Cutting costs

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PEARSON: VDRs can reduce costs and make due diligence more manageable.

Virtual datarooms are coming into their own as interest in local and cross-border M&A grows across the Middle East.

Sovereign Wealth Funds have been spearheading the investment in foreign companies, while other investors have looked more locally for opportunities. The scope of SWF activity during the fallout from the subprime crisis has been striking.

The volatility of the markets in which they are investing is just as notable.

While questions are raised about the transparency of the funds themselves, with commentators and politicians questioning the motivation of SWFs in their investment decisions, foreign investors - sovereign or private - must also get a clear understanding of their investment targets.

With the world to choose from and uncertainty around every corner due diligence is paramount - but costly.

To send teams of lawyers and accountants around the globe is not inexpensive, to send documents around the world is too risky and so the investor looking overseas must undertake a great deal of diligence in order to weigh up decisions before committing to undertake proceedings.

There is a way to avoid much of the cost and pain involved, saving investors and acquirers' time, money and resources. Secure online workspaces have increasingly been used in order to facilitate the virtual exchange of documents secure enough for big business.

They are being used for everything from M&A transactions to securitisation processes, wherever there is a need to exchange sensitive commercial information and a desire to do so efficiently.

In a recent piece of research conducted by IntraLinks, the leading provider of online workspaces, 39% of European M&A professionals thought that investors from the Middle East would be the most active in the European markets, almost double the number of people expecting Chinese or Indian investors to be the most active, despite these regions being rated as the leaders in previous years.

The figure is not too surprising given the levels of investment seen so far - Merrill Lynch and Citigroup reaped the benefits of overseas investors in January 2008 when a significant chunk of the US$21 billion investment that they received was provided by SWFs from Asia and the Middle East.

Investments in assets with a greater return - and potential reward - are increasingly of interest to the SWFs that have accumulated capital in excess of that needed to cushion them against economic shocks. The growth of interest in higher risk investments will fuel interest in the financial services markets taking a battering at the moment.

In the GCC region, the local market is seeing a greater number of opportunities for M&A. Karin Barry, associate in the global banking and markets division of HSBC Middle East, says that the time is right for consolidation: "A number of companies see the current climate as a chance to solidify their position in the region.

Other Middle Eastern companies see opportunities in nearby in emerging markets, for example Dubai investors are increasingly moving into North African markets like Egypt."

Furthermore, investors from Europe and the US are buying into traditional assets such as oil, finance, energy and smaller infrastructure players within IT and IT services. Barry explains: "Companies based in slow-growth western markets are increasingly expanding into high-growth emerging markets and often through M&A."

But market conditions are impacting the ability to carry out such deals, "An issue of increasing importance is the ability to secure financing," says Ms Barry.

"If a target has a number of loans on their books, the potential buyer must be able to support adequate credit to take these on, which is increasingly difficult in today's tight financing market."

Confidence can also be hit when looking overseas. "As companies expand out of their home market, they need a higher level of comfort because they will be dealing with unfamiliar regulations and tax issues.

In such cases the due diligence process is subject to even greater scrutiny, often one of the big four accountancy firms will be called in and virtual datarooms used to give enhanced transparency.

To acquire or not to acquire?

As the market switches from favouring lenders and borrowers by turn, it is in both parties' interests to see the investment - and investor or buyer - more clearly, without increasing the level of work substantially.

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READERS' COMMENTS

VDR's are only half the story
Posted by Graham Walker on Tuesday 8 July 2008 at 00:25 UAE time


While I agree on the point that VDR's help manage costs and make due diligence more manageable they miss the mark when it comes to closing deals. Companies like Firmex provide a VDR that not only provides due diligence management tools but a tool set to manage the deal closing, deal archive and instant deal binders at the end of a deal.
Having the entire deal run on a single deal management platform enhances the cost savings of a deal not only from the reduced cost of travel but it enhances the closing process and ultimately aids in better deal relationships... which is priceless.

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