When it comes to mergers and acquisitions (M&A), the focus often gravitates toward financials, market positioning, and growth potential. However, one critical aspect that cannot be overlooked is cybersecurity due diligence. Ignoring it doesn't just risk the security of the company being acquired, it jeopardizes the acquiring company's assets, reputation, and long-term stability.
Cybersecurity threats don’t pause for corporate transitions. An acquiring company may unknowingly inherit vulnerabilities, compromised systems, or ongoing data breaches, all of which can escalate once networks are integrated. Even when an acquired company continues to operate independently, its security risks don’t exist in isolation. Customers, regulators, and the media see both companies as one entity. A breach at the acquired company—no matter how small or disconnected—will be tied to the acquiring company’s brand, putting its reputation on the line.
This isn’t a hypothetical risk, but rather one that has played out in real-world acquisitions. The Marriott-Starwood breach in 2018 is a prime example. Starwood Hotels, acquired by Marriott in 2016, had an undetected breach prior to acquisition. When the breach was finally discovered, the headlines didn’t focus on Starwood, but rather Marriot: Marriott Exposes 500 Million Customer Records.
Undisclosed data breaches, poorly secured networks, non-compliance with data protection regulations, or lingering malware embedded deep within an acquired company's systems can all lead to significant consequences. Without thorough cybersecurity due diligence, these hidden risks can quickly spiral into costly incidents post-acquisition, leading to regulatory fines, legal battles, and a significant hit to stakeholder trust.
So, what should effective cybersecurity due diligence look like? Here are key areas to focus on:
- Comprehensive Risk Assessment: Identify and evaluate the target company's cybersecurity posture, including past incidents, current vulnerabilities, and the effectiveness of their security protocols.
- Regulatory Compliance Review: Ensure the target company adheres to relevant data protection laws and industry standards. Non-compliance could mean future fines or legal obligations.
- Third-Party and Supply Chain Security: Understand the security practices of the target company’s vendors and partners. A weak link in the supply chain can introduce unexpected threats.
- Incident Response and Recovery Plans: Review their strategies for managing security breaches. Are they proactive, or merely reactive?
- Integration Strategy: Plan how to merge cybersecurity infrastructures post-acquisition to prevent gaps in security during the transition. It may be wise to delay merging networks until the acquired company environment meets the security policies of the acquiring company. Premature integration could elevate security risks for the entire corporation and even result in non-compliance with security regulations.
Cybersecurity isn’t just an IT issue; it’s a business risk. Companies must approach M&A with the same level of scrutiny for cyber risks as they do for financial risks. In addition to evaluating cyber risks, organizations should also consider the cost of bringing the acquired company up to security standards as part of the overall business case. Failure to account for these expenses upfront can lead to unexpected financial strain and complicate post-acquisition integration.
By embedding cybersecurity due diligence into the M&A process, organizations can protect their investments, secure their data, and strengthen their position in the market. Ultimately, a successful merger or acquisition isn’t just about growing bigger—it’s about growing smarter and safer.
If you need support navigating cybersecurity risks in M&A, contact us to learn how we can help.
