1. Executive Summary
Create and preserve value by protecting intellectual property, mitigating critical cyber risk, complying with regulatory requirements and enhancing cyber resilience.
Mergers & Acquisitions (M&A) and investment in firms and startups have become an important part of the growth strategies of most businesses today. Most M&A integration efforts focus on elements like people, revenue, systems, finance and customer relations. Similarly, most investment focuses on market share, revenue growth and profit enhancement. However, throughout this process, cybersecurity and cyber compliance are often overlooked.
While merged entities may succeed in business integration or an investment may yield strong returns, however, any breach of confidential data, a large-scale cyberattack or non-compliance with regulatory requirements can negate these gains. Such incidents often attract negative media attention and erode shareholder value and trust. This paper highlights key issues related to intellectual property (IP) protection, data security and privacy, cybersecurity controls and compliance risks that may arise in the investee firm or during M&A IT integration and provides approaches for addressing this risk.
2. Introduction
India has been at the forefront of digital adoption and investment in technology startups have also grown multifold. With a new wave of digital transformation on the horizon, driven by the democratization of 5G, the Internet of Everything (IoT), and AI technologies, numerous startups are emerging to develop innovative products and solutions in this space. While this digital evolution offers businesses enhanced convenience and efficiency, it also brings significant cybersecurity challenges due to an expanded attack surface. In this hyper-connected digital economy, cyber threats are rapidly increasing in both volume and velocity. In the event of a cyberattack, companies may not only incur financial and operational losses but can also face long-term damage to their reputation, brand, and customer trust.
Most private equity and venture capital firms invest in technology-driven companies due to their potential for scalability, efficiency, and innovative solutions. However, after finalizing investments or acquisitions, in certain instances firms have uncovered the target company's history of data breaches, cyber threats, inadequate control, and compliance issues, leading to substantial financial losses. Cybersecurity is not a control or cost function, but a vehicle to create and preserve value.
3. Problem Statement/Challenges
Consider a hypothetical case - based on the experiences of M&A integration.
ABC Inc. in the U.S. acquired XYZ Plc. in India which had a subsidiary in the U.S. The initial integration focused on sales, technology integration, customer relations and finance. However, shortly after, several issues surfaced that required immediate attention, effort and investment, including:
- An external audit revealed weak access controls in critical systems including ERP and CRM, following the integration of the merged companies. This exposed further potential issues, such as Segregation of Duty conflicts, which required immediate attention.
- Applications, regarded as Intellectual Property due to their capabilities and use of agentic AI, were found to incorporate open-source components that violated copyright, leading to potential legal scrutiny.
- A security incident report revealed an internal breach, involving disgruntled employees who, fearing layoffs after the integration, exploited misconfigured access privileges to steal confidential documents and intellectual property.
- Constant media scrutiny of such incidents damaged the company's reputation and eroded shareholder trust.
- U.S. customer and employee data were transferred to a location specific cloud-based data center during technology integration, causing compliance and data privacy concerns.
- Post-merger, ABC Inc. had to spend a significant amount to resolve these issues, further impacting the operational efficiency of the merged entity.
In this hypothetical case study, the lack of cybersecurity controls and non-compliance might lead to costs and losses including:
- Regulatory fines, penalties and restrictions on ability to do business like onboarding new customers.
- Loss of productivity due to compromised systems and computing infrastructure.
- Loss of intellectual property.
- Violation of contractual obligations and legal risk in using open-source software.
- Weak infrastructure, application, API and supply chain security controls can leave and organization vulnerable to cyberattacks, resulting in loss of business, trust and reputation.
- Loss of privacy and confidential business data potentially resulting in class action lawsuits and a diminished competitive edge.
Conducting cyber due diligence prior to an investment, merger or acquisition helps organizations assess existing risks and identify issues that may warrant restructuring the agreement. This process involves evaluating the target's cybersecurity posture, policies, procedures, and controls to uncover any potential vulnerabilities.
However, it is critical to segregate the pre-deal due diligence and post deal integration. The Cyber Due Diligence (Cyber DD ) or pre-deal assessments are conducted prior to finalizing a transaction and are primarily focused on evaluating the cybersecurity posture of the target entity. These assessments typically face constraints related to limited data availability and the scheduling of management meetings, which can restrict the depth and scope of the analysis. The main objective during this phase is to identify and quantify potential cybersecurity risks associated with the target company, including assessing the need for one-off investments or recurring security measures. The insights gained helps stakeholders understand the level of risk involved in the transaction and determine whether cybersecurity concerns could impact the deal's viability or valuation.
In contrast, post-deal activities—particularly during the first 100 days—are centered on executing the cybersecurity improvements identified during the initial assessment and refining the cybersecurity strategy. This phase involves implementing quick wins to address critical vulnerabilities and deepening the assessment to validate earlier findings. The goal is to develop a comprehensive cybersecurity program tailored to the specific context of the acquisition, whether it involves M&A integration, standalone operations, or a carve-out scenario. By this stage, organizations can design a detailed cybersecurity roadmap aligned with their broader strategic objectives, ensuring the target's cybersecurity posture supports long-term growth and security resilience.
4. Solution Overview
Cybersecurity due diligence is a critical component of the overall due diligence process during mergers and acquisitions (M&A) transactions. This process involves a thorough examination of the target company's cybersecurity posture, policies, and practices to identify potential risks that could affect the acquiring company post-transaction.
Below is a detailed breakdown of the steps involved in conducting cybersecurity due diligence.
4.1 Pre-Deal Cyber Due Diligence Process
We recommend a five-step cyber due diligence process:
1. Creating organization business, threat and risk profile
This step serves as the critical foundation for assessing the cybersecurity posture and identifying vulnerabilities that may affect transactions and future operations. The complexity of ecosystem, application landscape, data sensitivity, regulatory requirements and contractual obligations along with scale might change the threat, control and risk profile of the organization. Understanding the business model, operational structure, technology landscape, and strategic priorities is important for identifying the applicable threats and controls and hence its cybersecurity measures needed to protect critical assets. Modern enterprises also depend on a network of vendors, partners, and third-party service providers, which can introduce risks through indirect attack vectors. Identifying potential risks from cloud service providers, managed IT vendors, and outsourced development teams is essential for comprehensive risk assessment.
2. Conducting External Attack Surface Management (EASM)
The first step in External Attack Surface Management (EASM) is identifying all digital assets associated with the target organization, including domains, subdomains, cloud instances, applications, and third-party integrations accessible from the internet. Once these assets are mapped, the acquirer must assess them for known vulnerabilities, misconfigurations, and weaknesses that could be exploited. Additionally, acquirers should monitor underground forums, hacker marketplaces, and breach repositories to check if any corporate data or credentials have been compromised. Since external attack surfaces are continually evolving due to new technologies, changing business operations, and emerging threats, implementing continuous monitoring solutions is vital to detect and remediate newly discovered vulnerabilities or misconfigurations before they can be exploited.
3. Identifying Baseline Security Controls Based on Organization Business Context and Threat/Risk Profile
During the pre-deal and post-deal phases, identifying baseline security controls is a critical step in assessing the target company's cybersecurity posture. This process involves understanding the specific business context of the target company and evaluating its unique threat and risk profile. By considering the industry, operational structure, and existing security measures, organizations can define a set of essential security controls such as implementing Multi-Factor Authentication, hardening endpoints, asset management, effective security monitoring, etc., necessary to protect key assets and mitigate potential risks. These baseline controls ensure that the organization can defend against common cyber threats while maintaining regulatory compliance. During this step, it is important to not only assess technical aspects such as infrastructure and data security but also to ensure the existence of incident response procedures, cyber insurance coverage, and compliance frameworks to address future security incidents. Establishing these baseline controls is vital for both safeguarding the organization's assets and ensuring that the security measures align with the overall risk management strategy throughout the M&A process. The controls can be adapted from the NIST CSF standard, which assesses maturity based on the threat and control profile to reduce risk and develop a strategic plan for implementing controls, including budgeting considerations.
4. Performing Technical Security Diligence
A thorough examination of the target company's security infrastructure must be conducted to identify potential risks that could affect the value of the deal. By assessing the technical aspects of the target company's systems, networks, and applications, organization can uncover weaknesses that could lead to vulnerabilities or exploitations. This step typically involves reviewing the design and architecture of the target company's IT systems and applications, ensuring that they follow the best practices for security. It also includes evaluating vulnerabilities and configuration settings to determine if there are any misconfigurations that could expose the company to cyber threats. Additionally, validating the security of open-source software used by the target company and simulating phishing attacks are key tactics used to identify potential risks. This technical security diligence helps to ensure that the acquiring company understands the true state of the target's cybersecurity environment, enabling them to make informed decisions and implement the necessary controls post-deal.
5. Reporting And Roadmap for Improvement/Open Exposure
This step develops a detailed report and improvement roadmap based on the findings of the previous assessments which is crucial for evaluating the current cybersecurity posture of the target company. This process helps identify any open exposures, risks, and gaps in security, providing clear recommendations for addressing vulnerabilities. The report should clearly document identified risks, weaknesses, and any compliance issues that could impact on the value or success of the deal. Additionally, the roadmap for improvement provides a strategic plan for the acquiring company to enhance the target's cybersecurity measures post-deal. The roadmap includes actionable steps, timelines, and resource requirements to address the identified vulnerabilities, ensure regulatory compliance, and strengthen overall security defenses. By providing a clear and structured approach to mitigating risks and improving security, this step helps ensure that the acquiring company can manage and reduce potential threats effectively, safeguarding its investment and ensuring long-term cybersecurity resilience.
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