Importance Of Cybersecurity During The M&A Lifecycle

Cybersecurity during the M&A lifecycle has become a significant concern in modern-day transactions. That’s because dealmakers increasingly rely on technology and AI to assist them through every step of the process.

Software and SaaS services are valuable tools, starting with evaluating acquisition targets through due diligence and integration. Using AI to assist with regulatory compliance, drawing up agreements, and other documents, and the final signing is also catching on.

However, relying on the Internet opens up the risks of cyber leaks and sensitive data becoming vulnerable to hackers.

Software tools can speed up the data analysis process, eliminate human error, and bring in a host of other benefits. But, they also come with risks that dealmakers should be aware of and prepare to deal with. Prioritizing cybersecurity and bringing in experts when deploying IT tools is advisable.

Failure to recognize and address cyber and privacy risks can create hurdles in the deal’s closing. Non-compliance with regulations related to cybersecurity can make it harder to get approvals from the concerned authorities.

Identifying data breaches that have gone unreported can result in acquirers terminating the M&A deal. Before initiating the process, dealmakers should adopt robust cybersecurity policies and conduct meticulous audits of the two companies’ IT assets.

Dealmakers keen on closing M&A transactions quickly tend to speed up the due diligence process. However, overlooking cyber threats can prove to be a costly mistake. This is why retaining and following the recommendations of accredited cyber teams is advisable.

Next, they should take measures to isolate the vulnerabilities and work out the right measures to remediate and mitigate them. That’s the significance of cybersecurity during the M&A lifecycle. As a result, at least 60% of companies entering into M&A deals focus on cybersecurity as part of their due diligence.

This figure will undoubtedly rise as IT takes center stage in operations in the coming years.

Cybersecurity Concerns When Planning an M&A Transaction

Identifying Risks

The first stage of an M&A lifecycle, regardless of the business vertical, is to conduct a detailed cyber audit. Acquirers must retain the services of expert cyber forensics to check the company’s operations and evaluate existing security protocols.

Their job is also to identify gaps in security and assess the company culture regarding cyber vigilance and awareness. Most organizations integrate technology, AI, and the IoT in their day-to-day work and train their employees on cybersecurity protocols.

These steps may include robust passwords, multi-factor authentication, and using company-assigned hardware that integrates necessary firewalls and other protection.

Companies should also have policies for opening unknown emails, downloading files, and other media that can potentially have embedded threats.

Securing Personally Identifiable Information (PII) that customers, vendors, and other third parties may have shared with the firm is crucial. Not only is this data a part of the IP assets, but breaches can result in penalties and fines that can potentially cripple the company.

Dealing with ransomware, Trojan horses, malware, and zero-day vulnerabilities are only some of the essential practices targets should have. Primarily because close to 88% of data breaches occur because of human error.

Performing these due diligence checks is an essential step acquirers take before making an offer of purchase. They may also evaluate the target for security policies, regulatory compliance, and fourth-party risk.

That’s because the law holds organizations accountable for the risks in the supply chain ecosystem. Any risks that vendors or their vendors are exposed to can percolate down to the purchaser, resulting in non-compliance.

Such risks are particularly important for sectors like finance, healthcare, logistics, and insurance. While some risks are minor, others may have a crucial impact on the business’s operations and incur higher penalties. For this reason, determining risk tolerance is part of the cybersecurity assessment.

Mitigating Risks

Having identified existing and potential risks, acquirers can move forward with damage control. Both participants should work on mitigating or eliminating risks entirely. Buyers will take on the risks arising from historical breaches, which is why they must resolve existing issues.

Acquirers may also require the seller to take steps to repair gaps in cybersecurity before the sale. Or, that the merger agreement includes covenants and contingencies that allow the buyer to terminate the deal. That is, if any major threats arise before the deal closes finally,

Buyers also have the option to require that funds are placed in escrow to cover any losses or fines. Since cybersecurity during the M&A lifecycle is a continuous and consistent process, dealmakers should institute protocols.

These protocols will include steps to conduct passive threat hunting and researching the data and information available on public forums. This research can help understand upcoming threats and detect possible data leaks that have occurred without the company being aware.

A cyber threat integrated into the target can impact the buyer’s company, making both organizations vulnerable to risks. Not only can these risks affect the surviving company’s operations, But they can also impact its reputation, integrity, and revenues. Losing customer trust can be a crucial risk.

Cyber threats and data leaks also extend to the digital assets the buyer intends to acquire. These may include Intellectual Property and Intangible Assets that add value to the sale.

Cybersecurity Concerns During Post-Merger Integration

Depending on the type of merger or acquisition transaction, dealmakers will want to assess the extent of integration. The legacy company’s core objectives will also dictate whether the integration is full, soft, or hybrid. Accordingly, cyber teams develop the appropriate risk management strategies.

For instance, post-merger, the target may maintain autonomy, in which case, cybersecurity concerns extend to financial reporting and processing accounts. However, if the target continues to operate as a subsidiary, the buyer will retain a 51% to 99% controlling interest.

Since autonomous and subsidiary companies maintain independent operations, cybersecurity might not be a crucial concern. When mergers end in complete symbiotic integration or absorption, both parties must determine their respective roles and responsibilities.

Working out these details at the onset will ensure that the transition proceeds securely and efficiently. The first step in the right direction is to work out standardized procedures for cybersecurity during the M&A lifecycle. That’s how they can share risk management more effectively.

During the due diligence, cyber teams may conduct an analysis of the target’s cyber and IT systems. But, once the deal closes, the acquirer must take intrusive steps to identify the full scope of the cyber risks. These steps include penetration testing and threat hunting.

Some of the core IT security threats include Distributed Denial-of-Service (DDoS) attacks, exploit kits, ransomware, and advanced persistent threat attacks. Drive-by download attacks, botnets, phishing attacks, viruses, worms, malvertising, and human error are other vulnerabilities to secure.

Prevention and Protection Strategies

While identifying and mitigating existing threats is crucial, acquirers must also take steps to prevent and protect their IT systems. Considering that the IT sector is rapidly evolving, new threats always emerge. With this possibility, companies must install endpoint protection and response (EDR).

EDR is effective for dealing with advanced threats that have penetrated deep into the IT ecosystem after evading front-line defenses. Cyber teams are better positioned to predict cyber attacks and deploy preventive measures more effectively using this platform.

Constant monitoring is also a crucial step in cybersecurity during the M&A lifecycle. As the merging companies integrate their IT systems, significant risks can emerge, with human error being a first.

Round-the-clock surveillance and real-time threat detection can counter threats from competitors and cybercriminals. Dealmakers should also be prepared for corporate espionage and spyware designed to steal valuable IP assets that drive the merger.

Hacking incidents intended to undermine the legacy company’s integrity is another real threat cyber experts should prepare for.

Cybersecurity Concerns After Completing Integration

Companies that rely primarily on IT systems to operate and provide products and services need to deploy cyber threat intelligence. Retaining expert teams will monitor the surviving company’s Key Risk Indicators (KRIs) to monitor and deter attacks consistently.

Ensuring the threat remains within acceptable limits and measuring security systems for efficiency is crucial. The company should also have incident response protocols so stakeholders know how to handle a cyber-attack.

Employees should also be ready to respond to data breaches or distributed denial-of-service attacks. Hiring a Chief Infomation Security Officer (CISO) or a professional in a similar capacity is a smart move. Outsourcing the task to third-party teams is also an option.

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Why Cybersecurity During the M&A Lifecycle is Important

Operational Disruption

The foregoing sections have talked about how cyber threats can endanger the participating firms’ IT systems, leading to operational disruptions. Loss of the legacy company’s integrity, customer trust, data, and IP are only the initial concerns.

As the two companies begin integrating their technology, they must deploy new systems to ensure compatibility and scalability. During the upgrade, they become vulnerable to cyber attacks that may remain unidentified because of the disruption. Increased levels of activity can also open gaps in security.

The company also risks malicious or unauthorized access that could go unnoticed since the teams are in the aligning process. This threat becomes more critical in the face of IoT capabilities that most companies adopt.

Unvetted IoT devices slipping through the cracks become targets for phishing and malware.

Data Breaches During Integration

Data is the lifeblood of organizations, and they use it not just to provide products and services. But also to drive their decision-making. Statistics show that 91.9% of firms derive measurable value from their data and data analytics investments.

Data can also be the key driver in the M&A transaction. This is why teams must adopt secure measures when combining and aligning these assets during integration. Any slip-ups and human error can risk data leaks and the information becoming open to hackers.

Acquiring Smaller Startups

While larger companies have the resources to secure their systems, smaller startups are at a higher risk. When buying these startups, acquirers should be aware of the target’s lack of cyber intelligence and dormant threats.

As a result, the buyer may have to invest more time, money, and resources to assess its security posture. The target’s records and documentation will need detailed scrutiny and examination for signs indicating threats.

Penetration testing, surveys, and interviews may determine whether buyers want to proceed with or terminate the deal.

Reorganizing Post Integration

Reorganizing the company after integration may involve relocation to new premises and hiring or firing personnel. Disruptions and dissatisfaction are commonplace regardless of how well the management plans the integration.

As the workforce from both companies attempts to align their roles and responsibilities, unexpected cyber threats can emerge. For this reason, the cyber teams should have failsafe measures to deal with these contingencies and avert the threats.

More importantly, they must have remedial processes in place to recover from the damage, complete with cyber insurance policies. And any other plans to minimize the monetary losses to the company.

The Takeaway

Adopting IT, AI, and IoT has become an indispensable part of the business landscape, but it has also raised risks. Cybersecurity during the M&A lifecycle is only one of the aspects. Companies must stay on top of their cyber capabilities to deter threats at any given time.

Since a cyber threat can result in a terminated deal, participants should be ready with cyber concerns starting at negotiations. Dealmakers should be ready with assigned roles and responsibilities about how the transaction will progress.

They should institute protocols to manage the protection of their IT systems, data, and IP assets. Investing in the right tools and expert cyber teams is also crucial. Most importantly, they should be prepared with robust risk evaluation metrics so they can stay vigilant.

Top-notch cybersecurity streamlines the entire M&A process through the integration process. It also ensures that the surviving company resumes operations quickly post-integration, achieves synergies, and starts to scale quickly. That’s how dealmakers can get total value from the M&A transaction.

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