The importance of cyber due diligence in mergers and acquisitions

By Baker Newman Noyes September 26, 2023

In a rapidly evolving business environment where innovation and agility are essential, staying ahead of market changes requires quick, proactive action. Organizations often pursue inorganic growth strategies, such as mergers, acquisitions, and joint ventures to stimulate growth, realize cost and revenue synergies, achieve operational and supply chain efficiencies, and increase market share. While mergers and acquisitions (M&A) can be an excellent way for a business to deploy capital and achieve a competitive advantage, they can also create significant cyber risks. Common cyber risks at a company include inadequate cybersecurity practices, lack of incident response planning and lack of overall cybersecurity strategies in place. During a transaction, organizational data and information is changing hands and being shared with many stakeholders. Transparency and communication are essential to a successful deal; however, it’s important to balance that with maintaining a secure cyber environment on all sides throughout the process. That’s where cyber due diligence comes in.

What is cyber due diligence?

Cyber due diligence involves assessing the cybersecurity risks associated with a potential merger or acquisition. It is a critical step in the M&A process and should be performed at least on the company for sale. It helps find potential vulnerabilities and weaknesses that could be exploited by cybercriminals. While it is most often performed by the buyer, it can also be performed by a seller or both merging companies. Cyber due diligence is essential for several reasons.

Why does cyber due diligence matter?

First, cyber threats are becoming more prevalent and sophisticated. As more businesses move their operations online and adopt innovative technologies, they are increasingly becoming targets for cybercriminals. In 2022, the Internet Crime Complaint Center (IC3) received 800,944 complaints, with the potential total loss of $10.2 billion (about $31 per person in the U.S.). As such, it is crucial for businesses to understand the potential cybersecurity risks associated with a merger or acquisition.

Second, cyber threats can have severe consequences for businesses. A successful cyber attack could potentially lead to the theft of valuable intellectual property, exposure of confidential information related to the M&A transaction, monetary loss, damage to brand reputation, and legal liabilities. These consequences can be devastating for businesses, especially in the context of an M&A transaction. A cyber breach during the M&A process can derail the transaction, leading to significant financial losses and damage to the reputations of all involved.

Third, regulatory bodies are becoming increasingly vigilant when it comes to cybersecurity. In many areas, businesses are required by law to protect their customer and employee data from cyber threats. It is therefore essential for businesses engaging in M&A transactions to be aware of their cybersecurity risks and to act in accordance with legal requirements. To not take precautions could result in potential financial loss, breach, or legal implications from an uncovered ongoing incident resulting in data loss, or improper sensitive data handling.

How do you do it right?

So, what does cyber due diligence entail? Cyber due diligence should involve a comprehensive assessment of the target company’s cybersecurity policies, procedures, and practices. This assessment should include an evaluation of the target company’s IT (Information Technology) infrastructure, software, and hardware, as well as its policies and procedures relating to risk assessment, access control, password management, data backup, and disaster recovery.

The assessment should also evaluate the target company’s compliance with relevant cybersecurity regulations and standards, such as the General Data Protection Regulation (GDPR), the Payment Card Industry Data Security Standard (PCI DSS), Health Insurance Portability and Accountability Act (HIPAA) or Gramm–Leach–Bliley Act (GLBA). Additionally, the assessment should consider the target company’s history of cyber incidents, including any past breaches or security incidents and how they responded. You can also use cyber due diligence to think ahead or prepare for a potential M&A event. In other words, it can be a tool used by companies who are getting ready to sell. Having a strong cybersecurity posture could not only improve the odds of potential interest or a sale, but it could also increase the price.

Once the assessment is complete, the acquirer should use the findings to develop a comprehensive cybersecurity plan for the newly merged or acquired entity. This plan should include measures to mitigate any identified risks, such as the implementation of new security controls, employee training programs, and regular vulnerability assessments and penetration testing.

Not a skippable step

In conclusion, cyber due diligence is an essential part of the M&A process. It helps to find potential cybersecurity risks associated with a merger or acquisition and provides insights and data to inform decision making and mitigate risk.

In today’s digital age, where cyber threats are becoming increasingly prevalent, businesses that do not undertake cyber due diligence are exposing themselves to significant risks. On top of the danger of a costly and damaging breach of information, transactions can be sensitive and stressful periods for both sides of the table. Owners and shareholders invest more than just time and money in their organizations, and M&A transitions can have an emotional impact that would only be negatively affected by a malicious cyber event. By conducting thorough cyber due diligence, businesses can reduce and mitigate risk to themselves, their customers, and their shareholders from a cyber breach and the devastating consequences one can bring.

BNN’s Information Systems & Risk Assurance practice offers a suite of cybersecurity and risk assessment services and can assist organizations of all sizes and across industries establish and maintain security and compliance in their IT environments. Coordinating directly with our transaction advisory team, our cybersecurity assurance professionals help buy- and sell-side clients experience a smooth transition for their cyber environment over the course of a deal. Get in touch with a member of our team to discuss what service or customized package could help you achieve your goals.

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