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The criticality of Data Security during M&A

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According to an analysis by Forbes, more than a third (40%) of acquiring companies involved in a merger and acquisition transaction revealed a cybersecurity issue during the acquired company’s post-acquisition integration

The prime purpose of M&A is synergy or ensuring that the newly merged company’s value and performance exceed the sum of all its freshly combined sections individually. The sooner the combined entity achieves synergy, the sooner a company’s financial performance is bound to improve.

Today, Mergers and Acquisitions are a way of life for financial institutions, and so many pertinent business issues bubble up whenever an M&A is discussed.

But when does information security enter the discussion?

Mergers and acquisitions (M&A) require meticulous attention to detail to guarantee that newly acquired systems and processes act according to rules and regulations. As these systems become more intricate, compliance officers entrusted with identifying and assigning cyber risk levels to target organizations face a much more formidable challenge.  In such a situation, businesses must devote time and resources to design effective data security programs to secure data for the companies or, in terms of M&A, rigorous cybersecurity compliance due-diligence programs. Having a compliance due-diligence program in place would ensure that all merger or acquisition targets are reviewed thoroughly before any prospective deals are closed. As a result, you’ll be able to keep track of the cyberhealth of your investments and assets post the acquisition.

According to an analysis by Forbes, more than a third (40%) of acquiring companies involved in a merger and acquisition transaction revealed a cybersecurity issue during the acquired company’s post-acquisition integration. Verizon’s discovery of a previous data breach at Yahoo! after executing an acquisition is one of the most well-publicized examples of an M&A-related cybersecurity dilemma. This discovery almost wrecked the deal, resulting in a $350 million reduction in Verizon’s purchase price. Not only this, but they also had to pay a $35 million penalty to resolve securities fraud allegations brought by the US Securities and Exchange Commission (SEC) and an additional $80 million to settle securities litigations brought by disgruntled shareholders.

This post will highlight the factors that need to be considered while implementing cybersecurity due diligence during mergers and acquisitions and outline how effective security compliance due-diligence at your organization can be enabled.

What is Cybersecurity Compliance Due-Diligence?

The process of discovering and resolving cyber risks within your internal or third-party network ecosystem is known as cybersecurity due-diligence. When it comes to mergers and acquisitions, businesses must always collect information about their target’s current cybersecurity posture and IT security efforts. In that way, they’ll be aware of any cyber threats and vulnerabilities they’ll inherit if a new entity or organization is formed.

The main goal of cybersecurity compliance due diligence is to detect and analyze any ongoing threats to an organization’s cyberhealth and determine if they have a compliance management system in place to respond appropriately to these risks.

Reaching this goal is a process in itself that can be further segregated into these three parts:

Creating a compliance risk profile of the target firm

A compliance risk profile is a quantitative assessment of the various kinds of compliance risks an organization is currently exposed to.  The goal is to give the acquirer a clear picture of their target organization’s overall risk by categorizing the threats they will face and the dangers they are going to pose. Risk assessments are excellent tools for companies wanting to create risk profiles because they provide transparency into the kinds of risk and severity of threats they can face shortly.

Look for red flags

Any suspected weakness that a cybercriminal can use to obtain access to a network can be referred to as a red flag. It is critical to reliably determine vulnerabilities within a company’s network environment while performing merger and acquisition due diligence by using specific risk assessment techniques. 

If you look at a company with a proactive cybersecurity culture, employees would be educated on security best practices, reducing their cyber risk exposure. Furthermore, if a target group or company would have an incident response and disaster recovery plan already in hand, that would demonstrate their readiness to respond to an attack, thereby reducing the risk of data leaks.

Investigate previous infractions

Examining an organization’s reaction to previous compliance breaches is an essential part of due-diligence during mergers and acquisitions. This gives them an idea about how they can handle future violations. Furthermore, they can investigate the steps taken to rectify the errors and frame programs to ensure that they don’t make redundant mistakes.

Apart from the abovementioned, there are other things to keep in mind to conduct due diligence during and after the merger and acquisition phase, aside from recognizing cyber threats.

Below we are trying to list a few ways of securing successful cybersecurity compliance due diligence process:

Checking for system compatibility

When it comes to assessing cybersecurity compliance, system integration can turn out to be problematic. A large part of evaluating cybersecurity compliance is looking at the programs a target organization has in place, which often requires your system’s compatibility. Ensuring that your systems are compatible when doing your due diligence can be an effective way to start the process. Many applications can help with system integration for analysis. Post-acquisition, having integrated systems, strengthens security by eliminating any potential security gaps caused by redundant network operations.

Making sure that the data is correct

Due diligence for cybersecurity compliance usually entails moving vast quantities of sensitive data between systems to be well examined. The difficulty here is ensuring that data is not tampered with when in transit, leading to an incorrect evaluation of cybersecurity systems. Here, too, system compatibility is crucial, as integrated systems minimize the risk of data corruption during transmission. By centralizing findings, data compatibility also supports strategic decision-making.

Evaluating third-party relationships

You would be held liable for any cybersecurity compliance events that occur within your target organization’s vendor ecosystem once you have already been acquired. For this reason, it’s critical to assess their third-party security posture during the M&A process. Third-party risk assessments, for example, would help you gain insight into vendor risks, allowing you to address any potential compliance issues before finalizing a merger or acquisition.

How can MergerWare help you monitor Deal risks?

MergerWare provides a comprehensive M&A playbook defining all key actions starting from pre-deal phase, due-diligence, Day-1, and subsequent phases of deal integration.

All rules of engagement between buyer and seller organization, legal do’s & don’t activities to avoid, acceptable activities prior to the merger are part of the playbook guiding principles that help the legal team avoid any critical mistake. Data protection, cybersecurity critical assessment, and reporting are also embedded within the platform.

As M&A professionals, we understand the importance of data security and maintaining the confidentiality of information in an M&A context. This key factor is incorporated into the way we have designed and built our entire platform. Do you want to go for an end-to-end M&A process that is not only effective and streamlined but also adheres to all the applicable regulations?

Visit and schedule a demo with us to learn more.