In the fast-paced world of mergers and acquisitions (M&A), speed and efficiency are often paramount. Data must be securely shared, analyzed, and negotiated—hence the widespread use of Virtual Data Rooms (VDRs) to facilitate this process. However, while most M&A professionals recognize the utility of VDRs, fewer seem to give enough consideration to how much they’re paying for these tools. This is a costly oversight, especially when you consider that a significant percentage of M&A deals never close.
When a deal falls through, there’s no transaction to charge costs against. This includes the cost of your VDR. Suddenly, the money your company spent on setting up and maintaining the VDR becomes a loss—a complete drain on resources with no return on investment. Let’s break down why more M&A and Corporate Development professionals should be deeply concerned about this.
The High Failure Rate of M&A Deals
Depending on the source, failure rates for M&A deals hover between 50-70%. That’s a staggering figure, especially when you consider the upfront costs associated with preparing for such transactions. With such high failure rates, the likelihood that your VDR investment ends up being pure overhead rather than a recoverable expense is significant.
Unlike other tools and services in a deal, where costs can often be recouped or at least justified by a successful transaction, the VDR sits in a unique category. It’s a tool used to streamline due diligence and manage deal data, which is vital, but only when the deal closes. When it doesn’t, the cost of the VDR, like sunk capital, is absorbed by the company.
VDRs: An Investment Like Any Other
Using a VDR is akin to making an investment. You spend money upfront with the hope that it will facilitate a successful deal, allowing you to recoup that cost and more. But when the deal falls through, your “investment” in the VDR delivers no return. This makes the cost of the VDR critically important.
For example, if you’re paying premium rates for a VDR but end up in the 50-70% of deals that don’t close, you’re carrying a much heavier financial burden than necessary. Worse still, the larger and more complex the deal, the higher the VDR cost, meaning your financial risk grows exponentially with each failed transaction.
Why You Should Negotiate Better VDR Terms
Given the high stakes, M&A professionals should seek better terms with VDR providers. This will ensure that even when deals don’t close, the financial hit from VDR usage isn’t as severe. Additionally, many VDR providers have hidden fees and clauses that can further inflate the cost. Understanding these details and pushing for more transparent pricing is essential.
Moreover, you should consider pushing for flexibility in your VDR agreements. Some VDR vendors may be willing to offer performance-based pricing or other models that allow for more cost control if deals don’t close. By negotiating better terms upfront, you can mitigate the financial risk that comes with failed deals.
Conclusion: A Call to Action
It’s clear that more M&A and Corporate Development professionals need to start paying closer attention to how much they’re spending on VDRs. In a landscape where the majority of deals fail to reach the finish line, VDR costs represent a significant financial risk. By treating VDRs like an investment, negotiating better terms, and keeping an eye on the bottom line, you can prevent a deal’s collapse from becoming an even bigger loss for your company.
The next time you’re gearing up for a deal, don’t just think about what you’re paying in legal fees or investment banker commissions. Ask yourself: Are we paying too much for our Virtual Data Room? And more importantly, what will it cost us if this deal falls apart?
It’s time to take control of your VDR costs—before they take control of your budget.
