Virtual Data Rooms for companies: advantages and disadvantages

According to KPMG’s September 1 statement, analysts forecast that the desire and capacity for M&A transactions among the world’s largest companies would increase over the next 12 months.

Due diligence is often considered crucial to the success of a deal. In any case, it is at least a very important part of a transaction. The data room is a necessary tool for due diligence. The main function of this tool is to facilitate the access and use of data in M&A transactions, and this exchange of corporate documents must be done in an extremely secure way, of course. Physical data rooms played this role before the digital age, with virtual data rooms (VDRs) taking the lead today. VDR is an IT-based due diligence tool, which provides many advantages, compared to physical rooms.

The virtual data room exists online, not within physical walls in some physical location, therefore the classic thief can’t do anything with it. Even if a thief has stolen the IT device (laptop, smartphone or any other) of the person who is a user of the virtual data room, the documents in VDR remain unreachable for that criminal while the user applies verification two-step: multi-factor authentications, which consist not only in entering the password, but also in sending a randomly generated code to another user’s device. This method makes theft or loss of the computing device no more dangerous with respect to the secret content of the VDR than a vegetable with respect to livestock.

Also, the 256-bit SSL encryption, used by some VDR providers, is impossible to hack, and the watermark is also a great help for security.

The list of advantages of a VDR, over the physical data room, depends on the position in a transaction: are you a Buyer or a Seller?

For a Buyer, the main advantages are:

• cost savings (costs for travel, hotels and personal meetings are reduced);

• time saving (due to travel time savings as well as access time flexibility);

• transparency between the parties to a deal.

For a Seller, the main advantages are:

• cost savings;

• time saving;

• simplicity of use;

• competitive price (VDR gives the possibility to significantly increase the number of potential buyers);

• legal compliance is easier;

• the security level is higher.

Of course, the disadvantages are also present in the use of VDR. Many features are yet to be implemented and are being rolled out constantly, just as you are reading this they are being rolled out according to customer tasks. Nothing is perfect: neither the VDRs, nor their providers, nor the users. However, strategically, globally, the main disadvantage of VDR is relatively insufficient publicity for this tool and, consequently, a less significant role in business than VDR deserves.