• Fred Silberstein

How to Minimize Cybersecurity Risks in Mergers and Acquisitions

When thinking about mergers and acquisitions, many businesses don't consider their cybersecurity posture. Here’s how to protect yourself during the process.

Key Takeaways

  • Cybersecurity risks and data breaches have increased due to dependence on technology for most tasks

  • Both acquiring and merging firms should conduct cyber due diligence to avoid surprises after the deal

  • Data breaches affect your overall business valuation and increase the time it will take to sell

  • They also lead to costly lawsuits and fines

  • One of the best ways to minimize cybersecurity risks is by conducting due diligence prior to signing the M&A deal

  • You should also strive to protect your data and be open to key stakeholders once you discover a breach

  • Working with competent professionals can help minimize these cybersecurity risks and make your M&A deal a success

Cybersecurity risks present lots of challenges to the growth of all businesses. This risk becomes even more apparent during mergers and acquisitions. When two companies are looking to transfer ownership, capital, and data, these risks are compounded.

Potential data leaks during an M&A deal can cause lots of problems. This is why acquiring firms should carry out cyber due diligence before completing the deal. Both big and small brands have been victims of cybersecurity attacks after accidentally opening themselves up or leaking private client information during an acquisition. This exposes them to fines, loss of customers, and lengthy lawsuits.


Why you should think twice about cybersecurity in your next M&A deal

According to Forbes, more than 40% of acquiring companies have experienced some cybersecurity risks in mergers and acquisitions while looking to integrate with other firms. A significant number of these companies find out about the cybersecurity problems long after completing the deal. Here are some reasons why you should think twice about cybersecurity in your next M&A deal.

  • It affects valuation: Frankly, no one wants to buy or merge with a company that experiences frequent cybersecurity attacks. If you are a seller that does not make cybersecurity a priority, you are likely to get a low-ball offer. Any buyer worth their salt will want to carry out thorough cybersecurity due diligence, and they will only pay top-dollar for a company with tight cybersecurity practices in place.

  • Avoid fines: Failure to disclose any recent cybersecurity attacks to a buyer will get you in hot water with the Securities Exchange Commission. A data breach that is discovered by the seller after the completion of the M&A process is likely to trigger security fraud charges. This means that you should be upfront with the buyer and take measures to minimize data breaches before they occur.

  • To quicken the buying process: Even the smallest M&A deals may take months, if not years, to complete. This is often due to the time it takes before the parties conclude the due diligence process. Having a robust cybersecurity strategy reduces the amount of time the buyer has to spend on digital due diligence.

  • Prevent costly lawsuits: Your buyer won’t take it so kindly if you fail to disclose a recent cyberattack you had. In fact, they are likely to sue. To avoid costly suits that can drag for years, it is important to address any cybersecurity matters beforehand. It is also worth noting that your business’ shareholders can sue you if they incur losses due to your negligence when handling or disclosing cybersecurity breaches to a buyer.

4 ways to reduce cybersecurity risks in mergers and acquisitions

With more cybersecurity attacks reported every day, it’s prudent to minimize these risks, especially during an M&A deal. Luckily, there are several steps you can take to reduce them:


1. Conduct due diligence

As straightforward as it sounds, many companies forget to carry out cyber due diligence on the other firm in a merger or acquisition. This is most likely to happen if you focus on the numbers and forget there are security and other operational issues to consider. If you realize there was a data breach after the deal is completed, chances are you fell short in the due diligence process. Whether you are purchasing a business or merging with one, it is important to conduct a comprehensive audit of the cybersecurity risks.


2. Protect your data

Data protection has been a contentious issue recently. Data protection laws such as the General Data Protection Regulations in the EU have been passed in multiple states, countries, and regions. These laws outline how companies should deal with third-party data and impose sanctions when a business ignores the regulations. When it comes to mergers and acquisitions, you may have to exchange data with a merging company, which presents an opportunity for data breaches. Instead, you can put measures in place to protect your data.


3. Be candid with your buyers and clients

Your buyer, and even clients, will have a difficult time trusting you if you recently experienced a data breach. That said, keeping such breaches under wraps can get you into trouble with the law. Your customers deserve to know about any breaches, especially if it involves their data. The reputation of your business may take a hit, but it will save you from a lot of legal battles.


4. Get professional assistance

When it comes to completing an M&A deal, it is prudent to have a team of professionals by your side. You will avoid many mistakes if you can get the services of competent M&A advisors and attorneys. That said, it is also prudent to get professionals that will conduct a risk assessment for you. If the risk is too much, then it may be best to shelf the M&A deal till everything is in order.


Let SF&P Advisors help minimize your cybersecurity risks in mergers and acquisitions

Cybersecurity risks and data breaches can cost you an arm and a leg. Not only do you risk incurring fines from the SEC, but you may also be sued for failure to disclose such breaches in an M&A deal. By executing proper due diligence and following standard safety procedures, you can avoid the problems these risks present. Working with professionals such as SF&P Advisors will ensure that you minimize security risks and have a smooth M&A deal. Contact us today for a quick consultation.