Abstract
The data room is a potential treasure trove of proprietary intelligence about oil and gas assets that are up for sale, but one must admit that there are more salubrious places in which to ply one's trade.
The author has experienced intense scrutiny by security guards before being permitted to enter a windowless room, with flickering fluorescent lighting and drab monochromatic decor. The seismic workstation and computers sat on bare tables, alongside boxes of musty documentation. The link with the world outside is via the seller's staff, who pop their heads round the door every hour or so to ask if one has any questions or needs any missing reports data to be brought from the archives. This work space is to be one’s “home” for the next few days. Welcome to the Orwellian world of pain that is known as the physical data room (PDR).
And the virtual data room (VDR) is not much better, as the M&A team, who has been tasked with due diligence of a large asset portfolio in an impossibly short space of time, can say goodbye to their families and friends for the project duration as they withdraw into their cubicles each day for complete immersion in an online world in order to make sense of a morass of electronic data downloads that is being continually updated by the seller.
This chapter covers the various types of data room one might be faced with and why they are so important.
Keywords: Data room, Definition, Importance, Physical, Virtual
The data room is a potential treasure trove of proprietary intelligence about oil and gas assets that are up for sale, but one must admit that there are more salubrious places in which to ply one's trade.
The author has experienced intense scrutiny by security guards before being permitted to enter a windowless room, with flickering fluorescent lighting and drab monochromatic decor. The seismic workstation and computers sat on bare tables, alongside boxes of musty documentation. The link with the world outside is via the seller's staff, who pop their heads round the door every hour or so to ask if one has any questions or needs any missing reports data to be brought from the archives. This work space is to be one’s “home” for the next few days. Welcome to the Orwellian world of pain that is known as the physical data room (PDR).
And the virtual data room (VDR) is not much better, as the M&A team, who has been tasked with due diligence of a large asset portfolio in an impossibly short space of time, can say goodbye to their families and friends for the project duration as they withdraw into their cubicles each day for complete immersion in an online world in order to make sense of a morass of electronic data downloads that is being continually updated by the seller.
This chapter covers the various types of data room one might be faced with and why they are so important.
2.1. What is a data room?
Data rooms are inevitably used whenever oil and gas companies wish to divest or dilute equity in assets or acreage. Potential buyers' teams visit data rooms to inspect, copy, and interpret the data that are deposited there by the seller. The team's findings help the potential buyer to decide whether or not to pursue the opportunity. Even though the materials therein can vary dramatically, in quantity and quality, data rooms remain rich sources of confidential oil and gas field information, but which can be mined only for a limited period of time. These days, data rooms come in different forms and can be physical or virtual or a combination of both.
There is usually no chance to re-enter a data room for a second look once it has been closed by the seller. The data room tends to be a one-off opportunity, so seller and buyers must plan meticulously to ensure it goes well. No matter what the format of the data room is, if the data room visit by the prospective buyer's M&A team, either in person or online, lacks the necessary forethought and administration, it may not achieve its objective and the potential deal may be delayed, or even not go ahead at all.
The following sections describe the different types of data rooms and compare their respective strengths and weaknesses.
2.1.1. Physical data room
The PDR has long been a necessary bane of the due diligence process. Traditionally, the PDR is a secure, continually monitored room, either in the seller's offices or those of an intermediary. The author can remember the caffeine-fueled assignments where a buyer's team of experts was assembled to paw through boxes brimming with confidential documents that reportedly held the financial secrets of a prospective acquisition. If additional documents or newer versions of documents are required, these will have to be brought into the PDR by the seller's staff or intermediary. In this “sanctuary,” the potential buyer's team will gather for days to comb through reams of confidential data about the seller's assets.
Only one team at a time will be allowed to enter the PDR as rival buyers often do not want their identities disclosed. Teams, often comprised of a number of experts in different fields, may have to be flown in from many regions or countries and remain available throughout the process, so the overall cost of keeping such groups in a data room can be high.
Hence, the PDR is an expensive, cumbersome, time-consuming exercise, entailing extensive data copying, lengthy travel, and tricky logistics. The main disadvantages of the PDR are threefold: location, scheduling, and working in real time. The geographical location of the PDR may prevent buyers putting in the right team at the right time, and the seller may be unable to update information in real time which may create deal-breaking holes in the asset database.
It should be noted that some governments consider it illegal to take oil and gas field data out of the country. This is indeed currently the case in Malaysia, Indonesia, and some Middle East states. The large oil and gas Majors in the former Soviet Union are also reluctant to let data be taken out of Mother Russia. Hence, the PDR format will always be enforced for M&A activity in these regions.
On a security note, sellers often disable the USB drives in the computers provided in the PDR to prevent the downloading of the data they have provided to be read only. The seller might also ask its office security team to remove the visitor's book from reception, as teams can look back to see which other companies, i.e., potential rivals, have visited the data room before them. Of course, the seller could be devious and insert bogus buyer company names to suggest the deal is particularly interesting and thus more competitive, in the hope of driving up the bid price.
Due to the cumbersome nature and the inherent expense of the traditional PDR, it was inevitable that there would be a move toward an online alternative, and this was realized with the advent of the VDR.
2.1.2. Virtual data room
The PDR has largely, but not completely, been replaced by the VDR.
Sometimes called the online data room, the VDR is an extranet or controlled access website that allows thousands of documents to be uploaded for an unlimited number of authorized buyers and their advisers to access and review them simultaneously. Almost all the data released via the VDR are proprietary, so potential buyers must sign a confidentiality agreement to prevent disclosure of any of the material provided to third parties.
The VDR option is arguably as secure as the PDR. It is accessible 24/7 over the allowed period, and it should be easy to administer, and in certain circumstances can be relatively quick to set up. However, the author has experienced up to nearly two weeks of delay in getting through the red tape of various IT departments to gain access to a VDR.
What can take a large amount of time and effort on the seller's part is ensuring that the most appropriate data are gathered and uploaded into the VDR. Information can be added or removed at any time and the changes logged for audit trail purposes. Typically, the cost of a VDR pays for itself in a single M&A transaction.
The VDR option offers many advantages over the traditional PDR method, both to the seller and the buyer. The faster speed, lower cost, and greater efficiency of the VDR allows the seller to access an increased number of bidders and permits a greater bid throughput, as well as providing unlimited time zone access for potential buyers around the world. Experience of M&A activity in the oil and gas sector has shown that buyers get better information, and experience a quicker response time from the seller, which results in more deals being closed successfully. Other benefits of a VDR to buyers include not having to transport their due diligence teams to an out of the way location, which saves time and money, but limits the collection of air miles by M&A team members. Sometimes it can prove difficult for buyers to get the right team into a PDR, but this challenge is overcome with the VDR. Not only can the right team review the deal data but also the information uploaded to the VDR can be refreshed constantly and be immediately accessible. The online system encourages continued daily interaction between seller and buyers via question and answer sessions and requests for new data, which plugs any deal-breaking holes in the evaluation dataset.
A major criticism of a poorly managed VDR is the lack of essential data therein, and the frustrating habit of sellers “drip feeding” data over the duration of the due diligence exercise. This practice delays the progress of the due diligence, causes frustration among the buyers, and extends the time required to confirm the seller's numbers, as often work must be redone when more recent and better information comes to light.
Another common gripe is the temptation for the seller or administrator of the VDR to be overly enthusiastic when implementing controls over access to buyers and their teams. The VDR can provide very high levels of security, including giving individual password access to potential bidders for a given time only, but some sellers can be over zealous in controlling access to their VDRs. The author experienced one extreme case where the seller insisted that all buyers' staff provide names, roles, email addresses, and mobile phone numbers to receive an SMS text each time they wish to access the online data room; once access was granted, the buyers' team had to ensure there was computer mouse activity every five minutes or they were be automatically logged out of the VDR by the security system. One can appreciate the increasing frustration and inordinate length of time required for buyers to download the pertinent data from such a Stalinist VDR arrangement.
Other frustrating security options used by sellers are making files non-downloadable and disabling the screen capture functionality so that users can only read what is displayed on the computer screen while online; or having to submit individual passwords for each file to be downloaded. One appreciates that data security is important, but sellers should remember that the buyers have already signed a legally binding confidentiality agreement to gain entry to the VDR, which means their M&A team members, both staff and associates, are legally bound not to disclose any of the data they are given access to.
Buyers are advised to ensure they designate a VDR downloader for the due diligence team in such instances, as described in Section 2.1.4.
2.1.3. VDR and PDR combination
Nowadays, most sellers use a combination of VDR and PDR.
The majority of the documents, reports, maps, images, logs, studies, drilling and production records, etc., are downloadable from a VDR. Yet, some datasets are simply too large to be downloaded in a sensible timeframe. In these less common cases, numbered external hard drives containing the mega datasets are sent to bidders by registered courier to avoid excessive time required to download from the extranet. The large files that are generally associated with processed seismic data and their interpretations, static geomodels, and dynamic simulation models tend to reside on the workstations in a PDR, which is usually located in the seller's offices or those of an intermediary. If the buyer's team members are unfamiliar with particular software installed on the workstation in the PDR, one of the seller's staff or a specialist consultant who are skilled users of the software will be at hand to open and browse the data files and, if permitted under the terms of the PDR, to print off screenshots. These people are only in the PDR to operate the installed software on the workstation, they are not there to offer advice on the data, provide analysis, or comment on the deal to the M&A team.
By combining the VDR approach with that of the PDR, most sellers invite potential buyers to their offices, or at the location of the PDR, to give them their management presentation. This “dog and pony” show allows the sellers to set the stage for the deal and to give their sales pitch to the potential buyers. Sellers gauge the attendance at these management presentations as an indication of just how serious the prospective buyers are in submitting a bid.
2.1.4. Virtual Physical data room
In response to the COVID-19 pandemic lockdowns and governments' safety measures, which have disrupted travel and prevented face-to-face business meetings taking place, the ever-resourceful oil and gas sector has developed the virtual physical data room (VPDR). The seller sets up a PDR in a secure location, either the seller’s offices or those of an intermediary, and allows potential buyers to remotely access workstations that have been loaded with the seismic data and interpretations along with the corresponding static and dynamic models of the assets on offer. The buyers can neither download nor copy information from the VPDR workstations, but data and models can be interrogated via their own computer screens. During their time in the VPDR, the buyers can interact with the seller and ask for an agreed number of selected screenshots to be saved and emailed to them at the end of the session. The seller’s management presentation, which invariably precedes a PDR, may not have the same impact via a video conference as a face-to-face show and tell with prospective buyers, but the VPDR does permit M&A business to continue almost as usual in these unprecedented times. The VPDR is run in combination with a standard VDR as described earlier in this chapter.
2.1.5. Designated VDR downloader
To avoid duplication of effort and so save time during the due diligence exercise, a buyer is advised to designate a member of the M&A team to download everything from the VDR and store it on a restricted access area of the buyer's own data server. This approach also ensures that all the data are downloaded, not just those files of particular interest to the certain members of the M&A team. Authorized M&A team members can then quickly access this downloaded version of the entire deal dataset. As updates are often uploaded by the seller, sometimes on a daily basis, it is imperative that the buyer's designated downloader regularly checks the seller's VDR website and keeps the other members of the buyer's team informed whenever new data become available.
2.2. Why are data rooms important?
Data rooms are invaluable sources of proprietary information that are, unfortunately, only accessible for a short span of time. However, important and very expensive decisions are made on the basis of a brief spell in the PDR. Thus, the potential buyer's team must gather and analyze all pertinent data to allow the buyer's management to make best decision possible.
There are some less scrupulous companies in the oil and gas sector who indulge in the data room past time of “tire kicking.” This unprofessional practice sees the “buyer” claiming to be interested in purchasing an asset, but who is simply using the data room as an opportunity to gain access to proprietary information, often in adjacent acreage to where the “tire kicker” has assets. Sellers must be wary of such companies and can either deny them access to the data room or treat any expressions of interest or potential bids from them with suspicion.
Now let us consider what essential documentation is associated with the data room.