The data room

In the world of mergers and acquisitions, the data room has long been a necessary nuisance of the due diligence process.

A data room is as straightforward as it sounds: a secure, private room where deal makers -- usually prospective buyers or investors, along with their lawyers, bankers, and accountants -- gather for days and sometimes weeks to scour reams of confidential data about a company. It can be an expensive, cumbersome, time-consuming exercise, entailing extensive photocopying, lengthy travel, and tricky logistics, since rival parties often want their identities kept secret.

But virtual data rooms are changing that.

Increasingly, due diligence is being done online, with thousands of documents uploaded to password-protected websites where an unlimited number of people can review them simultaneously. The virtual method is often faster, cheaper, more efficient, and more secure than the alternative.

''It's a better experience for the buyer," said Matthew Porzio, a vice president of product management for IntraLinks, a New York company that hosts virtual data rooms, also known as deal rooms or war rooms. ''It's so much better than having to sit in a room with dusty boxes and stale coffee."

Virtual due diligence also offers strategic advantages to sellers, who can track which documents have been reviewed, and for exactly how long, to gain insight into a bidder's level of interest. Because the sites are usually searchable, sellers can monitor which words or phrases -- such as ''asbestos" or ''litigation," for example -- buyers have searched for, offering hints about issues of concern.

The use of virtual data rooms was pioneered a decade ago by loan syndicators, who frequently handle large amounts of data that must be reviewed by large numbers of people. In recent years, virtual rooms have become a more common tool in mergers, acquisitions, and private equity transactions, in which copious information -- financial statements, contracts, board of director minutes, articles of incorporation, confidentiality agreements, environmental reports, leases, amendments to leases -- must be examined.

As their technology improves and popularity spreads, virtual data rooms are also being used for clinical drug trials, complex litigation, and other information-heavy business endeavors.

Virtual due diligence also received a boost from the heightened regulatory environment ushered in by the 2002 Sarbanes-Oxley Act, which requires greater financial accountability for public companies and has imposed rigorous compliance requirements. Those new standards have spurred many businesses to scrutinize prospective deals more closely, adding to the appeal of online diligence.

''There's definitely a convenience factor" to virtual due diligence, said Boston lawyer Edouard C. LeFevre, whose law firm, Foley & Lardner, offers virtual data rooms as a free service to clients. ''If you're dealing with a national buyer that has tax folks in one city and business folks in another and corporate headquarters in another, this makes it a lot easier for them to coordinate with each other."

An estimated 20 percent of all US merger and acquisition transactions are now done virtually, said Frank Brunetti, vice president of business development at IntraLinks. Merrill Corp., a financial printer and information management company based in St. Paul, began offering virtual rooms for mergers and acquisitions about three years ago. Since then, the rooms have grown from being used in 200 deals their first year to 1,400 last year, said Ed Bifulk, president of Merrill's online service, DataSites.

The average cost of a virtual data room is between $15,000 and $20,000, although Merrill has charged as little as $4,000 and as much as $1.2 million, Bifulk said. The cost is usually paid by the company being sold, with the fee based on the number of pages posted online.

A major selling point of virtual data rooms is that they shorten deal times by 40 days on average, according to data collected by Merrill -- a significant reduction in industries where time means money.

''If eight buyers each require a week to go through the information, the process could take two months, but with a virtual data room it could take just one week because all the buyers can review the information at the same time," said Brunetti. ''So the real value is saving time, because time is the worst enemy of someone involved in a transaction. Market factors could pop up and derail a transaction, so the sooner a deal is completed the more valuable it is."

Virtual data rooms can also increase the number of bidders, since the ability to access the room from any computer in the world, at any time, means costly travel is unnecessary and deals can be done less expensively.

Sellers can trim costs, too, since putting data online spares them from having to rent hotel space or tie up a conference room to host a physical data room, produce photocopies for prospective buyers, or pay a paralegal or law firm associate to sign people in and out.

''If there's a company in Tokyo interested in a company in Worcester," said Jeff Morris, a senior vice president at Merrill, ''they're more likely to take a look at that company if they can do their due diligence at their desks in Tokyo instead of flying over here to go through boxes of paper."

Similarly, virtual due diligence solves what Porzio, of IntraLinks, calls ''the Sweden effect": a situation in which a prospective buyer wants a far-flung consultant in, say, Sweden to review a document in the United States, but time pressures or cost concerns make that impractical. With a virtual data room, that distant expert can see the document in seconds.

Meanwhile, because buyers can review documents from their own desks, the risk of rival bidders recognizing one another on an elevator -- or of flipping through a visitor log to see which prospective buyers have been there -- is eliminated. Likewise, companies that don't want their employees to know the company is for sale don't have to arrange furtive visits by bidders.

From a strategic standpoint, the ability to track electronically which documents are viewed provides a ''flavor for the key items of importance to a buyer when they're looking at a business," said LeFevre, of Foley & Lardner.

It can also have tangible benefits. According to Merrill, after one deal closed, a client was sued for not having disclosed certain documents, but the lawsuit was dropped after a so-called electronic audit showed the documents in question had been reviewed thoroughly by the buyer.

Critics of virtual data rooms say they can be labor-intensive, requiring substantial time and effort to assemble, as well as constant monitoring to keep organized and updated. After all, unless the original documents are available in electronic format, someone has to scan thousands of pages so they can be digitized and posted online. When IntraLinks first began hosting virtual data rooms, 90 to 95 percent of everything it put online had to be scanned, Porzio said; that number has dropped to 50 percent.

Concerns about online security exist, although firms that host virtual rooms insist that passwords, encryption, and other precautions -- including the ability to prevent certain users from seeing certain documents, and to block documents from being printed or copied -- make virtual rooms more secure than physical ones.

Some deal makers question whether virtual due diligence is worthwhile for smaller, noncompetitive deals in which only one company is talking to another. Boston lawyer John J. Concannon 3d said he tends to use virtual data rooms when he's involved in auction-style deals with several potential buyers, such as the sale of a sports franchise.

''If there are multiple parties, that's when it really makes sense because it streamlines the process," Concannon said. ''But if you're just talking to one or two parties, the benefits of a virtual data room are not as good because it's a lot of work to put it together."

Sacha Pfeiffer can be reached at pfeiffer@globe.com.