Invisible threats – Why cybersecurity due diligence is nonnegotiable in M&A
January 24, 2025 – As the business community anticipates a surge in mergers and acquisitions (M&A) due to a more business-friendly administration and post-pandemic recovery, companies are preparing to seize new opportunities. Organizations aim to expand their market positions, master new capabilities, and drive growth through strategic acquisitions. However, this optimistic horizon is met with an increasingly hostile cybersecurity environment. Cyber threats are escalating in frequency and sophistication, making it imperative for both acquiring and target entities to prioritize cybersecurity due diligence in their M&A
High-profile cyberattacks have exposed vulnerabilities in even well-established organizations, leading to significant financial losses, reputational damage, legal liabilities, and, in some cases, deal failures. The average cost of a data breach has surged, with studies indicating costs exceeding millions of dollars per incident. This reality underscores the necessity for rigorous cybersecurity due diligence in the M&A process. This is the first in a series of articles focusing on cybersecurity in M&A and navigating the hidden risks.
Cybersecurity due diligence is nonnegotiable
When acquiring a company through a stock purchase or merger, the buyer generally steps into the target’s existing cybersecurity posture, including its vulnerabilities, past breaches, and latent threats. Meanwhile, a target organization that prepares thoroughly — by documenting past incidents, closing known security gaps, and clarifying compliance measures — can help avoid last-minute complications and maintain deal value.
Undiscovered cyber risks can significantly diminish the value of the deal or, worse, lead to post-acquisition crises that more thorough due diligence might have prevented. Failing to adequately identify and address cybersecurity risks can result in substantial financial losses, legal repercussions, and irreparable reputational damage for both sides.
Data protection regulations such as the California Consumer Privacy Act (CCPA) and the European Union’s General Data Protection Regulation (GDPR) impose strict obligations regarding data privacy and breach notifications. Noncompliance can lead to hefty fines and legal actions, adding layers of complexity to M&A transactions.
Moreover, M&A activities inherently expand an organization’s attack surface. Integrating disparate IT systems, networks, and applications can create new vulnerabilities. Cybercriminals often target companies during transitional periods, exploiting weaknesses that arise during the integration process.
Key considerations for effective cybersecurity due diligence
Buyers should verify the target’s cybersecurity posture, and confirm data privacy compliance and sound risk management. Sellers can help by keeping updated security documentation, showing clear governance, and disclosing any incidents or regulatory actions.
The points below guide both sides in reducing cyber threats and protecting the deal’s value.
1. Assess policies, compliance frameworks, and leadership
•Buyer perspective: Verifying alignment with NIST (National Institute of Standards and Technology) or ISO 27001 and compliance with GDPR, CCPA, HIPAA (Health Insurance Portability and Accountability Act), or PCI DSS (Payment Card Industry Data Security Standard) reveals the target’s risk profile. Reviewing policies, procedures, and governance structures shows how deeply these practices shape daily operations. Leadership commitment — evident through a Chief Information Security Officer (CISO) and board reporting — signals robust oversight. Consistent policy enforcement, breach notifications, consent protocols, and data rights management reflect cybersecurity maturity.
•Target perspective: Well-documented policies and regular audits give buyers confidence in the target’s defenses. Demonstrating leadership oversight, such as board reports or a CISO, highlights strong governance. Employee training materials reveal the effort to spread cybersecurity awareness across the organization. Sharing these elements shows the target’s commitment to governance and compliance.
2. Examine governance of incident response and data management
•Buyer perspective: Confirm that the target’s incident response, business continuity, and disaster recovery plans exist and undergo regular testing. Examine how leaders and teams coordinate during incidents, aiming for quick containment and clear communication. Strong data classification protocols protect sensitive information. Data Loss Prevention (DLP) tools or similar solutions reduce risks from unauthorized transfers. Also check data retention policies for unnecessary storage practices.
•Target perspective: Buyers want proof of incident response and data governance practices that are well-documented and updated. Training materials, test results, and clear leadership roles during incidents highlight readiness. Strong data classification procedures and the use of DLP tools show proactive risk management. Regular updates and drills confirm the target’s focus on operational continuity.
3. Evaluate technical infrastructure and security measures
•Buyer perspective: A detailed inventory of hardware, software, and networks reveals possible gaps. Checking for outdated systems, unpatched vulnerabilities, or missing controls is critical. Firewalls, intrusion detection, antivirus software, and patch processes should be examined. For cloud services,
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