Virtual Data Rooms in M&A transactions and their effect on information quality

Table of Contents

Table of Abbreviations

Table of Exhibits

1 Introduction
1.1 Nature of the Problem and Objective
1.2 Methodology and Structure

2 Definition of Key Terms
2.1 Key Terms in the Domain of Mergers & Acquisitions
2.2 Key Terms in the Domain of Information Quality Management

3 The Merger and Acquisitions Process
3.1 Forms of Merger and Acquisitions and Steps in the Process
3.2 Crucial Information in the Planning Phase of the Process

4 The Information Quality Framework
4.1 Introduction of the Framework
4.2 Case Study: Information Quality an Virtual Data Rooms
4.2.1 Introduction to Physical Data Rooms
4.2.2 Introduction to Virtual Data Rooms
4.2.3 Comparison of Information Quality
4.2.4 Further Improvement of Information Quality in Virtual Data Rooms

5 Summary and Conclusion

List of References

Table of abbreviations

Abbildung in dieser Leseprobe nicht enthalten

Table of exhibits

Exhibit 1: The Information Quality Framework by EPPLER

Exhibit 2: Example of a VDR directory

1 Introduction

1.1 Nature of the Problem and Objective

Merger & Acquisitions represent a knowledge-intense process¹. An enormous amount of information is involved in every step from the beginning to completion of a deal, and every professional engaged in the transaction sees himself confronted with an ever broader pool of information and data many times obtained with the assistance of infor- mation technology. Information technology thus provides, on one hand, the opportunity for improved information handling. On the other hand, the administration of informa- tion technology itself can further add a tremendous amount of complexity to a process. As a consequence of this massive information overload, the issue of information quality has gained momentum. With the vast diffusion of information technology and the ad- vent of the information age, the assessment of information quality began to draw upon the attention of researchers². Over the years, several information quality frameworks have been developed to help practitioners recognize and produce better quality informa- tion.³ It is the objective of this paper to apply and evaluate “the fit for use” of such a framework to the due diligence process within an M&A transaction. Furthermore, the application of the framework in this paper should enable people to better judge the benefits of currently widely-used virtual data rooms in comparison to their physical counterparts.⁴ Ultimately, an inference should be drawn about the potential of improv- ing information quality in the overall process of M&A.

1.2 Methodology and Structure

Having stated the background and purpose of this paper, the chronology of content and the structure are to be mentioned: In the second chapter, important terms significant for the understanding of the following parts are to be explained. The definitions cover terms particularly crucial to the understanding of the M&A as well as specifically important terms for the comprehension of the information quality framework. Once the key terms are clearly defined, the third chapter is to shed more light on the various steps of an M&A transaction and its distinct forms. In addition, information-critical situations in the planning phase of a M&A transaction are to be discussed. In the main and following chapter, a case study of the due diligence process in the light of the information quality framework by EPPLER (2006) is conducted. Prior to the case study, EPPLER’s IQF is introduced and differentiated from previously established frameworks. Throughout the case study, virtual data rooms as the state-of-the-art medium for due diligence is to be given special emphasis. Physical data rooms serve as a vehicle to demonstrate how the process has changed and what this implies for information quality. In the last chapter, findings will be summarized and an outlook for the future of IQFs in M&A transactions is given.

2 Definition of Key Terms

2.1 Key Terms in the Domain of Mergers & Acquisitions

The term M&A stands for the consolidation of two firms that create a new entity in the eyes of the law as well as simply for a purchase of another company. Conversely take- over is a generic term which only refers to a change in the controlling ownership inter- est of a corporation. For the purpose of this paper, the merger aspect is neglected and the focus lies on pure purchases where one party desires to acquire another party.⁵ The two parties involved in a deal are referred to in multiple ways. One can distinguish be- tween the target or the seller side and between the acquirer or buyer side of a deal. The buyer side may choose to approach a possible transaction with the intention of a friendly or hostile takeover. In the case of a hostile takeover, management of the ac- quirer may choose to circumvent the target’s management by going directly to the tar- get’s shareholders and buying shares in the marketplace. This is accomplished by a ten- der offer by which the acquirer seeks to buy more than half of the target’s common stock in order to gain control. In the case of a friendly takeover, it is usually supported and initiated by the target’s management. This paper will be dealing with friendly take- overs exclusively due to a higher activity of information exchange between the two par- ties. The broad information basis is crucial for the overall assessment of information quality in the process.⁶

The last term important for building common knowledge of a M&A transaction has been mentioned earlier on: Due diligence refers to the process through which the potential acquirer evaluates the target firm for acquisition.⁷ It is closely tied to the existence of data rooms in transactions. They represent a mean to aggregate all the information of a company in order to be viewed by the interested parties. Until the emergence of virtual data rooms in 1996, companies would employ conference rooms or other office facilities to display the documents requested. Today, a VDR comprises all the information necessitated for a deal in an online document database.⁸

2.2 Key Terms in the Domain of Information Quality Management

Prior to defining Information Quality Management and influential neighbouring man- agement concepts, it is vital to clearly separate the meaning of data, information and knowledge as they are commonly used randomly and interchangeably. Whereas data designates “raw”, unconnected, quantitative or qualitative items, the term information relates to linking various sets of data to form one coherent statement which can be called a piece of information. Information itself becomes knowledge when it is correctly interpreted and connected with prior knowledge. As a result of these definitions, we can describe the earlier mentioned knowledge-intensive process as a productive series of activities that involve information transformation and require specialized professional knowledge.⁹

The rise of Information Quality Management in the late 1990’s is strongly linked to the insufficiency of previously existing Quality and Knowledge Management theories and to adequately explain how usefulness and validity of information could be improved. While Quality Management theory concentrates on improvements in the manufacturing process, the theory of Knowledge Management focuses on turning information into ac- tionable knowledge. Since aspects of both managerial disciplines play a role in Informa- tion Quality Management, but cannot completely account for the new context of knowl- edge intensive processes, Information Quality Management can be defined as a combi- nation and further development of these two concepts. The later on introduced Informa- tion Quality Framework constitutes the outcome of theoretical research and is supposed to assist practitioners in the application of theoretical concepts of Information Quality Management.¹⁰

Before applying the framework within the scope of due diligence, it is necessary to clas- sify due diligence in the series of events in a M&A deal and to name the main forms of M&A.

3 The Merger and Acquisitions Process

3.1 Forms of Merger and Acquisitions and Steps in the Process

Friendly takeovers can be arranged in two different manners. In a one-on-one negotia- tion, buyer and seller come together in a direct negotiation and try to reach mutually accepted terms. In a formal auction, the seller can negotiate with multiple bidders simul- taneously.¹¹ Most frequently, the auction structure is selected because management be- lieves that auctions maximize the purchase price. Auctions thus offer a reinsurance to top executives since stakeholders cannot accuse them of having sold off the company too cheap. Even though formal auctions are never alike and sellers are not legally bound to maintain a fair and balanced playing field to test the interest of distinct bidders¹², one can note common features in the structure of the process: In a one step process bidders receive a teaser, in the majority of cases from a proxy of the seller. The proxy which can be an investment banker, a lawyer or any other kind of advisor serves as a mask of iden- tity. The teaser is made up of a short anonymous company profile to arouse the recipi- ent’s interest. After having confirmed an advanced level of interest the bidder is asked to sign a Non-Disclosure-Agreement. In return, he receives a full information memo- randum which, in some cases, is accompanied by a management presentation. Subse- quently, the bidder is asked to submit a Letter of Intent sometimes in conjunction with a marked-up version of the legal purchase agreement. In a one step process, the seller would now enter into exclusive negotiations with one bidder based on the quality of the LOI while in the two step process the seller merely narrows down the group of bidders to a smaller number and then gives access to more extensive information in the process of due diligence. After due diligence has been executed by the bidders the seller asks for the submission of a refined bid on which he eventually decides whom to negotiate with. He may choose to negotiate with only one or multiple parties. In particular, the two step process of an auction leaves the seller with the delicate opportunity to exercise signal- ling in an effort to drive up the price. This can be done by either telling all bidders in- volved in the auction that certain minimum terms have to be met to reach the next round of the auction or by creating a deliberate information asymmetry among bidders. A situation in which information is distributed unequally may then provoke a bidder to adjust its bid higher up. However, signalling in an auction also holds a great amount of risk for the seller. In the case where signalling fails to drive up the price and some bid- ders drop out of the auction, the seller is confronted with the phenomena of adverse se- lection.¹³ In the most severe case, he is unable to sell the company owing to the fact that finding bidders for a new auction is highly unlikely once information about the deal has become public. Regardless of the form of a transaction, information gathered in the in- ternal preparation phase of a deal can play a decisive role in the overall process.

3.2 Crucial Information in the Planning Phase of the Process

The planning phase of M&A consists of the development of the business and the acqui- sition plan. Decisions made later on in the process rely heavily on sound information gathered throughout the planning phase. Hence, it can be inferred that especially the quality of information in the pre-phase of the actual deal has a great impact on the out- come and success of a deal. In order to develop a business and acquisition plan which provides management with a guideline for setting the overall direction, substantial amounts of economic, industry, and market information are required. While the research for information relevant to the own business plan is fairly easy to conduct, obtaining sound information for the acquisition plan can be tedious. This is particularly the case when a company intends to integrate vertically and does not have prior knowledge of the industry it wants to forward or backward-integrate into. Finding reliable information can be even more arduous if the target is privately held and thus almost no company data can be found on commonly used databases.¹⁴ The existence of advisors in the M&A process, such as investment bankers or consultants, partially abuts on this infor- mation shortage of buyers. Access to hidden information is one valuable way for advisors to differentiate themselves and make them irreplaceable in a M&A transaction.¹⁵ In spite of the engagement of advisors and the probable improvement of information quality, it can be contemplated that the buyer’s initial valuation of the target’s purchase price reflects in either case a mere sketch.¹⁶

New information gleaned from a thorough assessment of one’s own position in the mar- ket in the context of a business plan can, however, have a considerable positive effect on future takeovers.¹⁷ Owing to the fact that a company is more aware of its actual posi- tion in the market and its overall corporate situation, unanticipated or unforeseen oppor- tunities as a result of new information becoming publicly available can be harnessed more rapidly and offer the possibility of a first-mover advantage¹⁸. After having pointed out information-critical situations in the planning phase of M&A transactions in this paragraph, the next chapter is evaluates information quality in the due diligence phase of a deal in order to apply findings on the entire deal structure later on.

4 The Information Quality Framework

4.1 Introduction of the Framework

A framework is defined by PORTER (1991) as “a legitimate form of research that can be validated through multiple case studies. Its goal is to help the analyst better think through the problem by understanding the firm and its environment […]”.¹⁹ The Information Quality Framework of EPPLER (2006) is based on this definition and aggregates Information Quality Frameworks of the last ten years to a new framework It accounts for the recent development towards knowledge-intense processes, a growing number of trade-offs²⁰ among the characteristics of information and a strong need for an implementable framework whose costs are controllable.²¹

[...]

¹ definiton given in chapter 2

² see Simpson/Prusak (1995), pp. 412-425.

³ see Eppler (2006), pp. 359-362.

⁴ see Fitzgerald (2005). p.9.

⁵ see de Paula (2004), p. 14.

⁶ see Frankel (2005), p. 148-149.

⁷ see Hitt/Hoskisson/Ireland (2003), p.251, Ferguson/Klym (2006), p.2.

⁸ see Bitfulk (2006)

⁹ see Eppler (2006), p.61.

¹⁰ see Eppler (2006), p. 27.

¹¹ see Frankel (2005), pp. 137-149.

¹² see Morosini/Steger (2004), p. 130.

¹³ see Akerlof (1970), pp.488-500.

¹⁴ see DePamphilis (2003), p. 177.

¹⁵ see Morosini/Steger (2004), p. 130.

¹⁶ see Bruner (2005), p. 182.

¹⁷ see DePamphilis (2003), p. 137.

¹⁸ see dePamphilis (2003), p. 133.

¹⁹ Porter (1991), p.955.

²⁰ for a definition see Weick (1979)

²¹ see Eppler (2006), p. 55.