Cybersecurity Red Flags in M&A: What Buyers Should Know

74% of buyers in M&A deals said cybersecurity concerns have derailed deals in the past two years, and 80 % of dealmakers uncovered data‑security issues in at least a quarter of acquiring their targets.¹

With cybercrime costing the global economy an estimated $600 billion annually—and a single breach costing an average of $4.3 million—investing in cyber due diligence isn’t optional; it’s table stakes.²

In a world where digital threats are a reality, mergers and acquisitions have transformed into something other than just a financial transaction. They have become cyber integrity battles with dire potential results. Companies can no longer afford to ignore cybersecurity threats because it could mean losing the transaction entirely, or facing serious post-deal ramifications.

🔍 Why Cybersecurity Is Important To M&A

Cybersecurity is now an essential element of M&A due diligence. Ignoring a cyber risk element in your due diligence can lead to large dollar losses, regulatory penalties, or damages to your reputation. Take for example the Marriott acquisition of Starwood Hotels. The overall acquisition cost to Marriott was reduced by $23.8 million after a HUGE breach of customer personal data and credit card information happened at Starwood prior to the acquisition.

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“Cybersecurity is no longer a side conversation—it’s central to whether a deal creates value or destroys it.”

🚩Top Cybersecurity Red Flags

Reported Data Breaches: Reported data breaches can result in very substantial liabilities. For example, the Yahoo-Verizon transaction reduced the acquisition value by $350 million dollars due to the Yahoo breaches that were disclosed.
Weak Security Posture: A company with legacy or outdated systems, or vendor security practices might leave the acquirer vulnerable to attacks from poor security hygiene.
Vendor Compliance Issues: A company that is out of compliance with a regulation or compliance requirement, such as GDPR or HIPAA, can expose the acquirer to litigation and large penalties.
Third-Party Risks: Cyber actors may exploit weaknesses within the supply chain or attack third-party vendors in the supply chain of the target company.
Insider Threats: Employees with malicious intent, as well as ineffective access management, can facilitate data leaks and sabotage.

🛠️ Identifying and Mitigating Risks Comprehensive Cyber Due Diligence

Utilize cybersecurity professionals to evaluate the target company's security posture, policies, procedures, and incident history.

Penetration Testing: Executing Pen Test scenarios to evaluate the target's IT infrastructure and to exploit vulnerabilities in the systems to understand risks.
Compliance Records Review: Identify whether the company has adhered to, and complied with, regulatory issues and how it has handled compliance problems.
Third-Party Vendor Evaluation: Assess the security practices of all vendors and partners working with the target company.
Employee Training and Policies: Evaluate the company’s employee cybersecurity training, awareness, and preparedness.

The Strategic Role of M&A Advisors

Strategically focused M&A advisory firms are able to assist acquirers in managing cybersecurity challenges during the acquisition process. Its capabilities include:

Risk Assessment: Identifying relevant cyber risks and threats, and assessing what impact those risks and threats could possibly have on the deal.

Integration Strategy: Creating a strategy to merge the IT systems of the two companies as securely and efficiently as possible.

Harmonizing Cybersecurity Policies: Ensuring that cybersecurity policies and practices become similar between the acquirer and target company.

Monitoring Cybersecurity: A strategy to continue monitoring the companies post-acquisition for buzzing cyber threats to address them appropriately.

Conclusion

Cybersecurity is no longer a side note in M&A deals - it is critical to the success and integrity of the deal. If buyers can proactively identify and mitigate cyber risks, they can secure their investment and ease the path to integration. In a complex landscape of buyers, sellers, seasoned M&A advisors, and cybersecurity experts, it is very important to work with qualified and experienced professionals to maximize each dollar spent on protection.

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Cybersecurity Red Flags in M&A: What Buyers Should Know

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