Posted on Mar 4, 2021
The successful execution of mergers and acquisitions (M&A) requires significant attention to detail in order to ensure that newly acquired systems and processes will function in a way that is in line with laws and regulations. As these systems grow in complexity, this has become an even greater challenge for compliance officers in charge of identifying and assigning cyber risk levels to target organizations. In order to address these challenges, organizations must take the time to create effective cybersecurity compliance due diligence programs.
Having an established compliance due diligence program will ensure that all merger or acquisition targets are properly vetted prior to finalizing any potential deals. This, in turn, allows you to continually monitor the cyberhealth of your investments and assets post-acquisition.
In this post, we will break down considerations for ensuring cybersecurity due diligence during M&As as well as outline how you can enable effective security compliance due diligence at your organization.
Cybersecurity due diligence is the process of identifying and addressing cyber risks within your internal or third-party network ecosystem. With regard to mergers and acquisitions, organizations should always collect insights into their target’s existing cybersecurity posture and IT security efforts. That way, they are aware of any cyber risks and vulnerabilities they will inherit once an organization is acquired.
A recent example of cyber risk impacting an acquisition can be seen in Verizon’s purchase of Yahoo in 2017. After Yahoo disclosed two large-scale data breaches, Verizon lowered their initial offer by $350 million to offset some of the security risks they would be taking on. This highlights the importance of continued cybersecurity due diligence as the threat these compliance risks pose can significantly impact an organization’s brand image and financial standing.
The primary objective of cybersecurity compliance due diligence is to identify and assess any outstanding threats to an organization’s cyberhealth as well as ascertain whether they have a compliance management system in place to appropriately respond to these risks.
This process can be broken out into the following objectives:
A compliance risk profile is a quantitative analysis of the types of compliance risk an organization is currently facing. The goal is to provide the acquirer with a comprehensive understanding of their target organization’s overall risk by categorizing the types of threats they face the danger they pose. Risk assessments are excellent tools for organizations looking to build risk profiles as they provide visibility into the types of risk and severity of threats an organization is facing.
A red flag is any identified vulnerability that can be exploited by a cybercriminal to gain access to a network. When conducting merger and acquisition due diligence, it is important to accurately assess vulnerabilities within a company’s network environment. This can be done using risk assessments as well.
You should also evaluate the business’s cybersecurity culture. A company with a proactive cybersecurity culture will take steps to educate its employees on security best practices, thereby limiting their exposure to cyber risk. Additionally, look to see if a target organization has an incident response and disaster recovery plan as this highlights their preparedness for an attack.
A key component of merger and acquisition due diligence is evaluating an organization’s response to past compliance violations. This provides insight into how they will approach future violations. Ask the target company about the steps they took to address violations as well as any new programs they have implemented to ensure it does not happen again. Finally, make sure you ask about how they informed their customers of compliance violations as failure to do so can result in significant penalties.
Outside of identifying cyber risks, there are other considerations to keep in mind in order to perform due diligence during and after the merger and acquisition phase.
Below are three keys to effective cybersecurity compliance due diligence:
System integration can cause a lot of issues when looking to assess cybersecurity compliance. A large part of evaluating cybersecurity compliance is looking at the programs a target organization has in place which oftentimes requires compatibility with your system. When performing your due diligence, make sure to identify whether or not your systems are compatible. Should you need it, there are several tools available that aid with system integration for analysis. Having integrated systems also helps bolster security post-acquisition as it eliminates any potential gaps in security that come as a result of redundant network operations.
Cybersecurity compliance due diligence normally involves migrating large amounts of sensitive data between systems so that it can be analyzed. The challenge here is ensuring that the data is not altered when in transit, as this will result in an inaccurate assessment of cybersecurity systems. System compatibility is critical here as well as integrated systems reduce the likelihood of data being corrupted while being transferred. Data compatibility also facilitates strategic decision-making by centralizing findings.
Once acquired, you will be held responsible for any cybersecurity compliance incidents across your target organization’s vendor ecosystem. For this reason, it is important to analyze their third-party security posture during the M&A phase. Tools such as third-party risk assessments help you gain visibility into vendor risks, allowing you to proactively address any compliance risk prior to finalizing a merger or acquisition.
The key to effective cybersecurity due diligence during mergers and acquisitions is continuous visibility into your target organization’s IT infrastructure. With SecurityScorecard’s suite of cybersecurity due diligence solutions, you can proactively embrace compliance due diligence by gaining a comprehensive view into any M&A target’s cyberhealth. This will help you analyze their compliance with relevant regulations as well as provide threat insights that will guide M&A discussions.
In addition, SecurityScorecard’s Security Ratings allow you to take control of third-party risk so that you can monitor new vendor relationships before agreeing to a merger or acquisition. By ranking vendor risks using easy-to-read A-F scoring, you can drill down on threat remediation and work proactively with third-parties to address compliance risk.
With on-demand security intelligence from SecurityScorecard, organizations can streamline the merger and acquisition process while also ensuring that compliance regulations are met.
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