Due Diligence – The Evolution from Paper to Virtual Reality
An Interview with Ed Bifulk, President of Merrill DataSite®
Due diligence may never be the same. Today our editors talk with Ed Bifulk, President of Merrill Corporation’s DataSite®, the catalyst and industry leader in virtual deal room technology. In replacing what was the traditionally time-consuming and onerous process of sifting through boxes of paper data and making it electronic and accessible online, Mr. Bifulk talks about why virtual deal rooms benefit buyers and sellers alike and how this common sense innovation is dramatically changing how deals are being done.
Why do virtual deal rooms make so much sense?
A virtual deal room streamlines the entire due diligence process by replacing the cumbersome paper deal room. In this virtual deal room environment, relevant documents are captured, indexed and presented for online viewing. In turn, data and documents are accessible for review from any Internet browser, eliminating the need to physically bring potential buyers into a document room. Additionally, ‘best practices’ virtual deal rooms provide advanced search and security as well as fine- grained audit functions. The deal room can become operational within 72 hours, dramatically reducing deal cycle times.
When are virtual deal rooms deployed?
The most common applications for virtual deal rooms are merger and acquisition assignments (M&A), private placement transactions, LBO divestitures, bankruptcies, financial restructurings, initial public offerings, private equity and venture capital transactions, asset liquidations, asset purchases, litigation support and DualTrac ™ sales. Anytime a corporation wants to sell assets, a virtual deal room can be deployed.
What size companies use virtual deal rooms?
A full range. Small projects can be made ready, sometimes in a matter of hours; we also handle large deals, like the service we provided to a well publicized organization that went into bankruptcy, and was eventually sold for $17 billion. The size of a virtual data room can vary greatly in terms of scope and process.
What kind of transaction and visitor volume are you supporting?
The DataSite® virtual deal room has hosted hundreds of transactions, with more than a million visitors representing more than $100 billion in transactions.
During 2004 we estimate that virtual deal rooms were used in 5% of the more than 18,000 recorded transactions and Merrill DataSite® was used in approximately 500 transactions. With the rapid adoption of virtual deal rooms in the marketplace today,we expect that this year we’ll handle about 2,000 projects. This means market adoption will grow to almost 20% acceptance and as a result DataSite will have quadrupled in size. It’s an amazing time for us.
What about audit capabilities? I understand some virtual deal rooms can track the footsteps of their viewers, is that right?
Definitely. Not only does Merrill DataSite® provide full audit capabilities, it is the only service that can track the footsteps of the viewers. As a result, sellers can produce complete audits of what buyers are looking at down to the page level. We provide detailed reporting on who views what document, when and for how long. These reports detail time viewed, user name, pages viewed, as well as noting other actions such as whether the user printed or downloaded the document.
When access and activity is monitored, legal risk is diminished. The sellers also get to see what people are looking for, to determine those buyers that are most interested in and most serious about the deal. Who’s doing the most due diligence? This is vitally important information when it comes to determining who the seller may want to “lock up” with.
Can you give a us a snapshot comparison of the physical deal room versus the virtual deal room. What was the process like in the past?
For a paper-based sale the seller would set up a physical data room and interested buyers would travel to the location of the documents. They would spend 3 to 5 days in the physical data room and all the seller would know was a group had shown up and left 3 days later, but you couldn’t really know what they did in the deal room for that period of time. As a seller, you didn’t know what they were looking at, if they found the information they needed or if they were really serious.
In a virtual environment prospective buyers can log on 24 hours a day and the selling team knows exactly who logged on, when they logged on and how long they were logged on for. They also know what was viewed and how they were spending their time. Merrill DataSite® is the only system I know that has that complete capability.
What about ROI? How are clients measuring the ROI of a deal room?
The benefits for buyers as well as sellers are substantial. Deal times and costs are reduced. There’s less risk and more competitive buyer pools. In a paper-based environment, a traditional due diligence period lasts 3-5 days per perspective buyer. If you assume there are ten prospective buyers on a deal, the physical deal room would then need to be open for 30-50 days. By using a virtual deal room, potential buyers log on from their own offices or wherever they are. Because all potential buyers can review documents concurrently, deal time can be reduced substantially, increasing the sellers ROI.
How is Merrill DataSite different from those virtual deal rooms that use PDF technology?
Good question. Some of our competitors offer a PDF system where sellers post PDFs to a database for buyers to access. DataSite uses tif technology where all of the documents within the site are converted to tif files. The benefits of tif over pdf are numerous. Tifs are never downloaded to the desktop as pdf’s are. PDF’s will cache on your desktop. Tif files can be viewed immediately vs having to wait for the entire pdf to download. In terms of the audit trail with pdf’s all you know is that reviewers are pulling down the files. You don’t know what they looked at. With tif images we can audit down to the page level. From the seller’s standpoint, it’s very important to know what people are doing and how serious they are about due diligence. Think about it: at the end of the day you may have 15 potential people performing due diligence, but you’re not going to go into “lock up” for 30 days with one or two of them until you really feel comfortable.
Proper due diligence has legal ramifications, doesn’t it?
Absolutely. The law says you have to divulge information, that’s why there were physical data rooms in the first place. But again, with a physical data room, all you know is that people went in there and left. Being able to produce a full and complete audit trail at the conclusion of a transaction, a seller can be quite sure the letter and spirit of the law have been met and that the buyers actually accessed the documents.
Whereas in a physical room a buyer might say, “You didn’t provide this or show us that”, the seller using Merrill DataSite® can go right to the system and show who looked at those pages, when and for how long.
You were first introduced to DataSite when you used the service on a private equity assignment, then became its president. That says a lot to me. How did that experience lead you to change careers?
I was with a private equity firm for 9 years and we bought about $9 billion worth of mostly distressed assets. In doing so I spent a lot of time flying around looking at companies and witnessed first-hand the assembly of physical data rooms. I also came to recognize the fear exhibited by company employees as they watched us setting up the conference rooms, wonderering what was going on. Are we being sold? Why are these people flying in? Who is going to be our potential buyer?
It took a great deal of time for me to put together my team and fly out to these physical data room venues. Then one day I was working on a project for a multinational, multi-billion dollar corporation that was using DataSite. The moment I logged on to Merrill DataSite® I knew that virtual data rooms were the future of due diligence. I contacted Merrill and helped write up the plans to expand the service. I resigned from the private equity firm more than a year ago and I joined Merrill to head up DataSite.
So from working in the private equity trenches you really know what it takes and the positive impact a virtual data room can have.
Yes. I remember one deal where it took weeks and weeks to track down the key documents to set up the room. We wanted the room to be perfect because we only had one shot with the people who were going to come in to see it. Once the room was ready potential buyers would fly in teams of 4 or 5 people. While each of those teams would stay for 4-5 days, we actually had to refurnish the data room with new documents 7 or 8 times because the reviewers would leave it in shambles. Documents were taken, misplaced or lost on a regular basis. To make matters worse, the process went on for 150 days! Getting everyone in and out of the deal room was an incredibly onerous process.
Making sure rooms are neat and clean and that documents are copied is not the best use of investment banking or advisory intellectual capital.
That’s right. I also found that because we wanted the data room to be perfect, it took us a long time to set up the documents. Conversely we are able to get the majority of a virtual deal room up and running right away. Sellers send us the documents and we have them processed through our system up in a day or two. A virtual project can go “live” with 15 potential buyer parties in a matter of hours. Then as the selling team continues to collect the balance of their information, they just forward it to us for input to the DataSite. Then we inform the buyers of the availability of new information that has been posted to the data room. In the end, sellers and buyers don’t have to wait until all the documents are available. You can build the room and start the due diligence process moving. But in a physical environment, that room has to be perfect because you have only one shot at the buyer.
How fast can you set up a virtual deal room?
We can set up a virtual room in 1 to 3 days. For many projects our mandate is to get 50,000 pages up within 48 hours. Our clients just love our ability to deliver in that timeframe. We draw support from the fact that Merrill is one of the world’s largest document management and financial printing companies, providing us with scanning facilities across the country and the confidence of 36 years of handling confidential documents.
Let’s go back to the technology. What about search capabilities?
We built powerful search capabilities into DataSite. Buyers can hunt down information more easily. Having the capability to search for information like change of control, liability, asbestos, what ever you want is critically important. The DataSite™ search function will just pull up documents upon request. Ours is the only service that searches not only the whole file but the whole database.
What impact does being part of Merrill have on your solution? On your customers?
As I mentioned earlier, our customers know that Merrill has served the financial services industry for more than 36 years, handling the most confidential documents and information in preparation for SEC filings, M&A transactions, tender offers and IPO’s. They know from years of working in the trenches with us that our physical, network and Web security is state-of-the-art, that confidentiality is a core tenet, speed and accuracy of utmost importance and that Merrill’s customer service and project management are first class. I think they draw comfort from Merrill, from our technology and from our professional’s direct experience in having worked in M&A and private equity for decades.
Is it true that the virtual deal room evolved from working on the Enron bankruptcy?
Yes. Merrill has a Litigation Support division that works with law firms needing access to millions of pages and documents. The lawyers may use only 1 percent of the documents for their cases, but they need access to all of the documents.
When Enron went into bankruptcy, Merrill’s litigation division took on all the bankruptcy information, more than 5 million pages and put it up on its litigation services platform. When the court ordered Enron to start selling assets, they wanted to do it quickly. The investment banker suggested that they use the litigation support tool, allowing them to start reviewing information right away. This opened our eyes to what was possible as we quickly learned of the need for a tool to serve the M&A marketplace. We started from the lit support application and re-built it for the M&A marketplace. With such an M&A tool, the key components are limiting and delineating access. As viewers log in, their assigned ‘roles’ control their viewing and printing rights. In turn a competitor that may be a buyer can be granted different document viewing and printing privileges than those assigned to a financial buyer.
You mentioned that you overhauled this first system and built an M&A product from the ground up?
Yes, and we’re so proud of it. Because the M&A market is unique, we basically stepped back and decided to build a new solution from scratch. We listened to what our clients had to say, what they liked, how we could improve our system and we invested a lot of time and money to develop a Virtual Deal Room that we believe is the best in the marketplace today. We rolled out our new version in August. A lot of people think it’s an enhancement to what we already had, but it’s much more than that. It’s just phenomenal in terms of flexibility and speed, functionality, audit and search capabilities, the ease of navigation, document loading, adding or removing users, assigning rights. We give our users the tools to do all this and more, or if they prefer we provide them with world-class professional customer service to do it for them. DataSite has streamlined and optimized the due diligence process. It has revolutionized M&A. The advent of Virtual Deal Rooms will surely send the physical data room the way of the dinosaur.
