Mergers and acquisitions have historically been complex undertakings that involve significant financial, legal and operational considerations, but in today’s digital age, cybersecurity is one of the most critical and most often overlooked aspects during the rush to complete a transaction.

In a study conducted by Aon, only 17 percent of companies are estimated to have adequate security measures in place as rapid digital evolution continues to accelerate. In addition, while roughly 42 percent of survey respondents agreed that failure to identify cybersecurity risks in a transaction could cause a deal to implode, only 25 percent admitted that cybersecurity was an important focus area of the due diligence process.

From the inception to the execution of a deal and through the integration of the acquired company, all stages of an M&A transaction are subject to heightened risks of cybersecurity threats and attacks. If left unchecked, these could leave both entities with significant financial losses, reputational damage, legal liabilities and in extreme cases, could affect whether the deal goes through. 

This article explores the pivotal role of cybersecurity in M&A deals and highlights the steps that involved parties can take to mitigate associated risks.

DUE DILIGENCE: CYBERSECURITY ASSESSMENT

Cybersecurity due diligence is an essential first step in any M&A transaction. It involves a comprehensive evaluation of the company’s cybersecurity posture to identify vulnerabilities, potential risks and past incidents. 

Key components of this assessment include:

• Cybersecurity Policies and Procedures: Review the company’s policies, procedures and protocols and assess their adequacy and effectiveness in protecting sensitive data and preventing breaches.
• Incident History: Investigate any past cybersecurity incidents, including data breaches, ransomware attacks and other security events to understand the impact of these incidents and the measures taken to address them.
• Technical Infrastructure: Examine the networks, servers and software applications that comprise the technical infrastructure and identify any outdated or unsupported systems that may pose security risks.

Assessing the key cybersecurity components above as part of the due diligence process can help organizations identify and mitigate potential risks, protect sensitive data and preserve the value and integrity of the transaction.

MITIGATING CYBER RISKS

Identifying cyber risks is only the beginning; developing a strategy to mitigate these risks is crucial for a successful M&A deal. 

Steps to mitigate identified cyber risks include:

• Risk Remediation Plan: Create a detailed plan to address identified vulnerabilities and weaknesses. This plan should be rigorously tested on a regular basis and outline specific actions, timelines and responsible parties.
• Robust Cyber Defenses: Implement additional security measures to enhance the company’s cyber defenses. This may include deploying advanced threat detection tools, enhancing encryption and strengthening access controls.
• Employee Training and Awareness: Ensure that employees of the company receive cybersecurity training on a regular basis and are aware of best practices. Cybersecurity is not solely a technical issue but also a human one.

Mitigating cyber risks with the strategies above helps safeguard the value and security of a transaction.

PROTECTING SENSITIVE DATA DURING THE M&A PROCESS

Throughout the M&A process, sensitive information is exchanged between parties. Protecting this data is crucial to prevent unauthorized access and data breaches. 

Key practices for safeguarding sensitive information include:

• Data Encryption: Utilize strong encryption methods to protect data, both in transit and at rest. This ensures that even if data is intercepted, it remains unreadable to unauthorized parties.
• Access Management: Implement strict access controls to designate which individuals have access to each system and to what degree of depth to ensure that only authorized individuals have access to sensitive information. Multi-factor authentication (MFA) should also be used to enhance security. Data shows that roughly 80 percent of security breaches involve a compromised privileged account. Privileged accounts have control and access over large amounts of company data, which can amplify the magnitude of an attack compared to a compromised regular user account.
• Secure Communication Channels: Use secure communication channels, such as virtual data rooms (VDRs), for sharing sensitive documents. While unencrypted email is generally considered insecure, VDRs offer controlled access and robust security features.

Beyond preventing data breaches, taking the steps above to protect sensitive data will maintain a sense of trust and integrity throughout the M&A process.

POST-MERGER INTEGRATION 

After a transaction has closed, proper planning and execution are essential to ensure a seamless and secure integration of the merged entities. 

Key considerations include:

• Unified Cybersecurity Strategy: Develop a unified cybersecurity strategy that aligns with the overall business objectives of the merged or acquired entity. This includes standardizing cybersecurity policies, procedures and technologies.
• IT System Integration: When integrating IT systems and networks, conduct thorough security assessments to identify and address potential vulnerabilities.
• Continuous Monitoring: Implement continuous monitoring to detect and respond to cyber threats in real time. This includes monitoring network traffic, user activities and system vulnerabilities.

By properly aligning systems and processes to maintain data integrity, the post-transaction entity emerges stronger and more unified.

LEGAL AND REGULATORY COMPLIANCE

Cybersecurity in deals is also influenced by legal and regulatory requirements — compliance with relevant laws and regulations is crucial to avoid legal liabilities and penalties. 

Key legal and regulatory considerations include:

• Data Privacy Laws: Understand the company’s regulatory environment and comply with data privacy laws applicable to the company’s operations. This includes the General Data Protection Regulation (GDPR) in the EU and the California Consumer Privacy Act (CCPA) in California.
• Breach Notification Requirements: Be aware of breach notification requirements that may apply if a cybersecurity incident occurs. Timely and transparent communication is essential to comply with legal obligations and maintain trust.
• Contractual Obligations: Review and negotiate contractual obligations related to cybersecurity. This includes representations and warranties regarding the company’s cybersecurity posture and potential liabilities. Organizations should ensure that they have sufficient insurance and indemnity against any potential liabilities arising from a cybersecurity breach.

Taking these into account to ensure legal and regulatory compliance can assist organizations in mitigating potential legal penalties and avoiding reputational damage.

In an era of increasing cyber threats, prioritizing cybersecurity in M&A deals is not just a best practice but a necessity. Implementing robust cybersecurity measures enhances the value, resilience and long-term success of the merged or acquired entity and ultimately safeguards the interests of all stakeholders involved. To learn more about how businesses should prepare for and execute a successful transaction, please reach out to GHJ’s Transaction Advisory Services Practice. To learn more about how to identify and mitigate cybersecurity risks and learn more about the cyber risk landscape, please reach out to GHJ’s Cybersecurity Practice.

This publication contains general information only, and GHJ is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. GHJ shall not be responsible for any loss sustained by any person who relies on this publication.