What is not in the data room?

Articles of association. Annual accounts. Leases. Financing agreements. Litigation. Permits. Insurance. Employees. Tax records. Technical reports.

Because some of the information that later decides whether an investment succeeds or fails has an uncomfortable quality: it is not in any data room. And some of it is not a document at all. It is a change.

• A sudden silence.
• An answer that, for the first time, takes longer.
• A question that suddenly someone else answers.
• A person who could decide yesterday and today is supposedly no longer responsible.

Perhaps part of good due diligence is therefore not only reading what is there. But noticing what changes.

In January 2000, AOL and Time Warner announced one of the most spectacular mergers in business history. The logic seemed compelling: AOL brought internet access and digital reach, Time Warner brought media brands, content and infrastructure. Old and new world were to dominate the future of the media industry together.

In hindsight, one episode is particularly interesting. The actual due diligence was carried out in just three days. One banker involved later called it “sloppy”. Even more remarkable was the recollection of an AOL lawyer involved: he had the impression that the transaction would go ahead regardless of what he might still find out.

That is perhaps one of the most dangerous things that can happen in due diligence. Not that information is missing. But: that nobody wants to find information that calls the deal into question any more.

The data room was still open. The decision perhaps no longer was.

In 2011, Hewlett-Packard acquired the British software company Autonomy. The fair value of the consideration recognised at closing was around 11 billion US dollars. A little over a year later, HP recorded an impairment of around 8.8 billion US dollars related to Autonomy.

HP stated at the time that its own investigations had revealed indications of serious accounting improprieties, disclosure failures and misrepresentations before the acquisition. The allegations led to years of investigations and litigation.

The case is complex. But that is exactly why it is interesting for due diligence. HP had advisers. HP had lawyers. HP had auditors. HP had data. More documents do not automatically mean more truth.

Perhaps the more interesting question is therefore not: what is available? But: what would have to be available if what we are being told is true?

In early 2019, after a SoftBank funding round, WeWork was valued at 47 billion US dollars. The narrative was enormous. WeWork itself spoke of a global platform, of data, analytics and technology.

Then the company prepared for its IPO. The prospectus published in August 2019 revealed things that were harder to reconcile with that story: heavy losses, substantial long-term real estate obligations, unusual governance structures and numerous related-party transactions involving founder Adam Neumann.

On 30 September 2019, the planned IPO was withdrawn. SoftBank subsequently recorded significant losses on its WeWork investments.

Perhaps here, too, it was not the information that was missing. Perhaps the more interesting question was: what are we actually buying? A technology company? A platform? A real estate model?

Perhaps sometimes no document is missing from the data room. Perhaps it just has the wrong headline.

No billion-dollar write-down. No scandal. No document with a red exclamation mark. Just a moment in which something is different from before.

None of this proves anything. But anyone who observes a transaction long enough knows its rhythm. Who answers. How fast. How precisely. Who stays silent. Who suddenly speaks.

And then something changes. Perhaps only for a moment. That is exactly the moment you must not miss.

Japanese has a remarkable concept for this: 間 (ma). Ma describes the space in between. The interval. The pause that is not merely absence but can carry meaning of its own.

In the West, we like to pay attention to what happens. Perhaps we would be well advised to take an interest in what happens in between, too.

Because sometimes the most important information in a transaction lies exactly there: in the brief moment in which something does not happen. Or suddenly happens differently.

And whoever misses it will not find it later in any data room.

— Mag. Nevena Shotekova-Zöchling

• Nina Munk, “The Taking of Time Warner”, Vanity Fair, January 2004: reconstruction of the AOL–Time Warner transaction based on interviews with those involved, in particular on the three-day due diligence phase and the assessments of bankers and lawyers involved.
• Hewlett-Packard, Annual Report 2011 / SEC filing: information on the acquisition of Autonomy and the fair value of the consideration of around 11 billion US dollars.
• Hewlett-Packard, Results for Fiscal Year 2012 / later SEC filings: impairment of around 8.8 billion US dollars, HP’s allegations and the resulting investigations and litigation.
• The We Company, Form S-1, August 2019 / amendments: business model, losses, long-term obligations, governance and related-party transactions.
• SoftBank Group, November 2019 and Annual Report 2020: withdrawal of the planned WeWork IPO and investments and losses related to WeWork.
• On the term 間 (ma): Japanese architectural and cultural sources use ma for the space in between or the interval, understood not merely as emptiness but as a formative part of the whole.