Cyber Risk Due Diligence [Capstone]

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    Max Eager

    Cyber Risk Due Diligence Best Practices for M&A: Safeguarding the Deal and the Data

    As a cyber risk management consultant, I have to be well aware of the critical role that cybersecurity plays in the success of mergers and acquisitions. In today’s interconnected digital landscape, overlooking cyber risks during due diligence can have devastating consequences for both the deal and the data that is often assumed to be secure. For my Essential M&A Capstone post, I’ll dive into some essential best practices for conducting effective cyber risk due diligence:

    Start Early, Stay Informed:
    Cyber risk due diligence should be initiated at the earliest possible stage of the M&A lifecycle. Cyber threats are constantly evolving, so staying informed about the latest cybersecurity trends and threats is crucial: Your due diligence teams should include a cybersecurity expert to assess and manage cyber risks throughout the deal process.

    Evaluate Cybersecurity Posture:
    Assess the target acquisition’s cybersecurity posture by examining their policies, procedures, and security controls–this will tell you how actively managed their cybersecurity is, and what areas are not particularly well defined (and therefore a potential source of risk). Review their incident response plan, data protection measures, and ongoing security training programs to make sure they can protect themselves and educate their staff to any new security standards. And, naturally, when you get access to their network, identify any vulnerabilities, potential weaknesses, or compliance gaps that may pose risks to the deal.

    Data Privacy Compliance:
    In today’s regulatory environment, data privacy compliance should be completely non-negotiable. Ensure that the target acquisition’s data collection, storage, and processing practices align with relevant regulations such as GDPR, CCPA, HIPAA, and control frameworks like NIST 800-53 and ISO 27002. Remember: The inability of a company to produce a SOC2 Type 2 audit for their IT systems or core products is a huge piece of evidence.

    Third-Party Risk Management:
    Extend your due diligence beyond the target company–who do they depend on? Evaluate the cybersecurity practices of key third-party vendors and partners, as their weaknesses could indirectly impact the target company’s security. Assess vendor contracts, security assessments, and incident response plans.

    Review Historical Incidents:
    Request a history of past cybersecurity incidents, breaches, or data breaches and understand how these incidents were managed and resolved–the CISO should explain these, or the GC. Analyze the potential impact on the target acquisition’s reputation, customer trust, and financial stability.

    Intellectual Property Protection:
    Intellectual property is often a crown jewel in M&A deals. Assess the target company’s strategies for protecting sensitive intellectual property, trade secrets, and proprietary technology: If they cannot protect adequately (up to your standard) the very data that you’re paying for, then you should pay less for that data because it requires additional costs to provide value within your own risk tolerance.

    Integration Strategy:
    Incorporate cybersecurity into the integration strategy, and include integration planning from the very start. Develop a plan for merging IT systems, networks, and applications securely early on and in coordination with security. Address any compatibility issues, ensure a smooth transition, and prioritize the security of sensitive data throughout the integration process by standing up a dedicated IT M&A Project Management Office.

    Cyber Insurance Evaluation:
    Review the target acquisition’s cyber insurance policy if applicable. Assess the coverage, terms, and limits to ensure that it aligns with the potential risks identified during due diligence. If they require more cyber insurance, then that’s another cost to knock off the valuation

    Contractual Protections:
    Integrate cybersecurity considerations into the acquisition agreement. Include clauses that address data breaches, liability, indemnification, and other cybersecurity-related matters: Use legal protection to mitigate risks and facilitate smoother negotiations.

    Ongoing Monitoring and Assessment:
    Cyber risk due diligence doesn’t end after the deal is closed. Implement continuous monitoring and assessments to identify and address emerging cyber threats, vulnerabilities, and changes in the risk landscape.

    Remember, a comprehensive cyber risk due diligence process is not only about protecting the acquiror’s investment, it’s also about safeguarding sensitive data that represents real human people, maintaining customer trust, and preserving the value of the acquired business. By following these best practices, you’ll be better equipped to navigate the intricate world of M&A while fortifying your organization against cyber risks.

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