Companies
use modern information management tools to organize financial data,
track supply-chain movement and compile customer relationship details.
So why not use them for dealmaking?
Even small transactions can require information flows among dozens
of people in different locations; large ones multiply the challenge.
Sellers need to make due diligence information available quickly, often
to numerous parties. Buyers, meanwhile, need to manage their side of
the diligence process and, what's even harder, choreograph a
complicated series of project handoffs as an acquisition moves from
initial screening through diligence, execution, integration and
follow-up, with the cast of characters involved often changing
significantly at each stage.
Until recently, though, technology tools designed to help companies
tackle these tasks have been rare -- partly because companies have
hesitated to put their sensitive, confidential data online and partly
because M&A is only now emerging as a mainstream business process.
But today, against the backdrop of a booming deal market, the picture
is changing.
A handful of M&A technology companies -- some startups, some
established corporations that were already selling other
business-to-business services -- have emerged over the past few years
aiming to help corporate development folks, private equity buyers, and
lawyers, investment bankers and other advisers manage the nuts and
bolts of their craft. The sellers of virtual data rooms -- most notably
Merrill Corp., IntraLinks Inc., Bowne & Co. and Dealinteractive --
have seen the most success thus far. Sellers use VDRs -- basically
document management tools hosted on a secure Web site -- to replace the
traditional, physical data rooms used for years in due diligence.
Increasingly, buyers are using VDRs as well, and this year about 35% of
all transactions will employ these online technologies, according to
several estimates.
Other vendors have taken on a seemingly more difficult task --
selling enterprise M&A software, comprehensive systems that
organize numerous corporate development activities, from target
tracking all the way through integration. These vendors and their
products aim to supplant the collection of software products (notably
Microsoft Excel and Project Manager) in use at most corporate
acquirers, and maybe even supersede some of the homegrown systems
deployed elsewhere. Two of the main players, startups PowerSteering
Software Inc. and TX2 Systems Inc., both report strong growth.
Meanwhile there's similar software available in tandem with M&A
consulting services from firms such as Accenture and now IBM Business
Consulting, which last fall acquired Valchemy Inc., another software
vendor in the space.
Other companies -- such as MoneySoft Inc., a small Phoenix-based
company in operation for 16 years -- sell everything from valuation to
return-on-investment software for under $1,000 (if you act soon).
Despite all these vendors, the M&A technology market still
remains small compared to other software segments. IntraLinks, for
instance, reported total revenues of $86.5 million last year, a number
that includes its sales in other market segments such as syndicated
lending. But the market is growing fast: Dealinteractive founder and
president Jordan Ellington estimates that out of the more than 36,000
deals in 2006, about 6,000, or 16.6%, were conducted using VDRs. He
predicts at least 9,000 data rooms will be used this year, a 50% rise.
"I see less and less resistance, and many companies, especially on
the buy side -- private equity firms and other investors -- nowadays
expect there to be a virtual data room associated with a transaction,
because it makes it easier for them to review the documents," Ellington
says. Dealinteractive, a service provided by Legaltools.net Inc., of
New York, claims it has hosted more than $15 billion in transactions on
its VDR platform.
PowerSteering Software puts the total market for enterprise M&A
software at $31 million in 2007, including both homegrown and
consultant proprietary systems. And John Cala, M&A practice leader
for the Americas at IBM Business Services, estimates that dealmakers
will spend more than $100 million on all types of M&A technology,
including virtual data rooms, this year.
VDRs allow for electronic sharing of documents so that buyers,
sellers and the bankers and lawyers advising them can collaborate on
documents pre-deal. The technology, which usually comes with
round-the-clock technical support, eliminates hours of travel time by
allowing buyers and their advisers to view sensitive target data online
rather than digging through file boxes in a designated deal room down
the street, across the country, or in some cases, across the globe.
VDRs also allow search options by key words and other prompts, making
it much easier to find information compared to old-school methods.
Sellers find VDRs particularly beneficial during an auction
process, with their advisers -- either the investment banks running
those auctions or outside lawyers -- often taking the lead in adopting
the technology. Buyers, meanwhile, often use online data rooms to
organize the documents of smaller companies they may acquire, for the
in-house deal team and outside advisers to review. What's more, by
using VDRs, buyers can get a head start on post-merger integration
since the information is already organized online.
"From my experience the benefits of using a virtual data room are
immediate and they're real," says Lori Marino, managing corporate
counsel at Avaya Inc., a telecommunications equipment provider in
Basking Ridge, N.J. Avaya used VDR technology provided by Merrill when
it acquired Ubiquity Software Corp. plc, a British maker of
communications software, in January, for $144 million, and Traverse
Networks Inc., a Fremont, Calif., developer of enterprise mobility
technology, in November, for $15 million. In the case of Traverse,
Marino says, Avaya received boxes of data from the seller and sent them
to Merrill, which in turn scanned in the documents and organized them
in an online location that was easy to navigate.
Marino says Avaya chose DataSite, Merrill's electronic data room
offering, after getting pitches from several vendors, because Merrill
was already doing Avaya's financial printing, one of the vendor's core
businesses since it was founded in 1968. Marino says the price (which
she didn't disclose) wasn't hard to justify. "The cost of this DataSite
is going to be well below the cost of flying your executives between
New York and wherever to review documents," she says.
"Ultimately it results in better deals," adds Andrew Goldberg,
Avaya's vice president of corporate development. "The cost of a virtual
data room pales in comparison to the risk of paying too much."
Other dealmakers are also enthusiastic users of VDRs. Erik Reynolds,
director of corporate development at ambulance service provider
Emergency Medical Services Corp., says his company recently began using
Dealinteractive's data room offering as a convenient and secure way to
share and organize diligence materials online for possible acquisition
targets, particularly since his deal teams are scattered across the
country. Based in Greenwood Village, Colo., acquisitive EMSC operates
in 36 states and had revenue of nearly $2 billion last year.
"We have targets all over the country and each deal requires a
different operational due diligence team," Reynolds says. "We found a
virtual data room to be helpful because we could keep everything
centrally located." EMSC is in the midst of three transactions, and its
sellers have agreed to allow the company to use electronic data rooms
to help review their due diligence materials. In addition, he says,
"Dealinteractive's service has a feature that allows the user to
quickly identify missing items, from which a 'to do' list can be
created."
Not that all buyers hail VDRs as a panacea. "I really think the
digital data room is overplayed," says Michael Frankel, senior vice
president of Information Resources Inc., a Chicago-based provider of
market information for the consumer packaged goods, retail and
healthcare industries. "At the end of the day digital data rooms don't
change the way we do deals. All they do is make deals slightly more
efficient. But I think the real powerful technological changes come
when technology helps us find the right target and attribute the right
value to it." Frankel says he's more interested in research tools such
as those offered by Capital IQ, Reuters Group plc and Bloomberg LP.
And Marino says it's imperative that companies appoint an in-house
administrator to monitor VDRs, which can be time consuming. "The
administration I would put in the list of negatives," she says.
While buyers enjoy the convenience of staying put, sellers like
online data rooms since they can attract global buyers much more
easily, and provide a bird's-eye view of who is accessing the sensitive
information. Most important, they limit what documents can be printed
off the site and determine who is reading what documents and when. The
footprint-tracking capability gives sellers and their advisers a better
idea of which buyers are most serious, and which suitors are simply
window shopping. Says Allen Cinzori, senior vice president and
principal at Software Equity Group LLC, an M&A advisory firm and
technology-focused investment bank in San Diego: "The sell-side banker
has real-time insight into buyer behavior by knowing how much time each
buyer prospect is spending on the site and the documents they are
accessing."
Indeed, auctions continue to be the VDR providers' sweetest spot.
"About 80% of the usage is for M&A sell-side mandates," says
Richard Hyman, managing director of Bowne Virtual Dataroom. A typical
profile for a deal is a multiple-bidder transaction with a purchase
price of, say, $1 billion, according to Jeff Kalina, vice president at
BMC Group Inc., in El Segundo, Calif. BMC provides Bowne's VDR
technology, in an alliance that was renewed in December.
Like auctions themselves, the use of VDRs is emblematic of the
general acceleration in today's complicated deal world. Just ask Doug
Brown, vice president of business development at NovaGold Resources
Inc., a mining company based in Vancouver, British Columbia, and a
participant in the recent flurry of dealmaking that has been
transforming the global mining industry.
NovaGold wanted a virtual data room provider to organize
key financial documents as it prepared to make an unsolicited offer for
Pioneer Metals Corp., of Vancouver, a bid it eventually launched in
June last year. The company chose IntraLinks based on an adviser's
recommendation and the technology's quick ramp-up time. "We needed a
secure, online workspace that would let us upload and access a rich
assortment of documentation -- and that we could light up quickly, with
little fanfare," Brown says.
It was a wild year in mining M&A, though, and NovaGold's plans
for the workspace shifted. Barrick Gold Corp. of Toronto jumped in with
bids for NovaGold and Pioneer, winning the latter in September.
Previously in buying mode, NovaGold ended up using the IntraLinks VDR
to review and manage its own documents, as it fended off Barrick's bid.
In December, Barrick finally acquired only a 14.8% stake in NovaGold,
falling far short in its hostile takeover attempt. Several other
companies had expressed interest in NovaGold before Barrick made its
offer.
IntraLinks' vice president of product development, Matthew Porzio,
says buyers like NovaGold are becoming more interested in using
IntraLinks "both on a transactional basis during a deal to streamline
deal team communications, and also on a long-term basis." He says they
realize that there's value in having financial and other corporate
information organized online in the future.
New York-based IntraLinks isn't the only VDR provider stressing
speed. "What we have built that further differentiates us is the
ability to load and launch a virtual deal room 70% faster than any of
our competitors," says Paul Hartzell, senior vice president of
DataSite. Merrill, itself an active acquirer, has developed a
technology that compiles various documents -- everything from CAD
drawings and blueprints to paper files -- and displays them in an
organized format for its clients to review. Hartzell says in one case,
his firm loaded 600,000 pages in less than 18 hours.
Besides the speed with which VDRs can be deployed, other frequently
asked questions about them deal with security, ease of use and, of
course, cost. Dennis White, a partner at McDermott Will & Emery LLP
and frequent user of online data rooms, says shopping for VDR
technology is much like buying a car with a base price and then adding
on features at extra cost. VDR providers can charge more for special
features, such as tracking which buyers are looking at what documents,
extra security, storing documents after closing and providing compact
discs of VDR content once a deal is done. White says companies can save
money by "educating themselves to the charges of uploading the data and
whether information in one format versus another can be done more
cheaply."
Acquirers looking at enterprise M&A software have even more
homework to do. This technology aims to help corporate dealmakers
manage every aspect of the M&A process, from target screening
through due diligence and execution, and on into integration management
and tracking of results. In between there are tools for analysis,
scheduling, workflow automation and capturing best practices so that
you can apply what you learned in one deal when you tackle the next one.
Baltimore-based TX2 is the newest player here. Founded and still
largely owned by CEO Juan Tosoni, a former enterprise software
marketing executive for several companies, including SAP AG, TX2
unveiled its flagship product, EMA (Enterprise Merger and Acquisition
Software), in January 2005. Tosoni, wanting to start his own company,
had looked for a complex business problem in need of a technology
solution and settled on M&A. "There are still a lot of cowboys out
there doing deals and we knew technology could possibly help them," he
says. "But we have to convince these businesses to do that."
With a boost from a hyperactive deal market, the persuasion is going
well. TX2's revenue topped $2.5 million last year, and Tosoni expects
it to grow by a factor of eight in 2007. Since Valchemy's acquisition
by IBM, four of its salespeople have signed on with TX2. The company is
already profitable, he says.
TX2 offers both a hosted and non-hosted customizable solution for
clients and charges anywhere from $25,000 for an individual transaction
up to $500,000 for a large enterprise license, Tosoni says. Corporate
customers include Aetna Inc. and Fairfax, Va.-based consulting firm ICF
International Inc.
ICF uses EMA primarily as an organizational tool, to keep track of
its deal targets, says Eric Hamann, manager of mergers and acquisitions
at the company. "We look at hundreds of deals a year and we get
hundreds of pitch books," he says. "We have all this info we've
collected on each company and it's a shame to shove it into some file
room." In January, the consulting firm acquired Advanced Performance
Consulting Group, in Washington, D.C., and Energy and Environmental
Analysis Inc., a consulting firm in Arlington, Va.
TX2 also customized its software for the law firm of LeBoeuf, Lamb,
Greene & MacRae LLP, its first customer. The firm offers the deal
management technology to its clients as a "Deal Dashboard." LeBoeuf
markets the dashboard as a "one-stop collaboration and accountability
workspace," which allows lawyers "to corral the moving pieces of a
deal, so that everyone involved knows what needs to be done, when, by
whom and at what cost."
Byron Kalogerou, senior counsel at LeBoeuf in Boston and a former
lawyer and dealmaker at Tyco International Ltd., says the firm has
achieved good results by using the software. "As a law firm we believe
it's essential in terms of organizing our activities and collaborating
with in-house counsel and business development folks, and we use it
across a multitude of clients across a number of deals," he says.
PowerSteering lobs a slightly different pitch. Venture-backed and
founded in 1998, the Cambridge, Mass., firm sells software for what it
calls "enterprise-wide strategic initiatives" -- which include Six
Sigma program management, project management, product development and
merger management. The company's M&A offering, prepared in
partnership with McKinsey & Co., came on the market in 2000 and
accounts for about 20% of the company's business. PowerSteering doesn't
disclose sales but says it has more than 80 clients.
The company's hosted technology is built around projects,
teams, deliverables and results tracking. A PowerSteering presentation
stresses the software's use in the timely execution of several large,
complex deals with a lot on the line. Says company founder David
Boghossian: "Once you've decided to go down the acquisition path, it's
all about speed and shareholder value."
Global brewer SABMiller plc (previously South African Breweries plc)
used PowerSteering's technology in its $5.5 billion merger with Miller
Brewing Co. in 2002, and again in 2005 when it acquired Grupo
Empresarial Bavaria for $7.5 billion. That integration project required
the management of more than 300 interdependent projects that were being
implemented in four countries, with team members on three continents,
PowerSteering says.
PowerSteering's costs vary depending on the size of the deal and the
number of people involved. A typical large merger, which may involve
200 users over 12 months, would start at about $1,500 per user per year
and would decline with volume, costing as much as $135,000 including
implementation and startup costs, Boghossian says.
All M&A vendors tout their software's ease of use and intuitive
interfaces. And most users agree the ramp-up time is minimal. However
one active corporate acquirer and enterprise software customer who
asked not to be named did report some hurdles. While mainly pleased
with the software, this corporate development chief has had difficulty
convincing designated integration managers to fully embrace it -- that
is, to faithfully update the information in the technology templates
and actively use the software to drive the M&A process.
That's the kind of problem often cited by dealmakers who are more
skeptical about automated tools. "The challenge with integration is not
a technology problem -- it's a people problem," says Information
Resources' Frankel. "I haven't had a need to move beyond the basic
Microsoft products." Frankel says the inputting of the data is the most
difficult task, no matter if one uses a spreadsheet or more expensive
software.
Some not-so-active acquirers also doubt whether they need such
tools. Greg Foster, vice president of corporate development at
Atlanta-based Turner Broadcasting System Inc., a division of Time
Warner Inc., uses an internal system for its small amount of M&A
activity. "Today we use good old-fashioned Excel to track deals," he
says. Last year Turner took control of Court TV from Liberty Media
Corp. for $735 million, and Foster says third-party acquisition or
integration software wouldn't have been beneficial in that transaction.
"Systems like this are much more applicable and much more helpful to
businesses that are very acquisitive and are doing many deals in a year
-- the IBMs of the world, the Microsofts of the world, Cisco [Systems
Inc.]. We have our own process and own way of doing things."
Those dynamics help to explain why Valchemy, the third main
enterprise software company, is now part of IBM Business Consulting
rather than operating as a standalone entity. IBM's Cala says that
enterprise M&A technology has not seen rapid adoption yet because
the majority of companies still don't do deals all that frequently, and
those that do often manage each deal as an independent project rather
than bringing a business-process orientation to the activity.
Venture-backed Valchemy, launched in 2002, faced a choice last
summer: Seek another round of funding, or find a buyer. As former
Valchemy CEO Bill Miller told The Deal in September, the sale to IBM --
whose corporate development department was the startup's largest
customer -- showed that the best way to bring Valchemy's technology to
many acquirers is through a service provider.
For IBM's business consulting arm, the acquisition marked a
stepped-up commitment to M&A work, including the provision of clean
rooms, in which third-party consultants tackle the details of the
integration while merger partners wait for regulatory approval and the
closing of the deal. Cala says IBM is targeting the largest companies
in the world, offering the software and services through various kinds
of arrangements, such as package deals or as a standalone product. "In
putting together two large companies there are thousands of operational
issues that have to be resolved and decisions that have to be made," he
says. "What ends up happening, if you don't have automation capability,
is that a lot of it gets done through e-mail, and it's far too easy to
slip through the cracks.
"The process of automation," he says, "can improve the results of the deal."
That, of course, is the basic premise for all these tools, whether
enterprise software, homegrown solutions, virtual data rooms, or even
Salesforce.com Inc.'s hosted customer relationship management software
system, which some acquirers use to organize their deal contacts.
The quest for efficiency and precision -- not to mention an edge of
some kind -- is widespread. Walt Lipski, managing partner at Capital
Advice LLC, a Scottsdale, Ariz., investment bank that represents
clients in the $5 million to $50 million revenue range, favors a
desktop application called DealSense Plus+. Developed by MoneySoft
Inc., the product provides financial analysis, return on investment
modeling and other acquisition tools. In the recent purchase of a
privately held company, Lipski says, the software allowed his firm "to
show the bankers exactly how we were going to improve the operation and
where that was going to free up cash."
TX2's Tosoni thinks M&A automation software is ultimately a $2.4
billion market. "There's plenty of room for all the vendors," he says.
"I don't think this market will be saturated for quite some time. We've
probably barely scratched the surface."
Whether or not he turns out to be right about the market size, it's
hard to argue with the part about scratching the surface. There's
little doubt that dealmakers, corporate and otherwise, want to raise
the level of their game, and technology is already helping. The
question, of course, is how to get the right mix of teamwork,
technology and services to improve results in a specific setting.
Acquirers still seem to be in the early stages of figuring that out.
Virtual data room basics
Pricing: Most providers charge on a per-page basis, ranging
from 70 cents to $1.45 per page hosted, according to Sarah A.W. Fitts,
an M&A partner at Debevoise & Plimpton LLP. Some providers
charge per document rather than per page. Volume discounts kick in at
various levels, and scanning runs an extra 25 cents or so per page if
you don't do it yourself. A wide variety of other features and services
(project management, indexing, reports and many more) produces an
equally wide range of final price tags: between $15,000 and $40,000 for
midmarket transactions, with large deals sometimes costing more than
$100,000 per data room, according to Jordan Ellington, CEO of
Dealinteractive. It's a competitive market, so shopping pays.
Ease of use: Users and vendors alike say VDRs require minimal
training, often less than an hour. The biggest headaches are scanning
(unless the vendor does it) and having an in-house administrator
monitor the site.
Security: Vendors say their sites are more secure than
physical data rooms, let alone e-mail and overnight mail. Document
access control is centralized; specific users can be restricted to see
only certain documents; users know they are being tracked; and printing
or saving documents directly from an online data room can be prohibited
or limited. But complete control of potential buyers is, of course, out
of reach. "As tightly as we can secure information and shield buyer
identity, VDRs can never completely eliminate the human factor," says
Matthew Porzio, IntraLinks Inc.'s vice president of product
development. As for hacker-type incursions, Debevoise's Fitts says
vendors should have an independent security audit to show you.
Who's selling what
Bowne & Co., New York. NYSE-listed financial printer and
communications services provider is ramping up marketing of its Bowne
Virtual Dataroom. Technology and services are provided by BMC Group
Inc. of El Segundo, Calif., in a partnership that was renewed late last
year. www.bowne.com
IntraLinks Inc., New York. Founded 10 years ago to serve the loan
syndication market, now one of the data room leaders with its On-Demand
Workspaces, used in capital markets, life sciences and litigation as
well as in the transactional world. www.intralinks.com
Legaltools.net Inc., New York. Eight-year-old company competes on
price with DealInteractive, which it says is 50% to 80% less expensive
than rivals. www.dealinteractive.com
Merrill Corp., St. Paul, Minn. The 39-year-old provider of
information management solutions to vertical markets, including finance
and law, says it holds about 45% of the VDR market with its DataSite
offering. www.merrillcorp.com
Other providers include Firmex Inc., Toronto (www.firmex.com), with an online room for law firms. Due Diligence Online LLC, Atlanta (www.duediligenceonline.com); Preview Services Ltd., Hanworth, U.K. (www.virtual-data-room.com); Pandesa Corp., Cupertino, Calif. (www.pandesa.com). R.R. Donnelley & Sons Co., Chicago, (www.rrdonnelley.com) offers a VDR powered by IntraLinks technology.
Enterprise M&A Software
PowerSteering Software Inc., Cambridge, Mass. Venture-backed,
founded in 1998, offers hosted software for "enterprise-wide strategic
initiatives," which include Six Sigma program management, project
management, product development and merger management. M&A clients
include SABMiller and Owens-Illinois. www.powersteeringsoftware.com
TX2 Systems Inc., Baltimore. Founded in 2003 by software marketing
executive Juan Tosoni. TX2's main product is Enterprise Merger and
Acquisition Software, available hosted and on-site. Customers include
LeBoeuf, Lamb, Greene & MacRae LLP and Aetna Inc. www.tx2systems.com
In August, IBM Global Business Services acquired Valchemy Inc.,
another provider of hosted enterprise M&A software. The product,
now known as M&A Accelerator, is available via various
arrangements, including in tandem with consulting services. www.ibm.com
A tool is just a tool
The terms of the merger that forged U.S. Steel Corp. in 1901 were
put together by J.P. Morgan and three other men in an all-night session
in Morgan's library, and then delivered to Andrew Carnegie. A few days
later, after a golf game, Carnegie scribbled his selling price of $480
million on a scrap of paper, which was then taken back to Morgan. The
financier looked at it and famously said, "I accept this price."
There are a few hundred reasons why this couldn't happen today, from
environmental laws to shareholder and employee protections to the
antitrust rules the steel deal helped engender. Modern companies
generate vast amounts of information to comply with regulations and run
their businesses better. And in the digital age our ability to generate
data greatly outstrips our ability to make sense of it--especially on a
tight deadline.
Virtual data rooms and other deal tools can help dealmakers manage a
volume of information that Morgan and Carnegie never imagined (and
might have found hard to tolerate). What the tools can't do,
experienced users agree, is make up for a lack of planning and thought
in the preparation of the information. It's hard to automate a mess,
and one big impediment some potential users face when contemplating
data rooms is the degree of organization required. The data room is
only as good as the people managing it, observes Sarah A.W. Fitts, an
M&A partner at Debevoise & Plimpton LLP. Users who get things
right, though, can organize, collaborate and share information in real
time from multiple locations in ways never before possible. "The
technology is neutral," Fitts says. "It's how you use it that makes the
difference." - Cheryl Meyer
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