Mergers and acquisitions are thrilling landmarks for any organization, opening doors to new strategies, territories, and creativity. However, they also come with risks — cybersecurity is one of the most frequently overlooked risks of mergers and acquisitions.
When two companies merge, they merge people, products, and strategies. They also combine digital systems and data, a task that may sound simple but isn’t. Hidden risks—vulnerabilities—can reveal themselves during mergers and acquisitions. Any vulnerabilities can jeopardize sensitive data, operations, and trust.
Making security a priority extends beyond just protecting data; rather, it ties into a bigger issue of protecting trust—and during any sort of merger, the trust of employees, customers, and stakeholders is on the line for the businesses involved. By identifying and remediating cybersecurity vulnerabilities in advance, businesses can reduce risk and set up the organization for a more seamless and confident migration.
The Consequences of Cybersecurity Breaches
Cybersecurity failures can kill a deal. Repeated failures to address vulnerabilities can sharply devalue a target company or kill the merger deal outright. When companies merge, their digital infrastructures often become a mishmash of systems, opening up pathways to major risks. The biggest risk in the patchwork is weak cybersecurity at one or both of the companies.
Consider data breaches. If a company’s infrastructure has previously been compromised, a buyer may perceive that as a financial liability, especially when there is no indication that such problems have been resolved. Regulatory fines, lawsuits, and erosion of customer trust can all diminish a company’s value.
Another factor is the lost potential if sensitive customer data is leaked during acquisition. Reputational damage might take years to fix, or regulators could step in and hand down fines for abuses of privacy laws.
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Buyers might amend their offer — or walk from the deal — when a cybersecurity risk is revealed. Even worse, a breach during ongoing negotiations can lead to a significant delay or a complete deal breakdown. Cybersecurity protection for systems is not enough — including protection for the entire transaction is essential.
Realize that due diligence should be practiced beyond legal and financial systems to digital systems. Cybersecurity is such a critical feature that overlooking it leaves your deal open to vulnerabilities that may lead to severe disruptions or breaks. You’re playing the odds about your company’s future unless you seek out possible cybersecurity gaps. But tackling such concerns early can set the stage for smoother integration and avoid toppling everything you’ve spent years building.
Cybersecurity Risks in Mergers and Acquisitions
Cybersecurity risks can abound between mergers or acquisitions, sometimes from unlikely sources. Here are 4 key cybersecurity challenges to watch for with mergers and acquisitions:
- Inherited vulnerabilities: Corporate acquisitions come with a digital legacy, for better or worse. Under the surface are legacy systems, outdated software, and inadequate security protocols. That inherited weakness is a low-hanging fruit for cybercriminals.
- Data breaches: In mergers and acquisitions, confidential information, including financials, customer data, and trade secrets, is shared. When that data isn’t adequately safeguarded, it’s a prime target for hackers. The trust of business partners is at risk at any point across a deal, and even the slightest leak will erode that trust.
- Third-party dangers: Contractors and suppliers can be a weakness in any company’s security, but third parties are often ignored as systems are integrated, which can lead to significant blind spots.
- Insider threats: Workers may be insecure about their jobs as companies merge or have uncertain prospects. This uncertainty increases the risk of insiders leaking sensitive information, whether on purpose or without meaning to.
The Regulatory Tightrope
Bringing together companies involves more than infusing personnel and systems; it also involves regulatory oversight. There are strict data privacy regulations, such as GDPR in Europe and CCPA in California. If you fail to meet those standards, you risk lawsuits, fines, and closing delays.
Regulators scrutinize mergers closely when they involve large volumes of customer data. Any security misfires encountered along the way could have a domino effect, complicating regulatory compliance and public confidence. It’s crucial to perform comprehensive audits of our digital systems and hold compliance to the fire.
Early merger discussions should explore how closely both companies follow data protection laws. If either company has pending violations or employs outdated privacy practices, it will be evident. Yes, these issues can become red tape later, so it’s critical that they get dealt with early.
How to Stay Ahead of M&A Breaches
It’s much better to be proactive and find risks yourself rather than have them revealed by hackers. Breaches during mergers and acquisitions carry a vastly higher risk. Here’s how to beat it to the punch.
Verify the target company’s cyber security strategy. Critique how they address access controls and their response time to threats and discover any gaps in their defenses.
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Red flags like outdated systems, poor encryption, and bad monitoring practices cannot be ignored.
Check the company’s history and look for past breaches. If the company has suffered a breach, note how it dealt with it and use this information to gain insight into other potential vulnerabilities you should prepare to remediate. Don’t forget that protecting data also protects your company's reputation, finances, and future.
These measures are crucial to minimizing cybersecurity vulnerabilities during mergers and acquisitions:
Start with Risk Assessments: Before integrating, thoroughly understand both companies' digital infrastructures and look for vulnerabilities such as old software, insufficient firewalls, etc. Address any risks discovered throughout the process before a full integration.
Safeguard Data Exchanges: Deals in mergers and acquisitions reveal sensitive data that might be exposed to prying eyes and not held accountable for proper security protocols. Protect all data exchanges with the use of encrypted tools.
Limit Access: When teams expand and integrate, access changes, but remember access should never be broader than necessary. Restrict sensitive data to only those who require access using role-based permissions. If the minimal access approach is taken, exposure can be contained.
Lessons from the Real World
Cybersecurity missteps have brought more than a few big mergers to a halt. Take, for example, Verizon’s acquisition of Yahoo in 2017. When Verizon discovered in due diligence that Yahoo had been the victim of massive data breaches, it knocked $350 million off the price. Those breaches affected over three billion accounts, leaving Yahoo’s reputation and finances in shambles.
Another example? Starwood Hotels, which Marriott acquired in 2016. When the deal was done, it emerged that Starwood had been breached years earlier, putting the data of hundreds of millions of guests at risk. Marriott didn’t just inherit the data; it inherited the fallout: regulatory fines and public backlash.
Don’t Overlook Cybersecurity in Your Deal
Cybersecurity should be at the forefront of mergers and acquisitions and integrated into every deal phase. Both organizations must cooperate with compliance and security best practices to minimize cyberattacks in your merger deal and ensure adherence to compliance and security best practices at both organizations.
Mergers are about creating something larger and more valuable. Investing in cybersecurity means protecting what’s there and setting the stage for future success.
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