Cybersecurity is a critical factor in a successful merger or acquisition from both the seller’s and the acquirer’s side. Most business operations today including financial transactions and the collection and storage of personal data are digital, which increases exposure to cyber risk. These risks are often amplified during a merger or acquisition, when systems, data, and personnel are in transition and security controls may be changing.
Why is extra vigilance in cybersecurity critical during an M&A?
A merger or acquisition can expose a business to a number of cybersecurity vulnerabilities, including:
- Weakened or misaligned cyber protocols
- Integration of systems with differing levels of security maturity
- Expanded attack surfaces as networks, applications, and data are combined
-
A broader threat environment, including:
- New employees or contractors
- New third- and fourth-party vendors
In addition to these challenges, M&A activity can introduce less visible risks. Undetected security issues, such as legacy malware, unresolved incidents, or outdated configurations, may exist within the target organization. The exchange and transfer of sensitive data during due diligence and integration can also increase the risk of unauthorized access or data leakage. Differences in security culture and practices between organizations may further complicate risk management during the transition.
If these risks are not identified and addressed early, they can disrupt operations, expose sensitive information, and negatively affect the outcome of the transaction.
How can it affect an M&A transaction?
Strong cybersecurity oversight is essential for any business. For sellers, a history of cyber incidents, weak controls, or unresolved vulnerabilities can reduce valuation, delay negotiations, or limit transaction opportunities. Buyers may require additional protections or remediation efforts to account for these risks.
For buyers, acquiring a company with inadequate cybersecurity practices or outdated infrastructure can introduce significant and ongoing exposure. This may include regulatory compliance issues, operational disruptions, reputational harm, and unexpected costs following closing. As a result, both parties should conduct thorough cybersecurity due diligence to identify risks and gaps before finalizing a term sheet.
Steps to ensure a cyber-safe transition
-
Screening & Due Diligence
Cybersecurity due diligence should focus on identifying vulnerabilities, threat exposure, and response capabilities. This includes reviewing the target company’s history of cyber incidents, how those incidents were managed, and whether regulatory obligations were met. The goal is to understand both existing risks and how effectively the organization responds to them. -
Review vendor relationships
Third-party vendors, and their subcontractors can pose significant external risk. It is important to evaluate vendor relationships, particularly those involving access to systems or sensitive data. Weak vendor security practices can extend risk beyond the target organization and into the acquiring company after closing. -
Target firm’s cyber response protocols
Cyber threats continue to become more sophisticated and difficult to detect. While no organization is immune, companies with clearly defined incident response procedures, escalation processes, and regulatory alignment are better positioned to reduce the impact of an attack. Evaluating these protocols provides insight into the organization’s preparedness and resilience.
If the merger or acquisition remains under consideration following these steps, additional actions should be taken to reduce risk during and after integration.
-
Identify critical digital assets
Critical digital assets include systems, data, or processes that would significantly affect the business if compromised or unavailable. These may include customer information, financial systems, intellectual property, or core operational platforms. Identifying these assets early allows the acquiring company to prioritize security measures and allocate resources effectively. -
Limit access
Periods of transition can increase exposure to unauthorized access. Access to systems and sensitive information should be restricted to essential personnel, with appropriate oversight and monitoring. Clear accountability helps ensure that access controls are enforced consistently across the organization. -
Update the cybersecurity plan
The cybersecurity plan should be reviewed and updated to reflect changes resulting from the merger or acquisition. This includes addressing system integrations, expanded data flows, updated roles and responsibilities, and confirmation that regulatory and compliance requirements are met for the combined entity.
Additional risk mitigation measures during integration may include using secure methods for data transfer, encrypting sensitive information, staging system integrations rather than combining networks all at once, and closely monitoring for unusual activity.
Conclusion
Cybersecurity is one of the leading risk factors in M&A. Both parties in a merger or acquisition benefit from a strong cybersecurity program as it is central to safeguarding operational stability.
By incorporating a disciplined approach to Cybersecurity due diligence and integration that considers the significant vulnerabilities of a company in transition, both buyers and sellers can better navigate the risks that come with merging digital environments.
Author: Kathryn Konzen, Esq. is the Director of Operations and Counsel, at Jacko Law Group, PC (“JLG). With over 15 years of experience in the legal profession, she brings a diverse range of expertise in areas such as operations, eDiscovery consulting, business development, recruiting, and more. Her practice focuses on working closely with clients, assisting them with their Cybersecurity and AI legal needs.
JLG works extensively with investment advisers, broker-dealers, investment companies, private equity and hedge funds, banks and corporate clients on securities and corporate counsel matters. For more information, please visit https://www.jackolg.com
The information contained in this article may contain information that is confidential and/or protected by the attorney-client privilege and attorney work product doctrine. This email is not intended for transmission to, or receipt by, any unauthorized persons. Inadvertent disclosure of the contents of this article to unintended recipients is not intended to and does not constitute a waiver of attorney-client privilege or attorney work product protections.
The Risk Management Tip is published solely based off the interests and relationship between the clients and friends of the Jacko Law Group P.C. (“JLG”) and should in no way be construed as legal advice. The opinions shared in the publication reflect those of the authors, and not necessarily the views of JLG. For more specific information or recent industry developments or particular situations, you should seek legal opinion or counsel.
You hereby are notified that any review, dissemination or copying of this message and its attachments, if any, is strictly prohibited. These materials may be considered ATTORNEY ADVERTISING in some jurisdictions.
