One of the most tricky aspects of an M&A transaction involves the transfer of information during the due diligence stage. In Canada, this process has traditionally occurred through the use of a physical data room. But this method of due diligence is not without its problems and inconveniences. Since 2000, electronic data rooms (EDRs) have been increasingly used internationally in a variety of types of transactions. But M&A practitioners have been cautious in adopting EDRs to support their due diligence processes. This may be attributable to the sensitivity of information in M&A deals, security concerns and perceived costs associated with the new technology.
For those unfamiliar with EDRs, an EDR replaces the traditional physical data room by making diligence materials available electronically at all times, through the use of the internet, compact discs (CDs) or digital video discs (DVDs). Data room materials are organized, indexed, scanned and converted into an electronic format. These files are then posted in a data room workspace or burned on to a CD or DVD. An EDR may also integrate technology to provide for an interactive experience and allow for the smooth flow of information between users. Features may also be added to the EDR to enhance the seller's control and analytical abilities.
Although there is no guarantee that an EDR will be immune from security breaches, in addition to username and password protocols, EDR providers attempt to alleviate security concerns by incorporating advanced technology such as digital identification certificates and security standard certifications.
According to third party EDR providers, using an EDR is generally cost competitive to the seller and less expensive for the buyer. Ultimately, with a larger group of bidders, the seller may be able to obtain a better price. EDR providers also claim that the bid time is reduced, on average, by at least a quarter.
The successful use of EDRs by some M&A practitioners in other countries, coupled with the demand for greater efficiencies in the M&A market, may well revolutionize the due diligence process and prompt a full-scale adoption of EDRs in Canada.
Diane Yu and Kathleen Ritchie