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Mergers & Acquisitions

The Importance of Cybersecurity in M&A Due Diligence

At a Glance

Main Takeaway

In the merger and acquisitions (M&A) due diligence process, identifying the target’s cybersecurity practices is vital to protecting your finances and assessing risk. 92% of data breaches in 2022 were cyberattacks, and the expected cost of cybercrimes is projected to reach $10.5 trillion by 2025.

Next Step

Understand the importance of cybersecurity in M&A due diligence and how to perform cybersecurity due diligence when acquiring a target company.

The Basics of Cyber Due Diligence

Cybersecurity due diligence broadly refers to identifying and addressing various cybersecurity risks in a business’ IT network. This process helps discover and correct cybersecurity vulnerabilities that cybercriminals could target and exploit. Cybersecurity aspects to consider include:

  • Cloud storage vulnerabilities and protections
  • Data management processes
  • Protections against malware, viruses, and ransomware
  • Proactive cybersecurity strategies
  • Post-attack procedures
  • Security controls
  • Infrastructure setup and risks
  • Compliance processes
  • Data privacy measures

Implementing robust cyber due diligence procedures helps keep your business less vulnerable to a cyber-attack and your client data safe. Having strong due diligence protocols in place also enables you to develop relationships with other companies that are more likely to do business with companies that maintain solid cybersecurity practices for the safety of their clients and reputation.

Depending on the industry, a certain level of cybersecurity due diligence is required to maintain compliance. For example, companies in the healthcare sector must enact cybersecurity features that adhere to HIPAA regulations, and those in the financial and retail industries must keep consumer data private and secure according to FDIC rules.

Why Cyber Due Diligence is Essential in M&As

Performing cyber due diligence during an M&A transaction should be an essential step in the due diligence process. In general, M&A due diligence helps you understand the target organization’s operations, including:

  • Supply chain
  • Marketing
  • Finance
  • Technology
  • Human resources
  • Sales
  • Cybersecurity

As the acquiring company, it is important to take an in-depth look at the target’s existing cybersecurity measures and potential risks. This assessment may also involve looking at the target company’s third-party vendors and subsidiaries, if applicable.

By performing cybersecurity due diligence, you can better estimate the risks associated with the potential transaction and how much effort and expense you may have to put forward to bring the existing cybersecurity system up to an acceptable level. The outcome may impact the terms of the transaction.

How to Implement Cyber Due Diligence

When performing cybersecurity due diligence during an M&A transaction, focus on the following:

Assess the Target’s Data Inventory

During due diligence, you must access the target company’s data inventory. This information is typically found on a document called a data map that provides a broad-level overview of the company’s data, where it is stored, and how it is transferred. If the company does not have a data map, you must create one as part of your due diligence.

The data map lets you pinpoint current cybersecurity risks and identify those that may become problematic once you acquire the company. Data transfer is a significant element in an acquisition, so creating and accessing the data map is crucial to a smooth transfer of information. It also allows you to implement security measures proactively, so no breaches occur when the acquisition is complete.

Perform Internal and External Assessments

Performing internal and external risk assessments is necessary for cyber due diligence. These assessments help you understand the target company’s potential risks to plan for expenses and efforts needed to improve cybersecurity controls.

To begin this due diligence phase, start by gathering information on the company’s past cybersecurity issues. Have they experienced a data breach or cyber-attack? If so, how did they handle the problem, and what measures did they implement to prevent another occurrence?

From this information, you can gain an internal measure of how the company currently handles cyber risks so you can make changes after the acquisition.

You should also perform external assessments. These assessments vary and can be executed by your cybersecurity team or a third party. Visit the Cybersecurity and Infrastructure Security Agency’s Cyber Resource Hub for information on assessment protocols and evaluations, such as the Cyber Resilience Review (CRR) Assessment and the External Dependencies Management (EDM) Assessment.

Create a Strong Integration Strategy

Preparing for an acquisition requires creating a solid integration strategy for completing the transaction. Many cybercriminals target newly merged companies because this is when network systems are at their most vulnerable. The transition often creates gaps in the companies’ cyber systems, opening them up to attack. You must work with your internal IT team or third-party vendor to enact cybersecurity protocols for a secure transfer of information.

Challenges to Consider

Even with the best cybersecurity due diligence strategy, you may encounter challenges when assessing your target’s cybersecurity infrastructure and practices, such as:

  • Lack of support or collaboration from the target company
  • Not enough time for thorough due diligence
  • Unknown past breaches of security incidents
  • Minimal or nonexistent documentation
  • Restricted access or permissions
  • Inadequate level of technology used by the target company

Mitigate these challenges by working with a professional M&A strategy development firm like Windes. Windes can assist throughout every phase of the M&A process, including cybersecurity due diligence. We help you prepare, analyze, and research your target company’s cybersecurity vulnerabilities to ensure you acquire a solid asset.

Implement a Strong Cyber Due Diligence Strategy with Windes

Taking a proactive approach to cyber due diligence is essential to the success of your M&A transaction. Work with Windes to develop a robust M&A strategy that includes all due diligence factors – tax liabilities, cybersecurity, and financial risks.

Our Mergers & Acquisitions Strategy Services ensure your M&A transaction is handled smoothly and results in a profitable acquisition. We serve businesses and high-net-worth clients in Los Angeles, Orange County, and beyond. We offer financial, tax, and business planning strategies to maximize efficiencies, minimize taxes, and take your business to the next level.

Contact Windes today to discuss your M&A objectives and find out how we can support you through the process.

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