In the contemporary digital world, cybersecurity is not just a matter for IT departments—it’s a strategic concern that should be front and center in the boardroom. This is particularly relevant during M&A processes, where undiscovered cybersecurity vulnerabilities can significantly depreciate the perceived and actual value of a deal.
The Rising Threat Landscape
The digital era, despite its numerous benefits, has seen an exponential growth in cyber threats. These threats have increased in both frequency and sophistication, with threat actors employing new techniques and vulnerabilities to breach corporate systems and data. Considering this evolving threat landscape, the importance of M&A cybersecurity due diligence is now greater than ever. Cyber due diligence in the course of M&A activities can unearth hidden vulnerabilities and potential liabilities, preventing massive financial losses and safeguarding the reputation of both acquiring and target companies.
In a broader context, a Forescout report showed that 62% of organizations agree they face significant cybersecurity risks when acquiring new companies, and more than half of the acquiring companies experience a critical cybersecurity issue during the M&A process. This highlights the critical importance of a comprehensive cyber assessment of the target company before integration to account for any cyber risks and to take the necessary actions to mitigate such risks. Unfortunately, many companies struggle with a lack of device visibility, which hinders the gathering of necessary information for an accurate and comprehensive cyber assessment. In fact, eight out of ten organizations discover a previously unknown or undisclosed cyber-related issue following integration, often due to a lack of asset visibility.
Key Components of Cybersecurity Due Diligence
Performing cybersecurity due diligence requires a comprehensive analysis of the target company’s cybersecurity infrastructure and policies. This process includes scrutinizing the security practices, protocols, and technology stack to uncover any potential vulnerabilities.
A key area is data protection—how does the company protect its sensitive data, including customer and employee information? Does it have robust measures in place to ensure user privacy? These are critical questions in M&A cyber due diligence.
Furthermore, the target company’s cybersecurity culture can be indicative of its overall security posture. For example, if employees are regularly trained on cybersecurity best practices, it demonstrates a proactive approach to cybersecurity, which is a positive sign.
Evaluating Incident Response and Business Continuity Plans
Beyond the preventive measures, the target company’s ability to respond to and recover from cyber incidents is equally important. Incident response plans should be robust and tested regularly to ensure they can effectively minimize damage, reduce recovery time, and limit the impact on reputation in the event of a breach.
Similarly, business continuity plans, which outline how a company will maintain essential functions during a crisis, are essential. These plans demonstrate resilience and readiness to face cyber threats. An acquiring company would need assurance that the target company can quickly resume operations following a cyber incident, minimizing operational and financial impact.
Scrutinizing Compliance and Regulatory Considerations
Regulatory compliance is a crucial element in the world of cybersecurity mergers and acquisitions. Companies operate under the ambit of various cybersecurity and data privacy laws, such as the EU’s General Data Protection Regulation (GDPR) or the California Consumer Privacy Act (CCPA) in the U.S. Failing to comply with these laws can lead to hefty fines and legal repercussions.
As part of the due diligence process, the target company’s compliance history should be assessed. This includes reviewing any past violations, the responses to such incidents, and the measures put in place to prevent future non-compliance.
Reporting and Recommendations
The communication of due diligence findings is essential to the success of M&A processes. The findings should be compiled into a comprehensive report detailing identified vulnerabilities, associated risks, and potential impacts.
This report should also include actionable recommendations for mitigating identified risks, which could range from revising cybersecurity policies to implementing new technologies or security controls. Such a report would serve as a guide for post-acquisition integration and help shape the combined entity’s future cybersecurity strategy.
Case Study
The Verizon-Yahoo acquisition serves as a significant example of the implications of cyber vulnerabilities discovered during post-acquisition integration. Verizon had initially agreed to acquire Yahoo, but in the process discovered a prior data breach at Yahoo that had not been disclosed. This breach was severe enough that it nearly derailed the acquisition entirely.
Ultimately, the discovery led to a renegotiation of the terms, with the purchase price being reduced by $350 million. Furthermore, Yahoo was required to pay a $35 million penalty to settle securities fraud charges brought by the U.S. Securities and Exchange Commission (SEC) and an additional $80 million to settle lawsuits from unhappy shareholders. This case highlights the potential financial and reputational risks that can emerge when cybersecurity issues are uncovered during the merger and acquisition process.
Conclusion
In today’s interconnected digital world, cybersecurity has become a critical consideration in M&A processes. Comprehensive cybersecurity due diligence can help identify and mitigate potential risks, protecting the value of the deal and facilitating a smoother post-acquisition transition.
As cyber threats continue to evolve, so should our approach to due diligence. Understanding the cyber risk landscape is crucial for a successful merger or acquisition. Ignoring it could lead to catastrophic consequences.
Engaging with CyberElite for M&A cyber risk assessments brings numerous advantages, including the ability to uncover hidden risks and liabilities, safeguard your reputation and brand, ensure business continuity, and achieve valuation accuracy. CyberEilte’s experience working with the Big 4 further solidifies their expertise in effectively managing cyber risks during mergers and acquisitions, making them a valuable partner in navigating the complex landscape of M&A cyber threats.
