges with the media.
Our Data Room can currently capture all the written communication between parties in a transaction in our Q&A module. In a very recent large transaction that just closed using our virtual data room, our client posted recorded conference calls and recorded audio and video management presentations.
It would not be a big surprise if in the near future all communication with outsiders (including the press) is kept in a VDR.
Very interesting parallel with the recently implement SEC´s Rule 17g-5 regarding securitization which among other things requires all communications between issuers of the securitized instruments and credit agencies to be recorded and kept in a password protected site accessible to other agencies.
During the next few weeks, we will talk about the the use of VDRs in different areas of the corporate world. Among others, we will focus on:
- Private Equity/Venture Capital Funds
- Hedge funds
- IPO Transactions
- Restructuring (Bankruptcy)
- Corporate Repository
We will share our experiences in each area with specific examples. Please send us comments and thoughts!
Congratulations to Intralinks on its IPO. Intralinks has been one of our main competitors in most markets for almost ten years.
As Bloomber covered last week, the capital raised was mainly to fund the partial repayment of the debt it took in 2007.
This is a very significant event for the industry, congratulations!
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?