Due Diligence, Quick and Clean

Using "virtual rooms," merger targets can meet a bevy of far-flung suitors with little muss and fuss.
Helen ShawApril 27, 2006

Before the Internet became widely used, companies on the selling block hired outside lawyers to store the documents needed for due diligence in rooms at their firms. Representatives of prospective suitors often traveled great distances to view the documents during allotted, separate times. The courting process was costly and time consuming.

The old storage method involved cumbersome tasks that ranged from keeping prospective buyers separate to ensuring that no one stole documents from the room. To be sure, many companies still host physical rooms. But by the mid-1990s, technology companies began to offer the “virtual-deal room,” also known as a “data room” or a “clean room,” and the process began to change.

In such spaces, a seller places financial and non-financial information on a secure website and grants potential buyers access to it to conduct simultaneous due diligence, explains Matt Porzio, vice president of product management at New York-based IntraLinks, a provider of virtual deal rooms. The virtual room allows for more companies to troll for deals in their own time zone.

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Companies are increasingly using clean rooms to share sensitive information when considering a deal. “It is a safe place for people to share information before a deal is agreed upon,” Lauralee Martin, CFO and chief operating officer at Jones Lang LaSalle, noted at a recent CFO Leadership Forum.

Martin and other finance executives say the rooms can spawn shareholder value. They do that by providing companies with a chance to share competitive information and find out how they can achieve efficiency before a deal is done, rather than after it closes. Part of a merger’s success stems from avoiding overlap, noted Karen Osar, CFO of Chemtura Corp., a chemical company formed by the merger of Crompton Corp. and Great Lakes Chemical Corp. Osar’s company captured value in its merger by using a virtual data room from March to July 2005, when the deal was completed, she said.

Another virtue of the virtual spaces is speed. Mark Beucler, the CFO of Lifeline Systems, said that doing due diligence on the Internet accelerated his company’s acquisition by Royal Philips Electronics, an Amsterdam-based company. On December 7, 2005, the buyer expressed interest; by January 18, 2006, Lifeline, a Framingham, Mass.-based provider of emergency-response systems announced the merger to its shareholders. Allowing far-flung companies equal access to Lifeline’s information across time zones sped up the process, according to Beucler.

The virtual room also enabled companies to bring better information to the deal table. “Clearer information is gained through the process on both sides,” said Beucler, whose opinion echoes that of other finance chiefs. Martin said that clean rooms help companies to enter a merger “in a go mode.”

They also provide the security and control that physical rooms can’t supply. A seller can track the access and printing privileges potential buyers use, enabling the target to gauge a possible acquirer’s interest level, explained James Sullivan, national director of virtual data room host Datasite, a unit of Merrill Corp. When the data room is closed at the end of the due-diligence process, the seller has a record of who accessed or printed documents.

Such a data trail proved useful for one IntraLinks client in 2004. At the eleventh hour of a deal, a buyer claimed it had just been made aware of one financial document and wanted to lower its bid by $10 million, recalls Porzio. The seller checked the audit trail for the data room and thus was able to prove that members of the buyer’s team had viewed the documents.

Useful as they are in mergers, however, clean rooms can’t completely eliminate the need to press the flesh. “The virtual data rooms house the fundamental information you need to look at as part of the due diligence process — tax returns, budgets, financial and non-financial information,” said Beucler. “But nothing can replace the value of actually meeting the executive team and understanding the culture of that company and how they drive value.”

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