For over a decade, virtual data rooms (VDRs) have been the preferred conduit for delivering information to bidders conducting due diligence in M&A transactions. VDRs are an efficient, cost-effective and secure means of simultaneously delivering large quantities of information to multiple parties and their advisers, many of whom are often located in different jurisdictions. However, when highly sensitive information is required in order for bidders to assess key transaction issues relating to value, risk or integration synergies, the traditional due diligence process is often unable to provide a workable solution to balance the information requirements of the bidders and the correlative risk on the vendor (which is heightened when competitive trade buyers are in the process). For example, the practice of redacting key information in documents provided in the VDR defeats the very purpose for which those documents are requested by bidders and the use of "black boxes" for review by preferred bidders merely limits the risk to selected parties (particularly if the deal doesn't go ahead).
Enter the 'clean team,' an impartial third party (typically a professional consulting firm) who operate a stand-alone VDR often dubbed the 'clean room'. The clean team is bound by strict impartiality and confidentiality protocols and the vendor submits critical and sensitive business information to the clean team, who then consolidate and 'sanitise' this information and release it to bidders in a generic form. For example, the vendor may provide the clean team with information about its employees' remuneration, which the clean team will then analyse and compare with information about market practice. The clean team would then provide this information (via the clean room) to bidders in a way that gives bidders enough information to assess the issue and ascribe indicative value to it for the purposes of the financial model, but does not disclose the particulars of the target's employees' remuneration.
Bidders can also submit sensitive information to the clean room about their own systems and processes, which the clean team will evaluate for the purposes of assessing integration issues and synergies. The clean team will then note key differences between the target and the bidder's businesses and advise whether the transaction is in line with both parties' commercial expectations. A clean team may advise on, for example, sales and revenue forecasting, supply channels and, ultimately, the suitability of a potential merger. If the deal collapses, there is no risk that sensitive information disclosed by either party during due diligence will make its way into the marketplace. In the US, the provision of information to clean teams by both parties is important because mutual anti-trust regulations prevent pre-completion information sharing in some cases. Therefore assessing integration issues and risks can be difficult.
Given the cost associated with using a third set of independent advisors, the use of clean teams in the New Zealand context is likely to be limited. However, we see potential for clean teams to be engaged in local transactions during due diligence in specific situations. For example, clean teams may add real value (either generally or in relation to specific aspects of a transaction) where multiple trade buyers are bidding for the target business, highly sensitive commercial information is involved and integration issues are critical to the success of the transaction. Our M&A specialists are happy to advise clients on engaging a clean team or on running a sale process generally.