M&A Security: How Inadequate Cybersecurity Is a Risk to Your Merger Plans

Cybersecurity Advice for Acquiring and Target Companies

If you have inadequate M&A security, your planned merger could be sunk. And any plans to float your business could go underwater, too.

While cybersecurity is the responsibility of the acquiring firm after a merger has been finalized, if you’re the target company, a security breach at the wrong time could jeopardize your plan ─ and leave your business in a highly fragile position.

The last thing you want during the merger is a data security issue, so due diligence is crucial.

The Implications of Inadequate M&A Security

If you’re not worried by poor security measures through a merger or acquisition, you should be. What looked like a dream ticket could suddenly become a nightmare.

As the acquiring company, inadequate cybersecurity of the target company can affect your compliance, trustworthiness, customer loyalty, revenue, and profitability. It could land you in hot water with regulators and lead to legal costs and compensation payments.

As the target company, vulnerabilities and/or data breaches could squash your valuation or even scupper the deal entirely. You, too, may find that you must pay fines, legal costs, and compensation. And let’s not forget how unhappy your investors will be.

The answer is to do your due diligence.

Due Diligence for Target Companies

Target companies should be proactive and conduct due diligence on themselves. Take a systematic and measured approach. Here are examples of strategies and steps you can take ahead of a merger:

Conduct a cybersecurity audit

Employ a third-party security specialist to conduct a cybersecurity audit.

  • List your technology inventory
  • Check your security policies and procedures
  • List all security measures
  • Self-audit to identify security gaps

Make sure you are using the proper security framework

The two most widely recognized security frameworks are SOC 2 and ISO 27001. Which you should use depends upon the type of company you are in and where you are located. We can help you decide which cybersecurity framework is right for your business.

Benefits from penetration testing and risk assessments

A penetration test or risk assessment will help you evaluate your security. You’ll be updated with any issues found, and a comprehensive report will help you understand and remediate any shortfalls in security measures.

Our solutions have been put together specifically to help small and medium-sized businesses meet and beat security expectations.

Due Diligence for Acquiring Companies

If you are the acquiring company, you’ll want to ensure that you manage the security risk embedded within the acquisition and presented by the target company. Your due diligence process should include:

  • Identifying and understanding the risks that may challenge the target company. You’ll need to assess based on industry, geography, vendors, and its products and services, as well as its systems and networks, software, and hardware.
  • Understand the target’s security policies and procedures and how it manages its data. Does the target company meet current regulatory requirements, and does it employ best practices in cybersecurity?
  • Review the target company’s latest security audit.
  • Review any data breaches, previous security-related penalties, and litigation (and outcomes).

You may also need to consider security spending, cyber insurance, cybersecurity training, encryption, access controls, disaster recovery planning, certifications, vendor risk assessments, etc.

In addition, you should:

  • Compare your security policies
  • Implement network segregation
  • Map the target company’s systems and processes against your own, and determine how best to integrate
  • Hire a third-party company to conduct a security audit
  • Meet and evaluate the target company’s security team

Post-M&A Security Issues to Address

When the merger is signed and sealed, you cannot afford to relax about security. You will need to:

  • Audit and manage access controls
  • Improve perimeter security measures
  • Centralize IT management and cybersecurity teams
  • Ensure that the combined group adheres to its regulatory requirements
  • Monitor and maintain cybersecurity policies, strategy, and implementation

Don’t Forget Cybersecurity Insurance

While cybersecurity due diligence is mission-critical during M&A transactions, cybersecurity insurance should also be adopted to protect against cyber risks. You may also benefit from representation and warranties insurance to cover misrepresentation or breach warranties in the merger agreement. Such insurances are available to acquiring and target companies, lasting for up to three or six years.

Underwriters to these policies usually examine the target company’s cybersecurity history, security measures, and adequacy of existing insurance. They typically rely on the acquiring company’s due diligence, so it is essential to ensure that any due diligence work meets the standard set out by the insurer and industry regulators.

Why M&A Security Due Diligence Is Crucial

Due diligence on cybersecurity before, during, and after a merger is crucial to the success of a merger. Effective due diligence will reveal risks and vulnerabilities, the work needed to remediate shortcomings, and the costs involved. This insight will provide an adequate foundation to negotiate the best deal.

Understanding the gaps and differences between the security strategies, policies, and practices of the acquiring company and its target will aid in the integration work that must be completed for the merger to succeed. This will allow both parties to focus on creating value within the merged organization and maximize the return on the investment for both the target company’s investors and the merged organization’s business.

To discover how Tiro Security can help you ensure that you maximize your return on investment with effective cybersecurity due diligence of M&A security, and to learn more about M&A cybersecurity insurance, contact us today.

Posted in