June 16, 2005

Online Due Diligence Gains Backers

NEW YORK -- For decades, merger advisers and lawyers have gathered information on their acquisition targets by logging countless hours in windowless rooms, combing through stacks of coffee-stained financial documents.

But these road-weary professionals say the traditional "data room" may soon go the way of the horse and buggy because they're now doing a majority of their due diligence online, from the comfort of their own offices.

Online data rooms have existed in various forms for about five years, but major U.S. banks and law offices have recently ramped up efforts to recommend them to clients after service providers fixed some technological quirks that had frustrated early users.

Most bankers and lawyers say they now jump at the opportunity to work from the Web whenever a client allows it. There are numbers to back up their enthusiasm -- virtual data room provider IntraLinks hosted 206 M&A deals in the first quarter, up 60 percent from the previous three months.

Online diligence is now the norm in broad-based M&A auctions, said Jeff Porphy, co-head of Credit Suisse's middle-market M&A practice. He estimated 60 percent to 70 percent of the data-gathering in those processes could be based on the Web within the next year or two.

The Web's efficiency should help offset the extra time due diligence now takes because of added regulatory requirements of Sarbanes-Oxley, some advisers said.

"We probably save a week or two by using online data rooms," Porphy said. "And we haven't seen nor heard of any technical problems or security issues."

Bankers as Janitors

Web-based M&A data discovery keeps sellers from having to reorganize reams of paper each time buy-side delegates finish their on-site work. It even allows them to electronically monitor which buy-side parties access what data and for how long.

Gone are the scheduling conflicts, stratospheric travel budgets and working lunches spent rifling through huge piles of paper for nuggets of information.

But a few advisers said they'd still rather plop down in the stacks and do diligence the old-fashioned way.

It's just good business practice, they argue. In the same way many people go to a store to try on a suit instead of buying it online, these advisers want to do their diligence inside the company hanging on the sale rack.

And in the conservative world of M&A banking, where it's still common to ship analysts to makeshift data rooms around the country, the online counterpart has not caught on as quickly as it has elsewhere, most notably in the U.S. syndicated loan market.

Early-stage tech obstacles with Web diligence services didn't help speed the process, some advisers said.

Cleary Gottlieb partner Ethan Klingsberg, who focuses on M&A work, said his law firm's associates used to dread online diligence processes that required hours in front of computer screens and filled their e-mail in-boxes with updates each time new documents were added.

"There were a lot of hiccups five years ago with these things, but they've reformed the technology and it has become a lot smoother," Klingsberg said. He said every auction-format deal on which he's currently working is running its diligence process online.

Pains Turn To Gains 

The technology used by providers like IntraLinks and Merrill Corp.'s DataSite has advanced considerably since the services were launched.

DataSite, which says it has handled transactions worth more than $100 billion in asset value, late last year unveiled a new version of its virtual deal room product that offers search capabilities and other tasks that would be impossible to execute in a room piled high with banker boxes.

Still, some buy-side advisers feel the sell-side's electronic monitoring capabilities could put them at a disadvantage. And the new technology does cut back on personal interaction between buyers and sellers.

But proponents of online diligence say data rooms are often staffed by junior-level employees who can't provide high-level information. Bankers can still lobby for more data if something they want isn't available, they say, and it's easy to arrange for follow-up meetings over the phone.

"I think the cost-benefit has changed over the years," Cleary Gottlieb's Klingsberg said, "and now people find it not as painful on the buy-side as it used to be -- and easier than traveling."