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Does online due diligence increase bidder numbers?

We've had some data in from Merrill DataSite (no relation to Merrill Lynch) on the impact virtual data rooms have had on the due diligence stage of M&A transactions. Admittedly Merrill DataSite have a vested interest in this, as they are a provider of virtual data rooms but the survey results are still interesting…

Two-thirds of European dealmakers believe that the number of parties conducting due diligence on M&A transactions has increased by an average of 24% due to the emergence of virtual data rooms (VDRs) in Europe, according to new research from mergermarket, commissioned by Merrill DataSite. Merrill's own research also shows that the average number of bidders at due diligence stage on a European M&A transaction now stands at six, collectively spending over 2,316 hours studying documentation.

According to the research, conducted amongst executives in the UK, France, Germany, Sweden and the Netherlands from the financial, legal, corporate and private equity spheres, almost a fifth (19%) said that they had seen the number of bidders increase by up to 50% compared to the number involved when due diligence is carried out through a traditional, physical data room.

Moreover, the study also shows that due diligence is having a more significant impact on deal outcomes with one in five (21%) deals now failing because of issues arising during the due diligence process. Executives believe that adverse market conditions are creating obstacles to successfully closing deals and are looking for ways to address this problem. For example, nearly three-quarters (73%) of executives believe that the credit crunch has resulted in more extensive analysis and longer due diligence cycles – causing critical delays in deal time.  

The significance of virtual data rooms in deal making has therefore increased, as they provide the means to not only attract multiple bidders to conduct parallel due diligence efforts, but also minimise the elapsed time for the process to take place. Of those people surveyed who had used virtual data rooms before, half thought that using one reduced the time required for due diligence by more than 30%, and one in ten thought it compressed the time by more than 50%.

Besides saving time, virtual data rooms enable the hosting party to actively monitor the bidders’ viewing activities such as which documents are being accessed, how frequently and for how long. As a result, the host is able to see which parties are committed to the deal compared to those who are just testing the water.  Nearly three-quarters (73%) of respondents said that they had found the virtual data rooms useful or very useful for assessing this aspect of the deal.