The leading role of due diligence data room in M&A transactions

M&A transactions

The new data protection law has arrived in M&A practice and the effects can be seen in the run-up to every corporate transaction, especially in due diligence. Thus, most companies today organize virtual data rooms to create secure collaboration.

Due diligence in M&A practice

Mergers and Acquisitions (M&A) is a popular growth tool for companies and a prerequisite for the creation of new organizational forms of international companies. By introducing a merger and acquisition strategy, companies ensure, on the one hand, the protection of their interests, on the other hand, the realization of competitive advantages.

Before purchasing a company or shares, the prospective buyer usually checks information about the target company as part of  due diligence. It is a procedure of forming an objective view of the object of investment, which includes analysis of investment risks, independent assessment of the object of investment, a full study of the company’s activities, comprehensive verification of its financial condition and market position. Due diligence (DD) focuses on the analysis of cash flows and liquidity of current operations, as well as factors that may strengthen or weaken them in the short term. As a rule, due diligence works cover the historical period up to the last 3 reporting years.

Since the documents required for the DD are mainly confidential, they are not handed over directly but are placed in a separate data room for inspection by the examiners appointed by the buyer. In the meantime, this is usually no longer done in an office, but in a virtual, secure online data room in the cloud.

What is an M&A data room?

According to vdraum.de, data room management systems are designed to automate the storage, retrieval, and management of electronic documents of various formats. Today, data room systems have become almost indispensable for businesses, because they not only simplify and automate many processes in the company but also help to significantly increase sales. A data room system is a program or web service that is an indispensable assistant in maintaining a customer database, scheduling tasks, monitoring projects, and accounting for documentation. In addition, data rooms have many more useful features, the set of which depends on the specific system.

The well-known data room systems perform the following functions:

  • document indexing;
  • full-text keyword search;
  • document configuration management with establishing the relationship between individual structural components;
  • assembly of documents, which allows you to combine all parts of a compound document for display on the screen;
  • organization of access to the document, regardless of its storage location;
  • search and manage documents using key components such as a table of contents or section title;
  • multi-level data protection, which allows access to documents only to certain users or sets types of access, for example, read-only;
  • accounting and archiving administration;
  • organization of issuance/return of the document;
  • document version control;
  • distribution of documents.

Security issues, in this case, are also of considerable importance. The ability to create tasks, work with them, access to documents for editing or only viewing – all this should be under controlled conditions in terms of the security model. Data room M&A implies the presence of the roles of the registrar and the developer, which distribute among themselves the rights to work with the document at different stages of the document’s life. The above approach to automation of document management is not the only correct and complete one, but its implementation will significantly simplify the activities related to document management, increase the level of communication between contractors.