Enhancing M&A Confidentiality – Leveraging Virtual Data Rooms for Secure Deal Management

Mergers and Acquisitions (M&A) is a complicated transactions that rely on confidentiality. The development of technologies made traditional ways to keeping secrets are not enough anymore. The alternatives like physical data rooms and email correspondence, are susceptible to breaches. These weaknesses highlight the importance of a stronger and more secure process. Virtual Data Rooms are fortresses that keep M&A information confidential. They are safe web-based databases that can be used by relevant parties for collaborating, sharing and viewing protected materials. This article explains what an online data room software is and how it can benefit an M&A process.

Security Challenges of M&A Management

Mergers and acquisitions (M&A) always presuppose dealing with large volumes of sensitive data and sharing confidential documents with lots of people. Naturally, this can put the transaction and the whole business at risk. 
For example, Forescout’s survey results demonstrate that 53% of organizations experienced a critical cybersecurity issue during the process of M&A that put the entire deal in jeopardy. 
This proves the need for a single solution that could secure deal-makers from huge financial losses and other negative consequences. A virtual data room (VDR), or data room software, is one such solution. 
Let’s identify the main security challenges the buy- and sell-side can face during the M&A deal: 

Data breaches:

The breach of confidential data is among the main risks for an M&A transaction. It’s also backed up by recent statistics: only in December 2023, there were 1,351 publicly disclosed incidents of data breaches in the world (which is a huge increase compared to only 470 cases in November 2023).

Limited access control:

Often, it’s difficult to control who has access to what during the M&A which can lead to disclosure of sensitive information to third parties. This is especially the case if M&A sides do not use any digital solutions to manage transaction data and prefer traditional physical data rooms instead.

Insufficient tracking and monitoring

The same corresponds to the inability to ensure adequate tracking and monitoring processes, that would allow determining the routes of data breach in case of its occurrence.

Inadequate version control

Dealing with a not-deal-oriented digital solution or a traditional data room doesn’t allow for maintaining effective version control mechanisms. This, in turn, can negatively impact decision-making and, as a result, even raise certain security risks.

Lack of secure collaboration

Any M&A deal involves lots of collaboration between the deal sides, legal specialists, auditors, and other parties, especially at the due diligence stage. Naturally, the subject of communication between the parties is sensitive due to the deal’s nature and requires a secure space to be discussed.

Role of Virtual Data Rooms in the M&A Process

By implementing a virtual data room solution during the M&A transaction, both sides ensure a secure environment for data sharing and thus, can save significant costs. This is especially relevant, knowing the average cost of a data breach, which was $4.45 million in 2023. 

Let’s define what a virtual data room is and what benefits it can bring to business during M&A.

What is a virtual data room?

A virtual data room, or electronic data room, is a cloud repository for data storage and distribution. Though similar to average cloud storage solutions on the surface, virtual data room providers focus on security more, which makes it an excellent solution for such complex financial transactions as M&A.

Benefits of implementing data room services in the M&A process

Below are the main advantages of using virtual data rooms during M&A transactions:

• Enhanced security and confidentiality. The variety of security features and serious security measures data room providers take ensure high-end data security and thus, safeguard organizations’ confidentiality and privacy.

• Streamlined and secure collaboration. Most virtual data room vendors offer a dedicated Q&A module, where the deal parties can discuss issues that arise. VDRs ensure a safe space for communication.

• Efficient due diligence. Besides bank-grade security, virtual data rooms also provide features aimed at making the due diligence process streamlined. This, in turn, significantly accelerates the decision-making.

• Improved monitoring. Most VDRs enable administrators to monitor all the activity inside a virtual data room. It means that every user’s action is traceable, which, in turn, reduces the chances of fraudulent schemes.

• Time and cost savings. All the above-mentioned advantages lead to significant cost savings since virtual data rooms ensure a smooth and problems-free M&A process. 

Top 7 VDR Features for Secure Mergers and Acquisitions

How exactly do modern data room providers ensure data security and confidentiality during the M&A process? The top seven VDR features that make it possible are described below:

1. Granular access permissions. The best data room providers offer up to 8 levels of access controls which enable data room administrators to better control who can access what documents, and thus, enhance data protection.

2. Multi-factor authentication. Most data room vendors provide a two-step authentication process for entering a data room. It presupposes every user verifying their identity by entering the SMS code before login.

3. Multi-layered data encryption. The majority of top virtual data room providers offer at least 256-bit encryption and 2048-bit keys for data when transferred and at rest.

4. Built-in redaction. This feature blackens out certain areas (such as those that disclose personally identifiable information) of a file or document so that they’re left confidential.

5. Watermarking. Every time a particular document is viewed, printed, or downloaded, dynamic watermarks appear on top of it. Such watermarks usually contain personal information about the user or their IP address, so that every action could be easily tracked.

6. Fence view. This feature represents a digital fence that appears on top of the document, thus, making only certain parts of the document visible, while the rest is hidden by the sliding barred screen.

7. Time and IP restrictions. A virtual data room administrator can restrict access to documents for certain IP addresses or set a particular time limit when files can be accessed.

Summing up

The security of data shared during mergers and acquisitions is hugely important. When approached insufficiently, it can lead to numerous problems such as data breaches, which, in turn, result in significant monetary losses or even deal failure. 

Virtual data rooms are the way to secure sensitive data during M&A. With a variety of dedicated features and serious security measures, modern data room providers ensure that the deal-making is not only secure but also streamlined and efficient. Choose the best virtual data room provider for your business needs by comparing top players on the market.