McCarthy Tétrault oversaw the sale of a business recently. There's nothing unusual about that; the national law firm handles a couple of dozen large transactions of this type every year. What was interesting about this one was that there were 15 potential buyers, yet the whole process took only six weeks.
Iain Morton, a partner at McCarthy Tétrault, says a deal with that many interested parties would have been nearly impossible to complete in such a short time if the bidders had done their due diligence the old way -- with representatives sitting down in paper-crammed data rooms to pore over the acquisition target's accounts and records.
Because sellers don't want potential buyers talking to each other, and because buyers need lots of time to study the information before making decisions, McCarthy Tétrault used to have to set up multiple, identical data rooms or schedule access for separate potential bidders at separate times.
Because each prospective buyer in this case needed almost the full six weeks to go through the records, it would have taken 15 rooms to do it so quickly in the traditional way.
Instead, McCarthy Tétrault set up a virtual deal room: All the records were digitized and made available electronically through a secure Internet connection.
Virtual data or deal rooms first appeared several years ago and have been gaining popularity since. Increasingly, Mr. Morton says, "you can't do a transaction without thinking about whether you want a virtual deal room."
The principal advantages of a virtual room are speed and the ability to work with more potential bidders than was practical with physical data rooms, he says.
On average, a virtual deal room cuts about 30 days off the bidding process, says Matt Porzio, vice-president of product management at New York-based IntraLinks Inc. His company's On-Demand Workspaces can be used as deal rooms and for other sorts of online collaboration.
IntraLinks handled one sale, for example, that involved almost 500 bidding parties, Mr. Porzio says.
Custom House Ltd., a Victoria-based foreign exchange company, used IntraLinks' system to negotiate an investment in its operations by Boston-based Great Hill Partners, an investment firm.
The process was efficient and helped reduce the need for travel, says Gina Roy, an operational analyst in Custom House's financial department. It also provided a more secure alternative to exchanging information by e-mail, she says.
Virtual deal rooms give sellers more control and a better feel for how the process is going, Mr. Porzio adds.
The software can track who retrieves which documents and when, so "you can get a sense that . . . buyer group one is certainly more active, so their bid may be more serious."
Sellers can also control access more closely. For example, Mr. Morton says, if a business might be sold either whole or in several parts, McCarthy Tétrault can give a potential bidder who is interested in one specific division access only to documents related to that part of the business.
Virtual data rooms are complex, so neither a selling company nor its law firm would usually want to construct one from scratch.
Instead, the seller relies on third-party services such as that of IntraLinks. Other offerings include Deal Room Express from Bowne Financial Print, a division of Bowne & Co. Inc. of New York; Merrill DataSite from Merrill Corp. in St. Paul, Minn.; and the Firmex Deal Room from Toronto-based Firmex Inc.
These services scan paper documents into electronic form and load all the necessary documents into an electronic database. Today, about 80 per cent of the relevant documents are in electronic form to begin with, says Richard Hyman, senior director of strategic marketing at Bowne.
Access to the resulting document database is through an Internet connection, using secure user IDs and passwords to ensure that only those who should be viewing the documents may do so.
As virtual data rooms become more popular, their capabilities are being extended to give sellers more flexibility and to cover more elements of the deal-making process.
Davies Ward Phillips & Vineberg LLP has offices in Toronto, Montreal, New York and overseas. A couple of years ago, the law firm hired Toronto-based Version 5.1 Inc., a Firmex sister company, to create virtual deal-room software to meet its particular needs.
Existing software wasn't as flexible as Davies Ward wanted, recalls Gillian Stacey, a partner and chair of the firm's technology committee.
Along with granting electronic access to documents that potential buyers need to review before making their bids, the system created for Davies Ward (which went on to become the Firmex Deal Room system) has facilities to manage the transaction itself.
That management tool eliminates a lot of confusion, Ms. Stacey says. Previously, transactions tended to rely on lots of e-mails and faxes.
"It can be absolute pandemonium on your closing day keeping track of e-mails flying back and forth," Ms. Stacey says.
Handing over this function to a virtual deal room not only reduces confusion but makes it easier for executives involved in the process to keep tabs on the status of the transaction from wherever they are, says Joel Lessem, director of sales at Firmex. He recalls one recent deal in which an executive vacationing in South America logged in regularly to check on the progress of an acquisition.
These document-sharing systems can be used for other purposes, too.
IntraLinks started off in the late 1990s marketing its On-Demand Workspaces as a way for financiers to put together loan syndicates, Mr. Porzio says, and expanded into mergers and acquisitions because the deals were often related.
Ms. Roy says Custom House uses the deal rooms to make documents readily available to its own executives when they are travelling, and to offer important prospective customers secure access to sensitive company information.
Security is a big concern in major acquisitions, so concerns about possible unauthorized access are understandable, but Mr. Morton says he believes virtual data rooms are as secure as the physical kind, where there is always some chance of a visitor looking at documents he or she is not authorized to view or removing materials.
One feature Custom House likes about IntraLinks' On-Demand Workspaces is the ability to control who can download and print documents and to flag and time-stamp those that are printed or downloaded so that if they end up in the wrong hands they can be tracked back to the source, Ms. Roy says.
Bowne, which is also a major provider of printing services, got into the virtual deal room business because it saw that was where the market was going, and Mr. Hyman expects the shift to continue.
"I don't know if it will ever be 100 per cent," he says, "but the majority will certainly be virtual deal rooms. It just makes too much sense."
Virtual deal room
What it is: A specialized document-sharing system especially useful for mergers and acquisitions and other financial transactions.
What it does: Provides an online "virtual" conference room for a seller of a business to share with potential buyers all the documents and data involved in a transaction, and gives buyers ready access to data for extensive scrutiny.
How it works: All the requisite records and documents involved in a sale or merger are scanned and loaded into an electronic database on a secure website. Authorized parties access the "room" through an Internet connection, using secure user IDs and passwords. Usually the site is run by a third-party service; the fees are paid by the customer, usually the seller or its law firm.
Why it's popular:
All potential buyers or bidders can have ready access to data online, eliminating the need for separate-but-equal access to documents.
Seller can work with more potential bidders than was possible with physical data rooms.
Reduces the need for staff travel; provides secure environment for information exchange.
Seller can control who has access to specific data, and can easily check status of the transaction.
System can track who accesses which documents, and when.
What it costs: The common model is to charge according to the number of documents involved; the fee includes scanning and loading the data and the use of space on the provider's system for a length of time. Iain Morton, a partner at McCarthy Tétrault, says costs for this service usually start at about $25,000. Another method is to charge a fee to the customer according to how many of its employees use the room.