When it comes to huge corporations taking part in acquisitions or mergers, then there will be a lot of sensitive documentation that will need to be made available to both sides. Much of this information will be highly classified and is not intended for general use.

This is where a data room comes into effect. It is a room, either physical or virtual, where the documentation and other important information is held, and through which the buying company and their team, are able to search through the documents while conducting their due diligence.

Why are data rooms used?

The main reason for the use of a data room is security and privacy. They are a place where parties can share important documents during things such as corporate deals or company mergers. These deals could be worth hundreds of millions of pounds, and the information in such documents could be extremely valuable and vital to any deal being agreed between the two parties.

Data rooms can restrict access to the documents, and there can be varying degrees of permissions, with different personnel being allowed access to different parts of the information and data. Using a data room for these types of events will help to minimise the risk of any unauthorised access to the documents, as well as keeping the information in a secure and monitored location.

The types of data rooms

The original type of data room was a physical one. It would be located somewhere in a secure building, usually in the head offices or headquarters of a company or inside a bank, and would be monitored 24/7 by security personnel.

The company would move all of the required documents that the other company (in most cases the buying company) ask for, and it is there inside this physical data room that the company and their lawyers would go through the documentation, carrying out the necessary research. The alternative to a physical one would be a virtual one, which has become more popular in recent years, as the world goes cloud crazy.

Limitations of a physical data room

These physical data rooms have a number of limitations though, and it is these that are encouraging many companies and corporations to make the switch over to virtual data rooms. With a physical room, you are going to be much more limited in who can access the documentation and when.

There are going to be times when a lot of different individuals or teams are going to need access to the data. There are strict limitations on the number of people who can be inside the physical data room at any one time. If there is already a group inside, then no one else is going to be allowed in until the current occupants vacate the room.

This can mean that certain individuals may have to wait a while before they are allowed access. If they are travelling from out of town, or even from another country, this can make things very confusing, time consuming and expensive.

If a company has to send a team over to carry out their due diligence in a physical data room, there are going to be a number of expenses to consider. The first is the travelling expenses. If two companies in different parts of the world are looking to merge or for a deal to take place, it will mean one group of them travelling to the others location where the physical data room is. There will also be additional costs for this such as accommodation, meals and other expenses.

Searching through the data is time consuming

If you are sending a team over to a physical data room to carry out their research, then the actual reviewing and searching through all of the documentation is going to be a very difficult and time consuming process.

Some companies may be providing printed documentation for a period of 25 years or more, so you can imagine just how many files and pieces of paper that could amount to.

Why a virtual data room is the preferred option

Though physical data rooms are still in use today around the world, they are gradually being phased out and being replaced by virtual data rooms. This cloud based solution offers a huge amount of advantages over the physical option.

Faster access of the data

One of the most important features of a virtual data room is that it is much faster to access the data. Everything has been digitized, and finding any specific documentation can be done in mere minutes, whereas in a physical data room, it could take hours to locate a specific file.

This increased speed in the ability to analyse and search through the data means that decisions can be made much faster, and deals that may have previously taken months to agree to can now be done in weeks or less. In business, time is money, and the more time you save, the more money you are saving.

Easier access of the data

As well as being much faster to access, it is also easier. You no longer have to travel and do your work inside a physical data room. You can do everything remotely and at your own pace. Due diligence can be completed by all parties at the same time, rather than waiting for one group to carry out their research inside the physical room, and then let the other team do their work afterwards.

Now everything is available instantly to everyone. There are of course a number of barriers to entry of who can access what information, but with the right authorization, all parties are in a much better position to access the data they need, when they need to.

Lower costs

Maintaining a virtual data room is much more economical than a physical one. The cost that would otherwise have been spent on maintaining the physical room, along with the various levels of security needed, could instead be used to digitize documents and other sensitive information, so that everything can be accessed online, rather than in person at a physical location.

Paperless documentation means lower costs and is also good for the environment. Another benefit with having all of the data in a digital format is that it won’t be prone to accidents such as a fire or natural disaster. Everything is stored digitally, with a number of backups being stored in other secure locations in the unlikely event that one set is damaged or compromised.

Some final thoughts

Virtual data rooms are the future, and with the advancements in technology and internet speeds, it makes sense that carrying such important and sensitive work can be done remotely and securely, and with much quicker access and tolls to find specific documents.