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May 16, 2023 5 minute read

How to Conduct Effective M&A Cybersecurity Due Diligence

Mergers and acquisitions (M&As) are surefire ways of helping companies grow in size and leapfrog their rivals. However, while they are significant investments that promise game-changing returns, neglecting M&A cybersecurity can present serious risks. This is especially true in today’s digital era, where cyberattacks have become more frequent and sophisticated.

Statistics show that there is a cyber attack every 39 seconds and that the cost of cybercrime will hit $10.5 trillion by 2025. You can minimize the risk of becoming one of the victims of such costly cyberattacks, though, by conducting effective cybersecurity due diligence during the M&A process.

As a company leader, the last thing you want is to experience a data breach and the ensuing bad publicity. This guide, then, will provide an easy-to-use framework for conducting effective cybersecurity due diligence during M&A.

What Is Cybersecurity Due Diligence?

Cybersecurity due diligence is the process of evaluating an organization’s security posture from a cyber perspective. It identifies potential vulnerabilities and mitigates risks before, during, and after M&A activities.

Proper due diligence involves assessing the target company’s cybersecurity practices, processes, policies, and infrastructure to ensure that they meet acceptable standards for cybersecurity. The goal is to identify any cyberthreats that could be potentially damaging and create a plan of action to mitigate them.

Why Is Cybersecurity Due Diligence Important?

Cybersecurity due diligence should be at the top of your priority list when you are considering acquiring another company. Here is why:

Understanding the threat landscape

You should take any opportunity to understand the risks and the malicious actors who might target you and the other party involved in the transaction. Cyber risks differ from sector to sector, so the threat landscape will be different for organizations across various industries.

As a result, some acquisition targets will require you to perform more comprehensive due diligence. If the acquisition target will be more involved in the daily business operations, the due diligence process should also be more thorough.

Comparing security standards

Cybersecurity due diligence will help you determine the security posture of the target company and whether it meets your organization’s security standards. You will identify gaps in the target’s security infrastructure and get a better picture of their overall cybersecurity practices. This step ensures your organization does not become a victim of cyberattacks due to vulnerabilities in the newly acquired company.

Identifying the deal-breakers and deal-changers

Cybersecurity due diligence can help you identify deal-breakers or changes the target must make before completing the transaction. These could include outdated security protocols, a lack of encryption standards, and potential legal liabilities from data breaches.

For instance, if a target organization has serious deficiencies in its security practices, it might not be worth the investment. On the other hand, if the issues are only minor, you may be able to negotiate a lower acquisition price to fix them. You can push the target to fix the issues before closing the deal. 

How to Conduct Effective Cybersecurity Due Diligence

The effectiveness of your cybersecurity due diligence during an M&A will mean the difference between a successful integration and a complete disaster. Here are some best practices that you should consider when conducting cybersecurity due diligence:

Assess the target company’s cybersecurity maturity

Cybersecurity maturity is the level of security that the target organization has achieved. It indicates how well the target can identify, respond to, and recover from cyber threats. Assessing the maturity of the target’s cybersecurity posture is key to understanding its overall security posture.

At this step, you should focus on evaluating the following:

  • The effectiveness of their cybersecurity policies and procedures
  • The strength of their IT infrastructure and network security
  • Their employee training and awareness programs
  • Their incident response and business continuity planning

An in-depth cybersecurity maturity assessment will give you a clear picture of the target company’s strengths and weaknesses. In turn, you can make informed decisions regarding the acquisition.

Identifying potential security risks

Identify the potential cybersecurity risks the M&A could introduce to the newly formed entity. Focus on the following areas to identify the risks:

  • Analyze the target’s existing data, internal networks, and security protocol.
  • Evaluate third-party vendors and services used by the target organization.
  • Identify where the target’s security gaps may lie.
  • Identify vulnerabilities in the IT infrastructure, outdated software or protocols, or weaknesses in employee training and awareness programs.
  • Review the target’s historical security incidents and breaches to understand the risk of a future attack.
  • Pay attention to any data breaches or compliance violations that have occurred in the past.
  • Evaluate the breach responses and corrective measures taken to ensure that similar incidents do not occur in the future.

Evaluate the target’s legal standing

Every company is subject to certain cybersecurity laws and regulations. These include the GDPR, HIPAA, PCI DSS, and the NIST Cybersecurity Framework. Evaluating the target’s compliance with these regulations will give you a better understanding of the legal risks associated with the transaction.

At this step, you should also investigate whether the target company has received warnings from regulatory bodies such as the Federal Trade Commission (FTC). Any warning from the commission is a sign that the target company has failed to comply with cybersecurity regulations.

When evaluating the legal standing of a company, you should also consider whether the regulations governing the target company differ from those governing your own. A difference in regulations could mean you must make an additional effort to comply after merging.

Align cybersecurity strategies and priorities

Safeguarding your M&A deal requires both parties to be on the same page about cybersecurity. You must align the target’s cybersecurity priorities with your own to ensure you work together to strengthen the security of the new entity.

Start by analyzing the target’s cybersecurity strategy and procedures. Is it similar to your own? Do they have any additional security measures in place that could be beneficial for you?

Identifying differences in approaches can help you mitigate risks and develop a unified security strategy. For example, if the target organization has a more robust approach to data security, you may need to adjust your own policies and procedures accordingly.

Other key alignment measures include:

  • Ensuring the technology stack and the physical infrastructure of both companies will integrate. Compatibility issues can lead to various security vulnerabilities.
  • Aligning the cybersecurity policies of both companies
  • Reviewing the target’s cybersecurity policies and procedures to ensure they are compliant with your own
  • Training employees from both firms on any new security protocols or procedures
  • Rewriting the cybersecurity measures of both companies to reflect the new entity
  • Assigning people to oversee the compliance of these policies and procedures

Challenges of Cybersecurity During M&A

While conducting cybersecurity due diligence is vital for any type of M&A, you will likely encounter several issues. Some common ones include:

  • Little or no support from the target organization due to fear that transparency will affect the overall acquisition value
  • Little time to perform thorough due diligence due to competition from other potential buyers
  • Poor documentation of past data breaches and incidents
  • Lack of permission to perform external audits
  • Complex cybersecurity regulations

You can overcome these challenges by partnering with an experienced M&A security advisor and cybersecurity stakeholders. They will help you identify and address any potential issues or risks before signing the deal.

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