An M&A transaction comes with numerous cybersecurity issues, as acquiring a company means inheriting its security controls and potential vulnerabilities. However, despite the growing risks, cyber due diligence remains an overlooked step in many deals, with only about 10% of companies conducting a thorough cyber due diligence MA assessment.
The guide below aims to shed light on the importance of investigating the cyber issues of a target company and show that its results may affect the final terms of the acquisition agreement.
What is M&A cybersecurity due diligence?
M&A cybersecurity due diligence involves assessing and mitigating cyber risks in a target company during M&A. This process includes evaluating security policies, controls, and potential vulnerabilities to protect sensitive data and prevent financial or reputational damage. A review should also cover cybersecurity risks linked to third-party vendors and subsidiaries.
Understanding the risks is crucial for buyers, private equity firms, and investment banks, as data breaches can expose intellectual property, customer data, and financial information, leading to significant consequences.
M&A practitioners should also realize that cyber threats are not limited to tech-driven industries — every sector faces risks, making cybersecurity due diligence essential in all M&A transactions. The statistics below demonstrate what sectors suffer from cyber attacks most frequently.
Source: controlrisks.com
Ignoring M&A cybersecurity and failing to identify cyber threats may result in:
- Significant financial loss in the form of decreased revenue, market value, market share, and even regulatory fines
- Ruined brand reputation resulting in the loss of social capital and overall brand failure
Why cybersecurity due diligence is an essential part of M&A deals
Drawing on our own experience, here’s how an acquiring company can benefit from M&A cybersecurity due diligence:
- It helps identify potential risks and vulnerabilities of a target firm in terms of cybersecurity. Verizon discovered Yahoo’s massive data breaches during due diligence, leading to a $350 million reduction in the purchase price.
- It uncovers previous data breaches that the target organization may have suffered but didn’t announce publicly. A data breach at Marriott International’s Starwood division exposed the records of up to 500 million customers, with unauthorized access dating back to 2014—two years before Marriott acquired Starwood in 2016.
- It diminishes the risk of future breaches and liabilities. It helps to avoid fines, litigation, brand reputation damage, and loss of customers.
- It allows assessors to perform a proper valuation of the target’s information assets. This results in a more accurate assessment of the value of the whole business.
- It helps a buyer to preserve an established value in the future. By identifying and addressing cyber risks early, the buyer can mitigate threats that could harm the company’s long-term growth, reputation, and market position.
- It builds trust with stakeholders. Demonstrating thorough cybersecurity due diligence can assure investors, customers, and partners that the company is committed to protecting sensitive information and preventing future breaches.
Related resources: Learn how to identify potential risks with our expert guide on red flag due diligence.
Emerging cyber threats in M&A transactions
Here are the main cybersecurity risks to be aware of during M&A:
1. Ransomware attacks on mid-sized companies
Cybercriminals are increasingly targeting mid-sized companies involved in M&A deals. These companies often have valuable assets but weak cybersecurity, making them prime targets. Once acquired, they can serve as a gateway for attackers to breach the parent company’s secure systems, uncovering hidden vulnerabilities. To mitigate this, strong security controls should be established early in the process.
2. Digital risks
In today’s digital age, the adoption of AI and robotics in M&A deals offers new opportunities but also increases cybersecurity challenges. These technologies often rely on third-party providers, creating potential cybersecurity risks. Additionally, the trend of “AI washing,” where companies exaggerate AI capabilities, can mislead acquirers, leading to poor decision-making and overlooking cybersecurity vulnerabilities.
3. Phishing schemes
Phishing attacks are becoming more sophisticated, especially in the context of M&A transactions. Cybercriminals often exploit the chaos and communication during mergers and acquisitions, posing as legitimate stakeholders to steal confidential information. These scams can trick employees into revealing login credentials or confidential data, leading to serious security breaches. A strong security strategy to detect phishing attempts is crucial.
4. Supply chain cyber threats
As M&A deals often involve a network of third-party suppliers and service providers, these external partners can become targets for cyberattacks. A breach in the supply chain can compromise critical business data and systems, even if the acquiring company has strong internal cybersecurity measures. It’s essential to assess the cybersecurity posture of all third-party vendors, identify vulnerabilities, and ensure they meet the necessary security standards for regulatory compliance.
5. Insider threats
The pressure and uncertainty surrounding M&A can make employees more vulnerable to exploitation by cybercriminals or competitors looking to gain a competitive advantage. Acquiring companies need to implement strict data access controls, monitor employee activities, and conduct background checks to reduce the risk of insider threats during the deal process. Proper breach preparedness is key to managing these significant risks.
Implementation guide to cybersecurity due diligence
A strong cybersecurity due diligence process ensures a secure M&A transaction and prevents costly cyber risks. Follow this checklist to assess and integrate the target company’s cybersecurity effectively.
1. Identify security risks and protections
Start by evaluating the target company’s overall cybersecurity posture to understand potential risks and necessary improvements:
- Assess the size and complexity of the company’s IT infrastructure.
- Consider what cyber threats the company is most likely to suffer from.
- Review existing security policies, control procedures, and protection measures.
- Examine third-party and supply chain security risks.
2. Conduct a thorough security assessment
The final list of items to check may vary depending on the industry. Below are the common security diligence assessments that all acquirers want to conduct:
- Technical assessments. Analyze how data flows between the target company’s network systems and check for cloud, third-party, or on-premise dependencies.
- Data protection. Review how the company collects, stores, and secures personal and sensitive data.
- Regulatory and legal compliance. Ensure adherence to GDPR, ISO 27001, NIST, or other industry-specific regulations. Determine if additional consent is needed to use customer or private data after the acquisition.
- Incident history. Examine past security breaches, their impact, and the company’s incident response capabilities.
- Employee cybersecurity awareness. Assess training programs, onboarding/offboarding processes, and human error risks.
3. Create a strong integration strategy
Cybercriminals often attack newly merged companies because this is when network systems are the most vulnerable. Here’s what to do to prevent data breaches during integration:
- Define your data integration teams and leaders.
- Develop a clear strategy for the entire data integration process so that every team member knows what to do and how to do it.
- Implement robust security tools and technologies, such as multi-factor authentication, encryption, and endpoint protection.
- Train employees on cybersecurity best practices to reduce human error.
- Define where your data integration system will be hosted — in the cloud or on-premise.
- Create reliable backup plans before starting the integration.
- Monitor progress, adjust and set new goals, and make data integration a step-by-step process.
How data rooms enhance cyber due diligence in M&A transactions
Based on our experience, data rooms for due diligence are essential for cyber due diligence. They provide advanced security features, centralized storage, and efficient collaboration, making the process more secure and streamlined.
Here’s why M&A professionals rely on VDRs:
- Centralized data storage. Store all sensitive documents in one secure place.
- Secure file sharing. Exchange data safely due to numerous security features like permission-based user roles and data encryption.
- 24/7 accessibility. Work from any device, anytime, with real-time updates on new files.
- Effective collaboration. Simplify and streamline collaboration using features like chats, comments, notifications, and video conference programs.
- Due diligence automation. Speed up the process with AI-powered document indexing, automated reports, and advanced search functions.
- Cost-effectiveness. Avoid unnecessary expenses on renting and maintaining physical data rooms.
Since virtual data room security is a key reason companies rely on VDRs for cyber due diligence, let’s have a look at the security measures vendors take to ensure their customers’ data is protected.
| Security measures | Description |
| Document security | Operational security measures include strict access policies, biometric entry authentication systems, and thorough employee background checks. Dynamic watermarks permit admins to see who viewed, edited, or printed a file. Remote shred lets admins adjust user permissions remotely, even after a document has been downloaded onto a user’s device. Fence view prevents unauthorized file viewing by allowing VDR users to see only particular sections of a document. |
| Access security | Two-factor authentication (2FA) requires a password and a single-use code sent to a user’s mobile phone. Granular access allows administrators to control who can view, edit, or download a document. Time and IP access restrictions let admins restrict logins from a particular IP address and set rules for file session duration. |
| Compliance | ISO27001 certification proves that a data room’s information security management system (ISMS) meets the requirements of risk management. SOC 1 certification assures confidential financial information is handled securely. SOC 2 certification identifies how businesses should manage sensitive customer documents. |
Key takeaways
- Cybersecurity due diligence is essential in M&A to prevent financial losses, protect data, and ensure compliance.
- A strong risk assessment helps uncover hidden cybersecurity threats in the target acquisition before the deal closes.
- Cyber threats like ransomware, phishing, and insider attacks can disrupt the deal lifecycle if not properly addressed.
- Virtual data rooms enhance cybersecurity due diligence by offering centralized, encrypted storage and secure document sharing.
- Proactive cyber resilience strategies ensure long-term protection against evolving cyber threats in M&A transactions.
