What is a Data Room?
A data room is a secure place that is used to store privileged data, usually for legal proceedings or mergers and acquisitions transactions. Data rooms are used for storing documents, file sharing, securing sensitive documents, and conducting financial transactions. There are two types of data rooms: physical data rooms and virtual data rooms.
In mergers and acquisitions, the data room is usually set up in the seller’s business premises or office, where the buyers, sellers, and the attorneys handling the transactions can meet to access documents.
Physical Data Room
The physical data room is also known as a due diligence data room. It is a physical location that is established by the seller to store essential documents that are required during an M&A transaction. The data room is part of the due diligence process; buyers and attorneys representing the buyer can access it before closing the transaction.
The buyer will often need to get as much information as possible about the company being purchased before closing the deal. Therefore, the seller usually stores the required documents in a central location that is continually monitored and secured to limit access to authorized persons only. Often, the seller will allow access for one bidder/buyer at a time, together with their team of experts, as a way to maintain the integrity of the documents.
In large M&A transactions that involve many bidders, sellers will require buyers to fly into the country or region and be available throughout the process. Since the process involves hosting a large number of high-level buyers and experts, the cost of running a physical data room is often high.
To better manage costs, the majority of sellers are moving to virtual data rooms where buyers and their experts can access the documents remotely. A virtual data room is substantially less expensive in terms of time and cost than a physical data room.
Virtual Data Room
A virtual data room is a cloud solution for securing and sharing confidential information. It can facilitate the due diligence process of an M&A deal or venture capital transaction by allowing potential buyers to access the data through a secure internet connection. Virtual data rooms are quickly replacing physical data rooms due to their cost efficiency, ease of accessibility, and security measures.
The standard features of virtual data rooms include a Q&A tool, notes, multi-factor authentication, and advanced permissions. With increasing online security concerns, virtual data room providers are coming up with more sophisticated security improvements to ensure data integrity.
How Virtual Data Rooms are Used
The most popular use of virtual data rooms is in mergers and acquisition deals. Buyers often need access to large volumes of confidential documents as part of the due diligence process. Many of these documents are confidential in nature and must be stored in a secure place that is accessible to bidders.
Virtual data rooms make it easy for buyers to review and exchange documents without traveling to the seller’s offices. It also makes the review process cheaper since the buyer does not need to handle large paper documents or pay for the travel of multiple experts to scrutinize the documents.
Court proceedings often involve dealing with large volumes of documents. Some of these documents are highly confidential and may easily get lost or stolen. The use of virtual data rooms allows attorneys, regulators, and other interested parties to access the documents remotely without worrying that the documents will be stolen.
Virtual data rooms also come into play when a case involves international teams working on the same case. The teams can access all required documents from a central place without the need to fly out to access some documents. Where the integrity of these documents is threatened, the issuing party may set the documents as “view only” to limit access.
Initial Public Offering (IPO)
When a company is issuing an IPO, a significant amount of paperwork is involved as attorneys, investment bankers, and other parties are required to sign and verify documents. Storing these documents in a virtual data room ensures the security and integrity of the documents and prevents access by third parties who are not part of the transaction. The company can also ensure competitors do not access these documents by preventing copying, printing, and editing the documents.
Physical Data Rooms vs. Virtual Data Rooms
A large number of companies are transitioning from physical data rooms to virtual data rooms due to the following reasons:
Lower setup and operational costs
Running a virtual data room is often cheaper since the only thing that a company requires is a secure computer system and access to online documents. With a physical data room, the company will need to rent a physical space and hire a security company to keep the room under 24-hour surveillance.
Also, when potential buyers are coming to review the documents, the company will incur an extra cost in paying for their travel, accommodation, and meals. Implementing a virtual data room does away with all the above expenses, so operational costs are lower.
A virtual data room is hosted on the internet; anybody around the world can access the documents. It gives investors from all over the world access to vital documents that will help them make an informed decision.
Global accessibility also increases competition among buyers, as the company being acquired can benefit from getting a higher price than may be possible when competition is limited to a specific geographical location.
Preservation of documents
Storing documents in a virtual data room ensures that the information is preserved securely for as long as the company wants. The documents are not affected by natural causes like fire and storms, as is the case with physical data rooms.
Maintaining documents in traditional data rooms subjects the documents to wear and tear; the documents will keep piling up to a point when it will be difficult to access documents from previous years.
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