Why Risk It? Understanding Cybersecurity Due Diligence

In an era of digitization, cyber attacks have soared, becoming one of the most widespread and damaging threats to our information security. Avoid falling victim to data breaches with a comprehensive due diligence report that gives you full visibility into your target’s vulnerabilities.

Today, most enterprises are completely dependent on digital data and network systems, and while these virtual transactions bring tremendous economic value, there are also significant vulnerabilities and security risks looming in the sidelines.

In the context of an M&A transaction, it is critical to ask the right questions to understand the risks tied to a target’s vulnerabilities. Does the target have the appropriate cyber defenses needed to protect itself in the event of a breach? What is the potential scope of damage that may occur? With an in-depth evaluation of a target’s systems and security protocols, acquirers can know the true value of the target company and structure the deal according to these insights.

What’s at Risk?

Cyber intruders can operate from anywhere in the world, but with the right review process in place, businesses can rest assured that their information assets are secure. However, without a strong defense, cyber criminals can steal, change, or destroy company information, exploit and harm company systems and operations, and irreparably impair your reputation. As cyberattacks grow more and more ubiquitous, it is critically important to conduct cybersecurity due diligence so that you know the full extent of vulnerabilities. With today’s dependency on network systems, this isn’t news, but what does this mean for M&A deals?

There are a surprising number of M&A transactions that become blindsided by the hidden cybersecurity risks embedded in a target company. Acquirers are unaware of or underestimate the disruptive impact of cyber attacks, often foregoing a thorough cybersecurity due diligence process in order to move ahead in the deal cycle.

Even the most sophisticated companies can be unprepared for the chinks in a target company’s armor. While an acquisition target looks great on paper, it might be riddled with cyber-related weaknesses that can lead to future post-transaction risks, fines, and costly remediation plans.

Some of the most commonly overlooked issues include:

  • Information security risks and shortfalls in governance, operations, and technology.

  • Undisclosed or unknown breaches.

  • A target company’s inability to detect, respond to, and prevent cybersecurity incidents.

As cyber events continue to proliferate and infiltrate businesses worldwide, cybersecurity due diligence deserves to be a required part of the M&A process, particularly at the earliest phase of the transaction. These commonly overlooked issues can be immediately negated if acquirers prioritize cybersecurity assessments, conduct in-depth evaluations, and treat cybersecurity as its own risk category, highlighting the severe risks that cyber threats pose to all companies and M&A deals.

Go Beyond Mere Due Diligence

Understanding the vulnerabilities of a target company is essential in every M&A transaction. It’s not enough to perform simple, surface-level due diligence anymore. Instead, acquirers must carry out comprehensive cybersecurity evaluations or else risk inheriting the liabilities of its target company.

When assessing a target’s cybersecurity defenses, diligence experts must determine the full scope of risk while also evaluating a target’s probable experience with cyber incidents. With a clear picture of the digital landscape, and the harm that can stem from its compromise, acquirers can closely approximate the actual condition of a target’s digital assets.

To confidently map the threat landscape, the cybersecurity due diligence process should answer the following questions:

  1. What are the target’s digital assets? What is the importance of those assets and their long-term value;

  2. What does the target’s internal cybersecurity program look like? Is it study enough to protect assets in the event of a breach;

  3. What is the target’s cyber-risk-management strategy? How does it relate to the target’s third-party and joint business initiatives;

  4. Has the target undergone any recent or past breaches? What was the response plan;

  5. Is the target in compliance with cybersecurity regulations; and

  6. What is the company’s defense plan? Is it resilient and able to protect against a cyber attack on digital assets?

Cybersecurity due diligence teams are prepared to answer these questions by fully assessing a target company’s security posture, from recent data breaches, the scope of damage, defenses of the target, and any other vulnerabilities that may devalue digital assets in the future.

Staying Vigilant

Once implemented, a strong cyber due diligence framework will provide key insights needed for a more careful valuation on each deal. Today, there is a significant push from IT professionals to use real-time analytics and cybersecurity best practices to monitor a target’s systems, and relying on early cybersecurity due diligence will help you achieve some measure of peace during your M&A transaction.

The most effective cyber due diligence module will help you pre- and post-transaction, as experts uncover and assess information security risks throughout the deal cycle. Specifically, adequate cyber due diligence will include:

  • Internal and external vulnerability assessments, penetration testing, and other security reports.

  • Confirmation that previous cyber events were remediated appropriately.

  • Whether the company has an information security program and if the employees are up to date on such programs.

  • Investigation of possible security gaps.

  • A dark web search for evidence that the target company’s data is compromised.

  • Assessment of the company’s policies and whether they’re meeting regulatory compliance.

  • Evaluation of cyber risk mitigation and data retention policies.

  • Review of contracts and SLAs for any vendors used by the company.

  • Examination of the company’s process for identifying, investigating, and responding to data or security incidents.

After completing the cyber diligence process in the pre-transaction phase, the post-transaction phase will yield a proactive and comprehensive cybersecurity strategy with the right policies, leadership, remediation plans, and security and risk program to help you achieve a successful integration.

Ultimately, cyber due diligence helps you build a plan to address security issues throughout the deal cycle. Once a benchmark of cyber readiness is established, acquirers will be in the position to define the condition of the target’s digital assets, make definitive acquisition agreements, and mitigate risks.