What is a data room?
Data rooms, a classic in the language of M&A (mergers and acquisitions), are today an essential element of both buy-side and sell-side M&A processes. They allow to store in the same space a lot of information and documents, often confidential, useful to the different parties of the deal. Let's go over this key element to master in an interview!
What is a data room?
Concretely, a data room is a space, physical or digital, allowing to store and share various confidential data, generally during legal proceedings, or in the case we are interested in, during the process of acquisition or transfer of a company. On these platforms, you can find documents and files of all kinds, financial reports, legal notes, or analysis of the management of such and such a company.
Physical data rooms tend to disappear completely today in favor of digital data rooms, which are easier to access and allow more data to be shared. The latter are defined as a secure cloud solution.
What is the purpose of a data room?
During an M&A process, the data room as previously defined comes into play during the due diligence process. This phase of the process, which follows the prospecting phase, corresponds to the process of verifying, investigating or auditing the potential transaction or investment opportunity in order to confirm all relevant financial facts and information. The data room serves to facilitate the process by allowing potential buyers to access the data via a secure internet connection.
see more: Focus on M&A operations
Virtual data rooms today offer multiple additional functionalities such as a question and answer tool between the different parties, advanced authorizations, or multi-factor authentication. Because of the many concerns about the security of online information, which can be the basis of multi-billion dollar deals, data room providers offer sophisticated, state-of-the-art systems.
What is in a data room?
In the context of an M&A process, the organization of the data room meets a set of standards that must be respected. Generally speaking, there are between 100 and 1000 documents, depending on the size and importance of the deal in question.
The main elements that make up the data room :
- Legal and tax: leases, tax audits, company statutes, intellectual property, etc.
- Financial and accounting: loans, schedules, balance sheets, budget, annual reports, business plan
- Business-related: supplier contracts, competitive positioning, product and service descriptions, supply chains.
- Social: salary policy, organization charts, standard contracts, etc
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Who can use a data room?
In general, the two parties involved in the deal, represented by their respective managers/majority shareholders, as well as their various financial advisors (investment banks), will be able to consult the data room. It is important to keep in mind that the primary objective of a data room is to keep the information as confidential as possible, so it is normal that outside parties do not have access to it. According to a study published in 2021, nearly 50% of American mergers and acquisitions are leaked or are revealed by the press before their official announcement, a phenomenon that the various players in the field are trying to avoid at all costs. Recently we have seen the Slack-Salesforce, Tiffany-LVMH or Peugeot-Fiat Chrysler deals being leaked to the press before any final signature.
To conclude
Digital data rooms have become indispensable tools for investment banks and their clients. The sensitivity of the information they contain makes these digital vaults a real strategic challenge for the various M&A players. Do not hesitate to register and start the trainy training to learn more about this notion!
