Making Sense of M&A Cybersecurity Due Diligence
Why Cybersecurity Due Diligence Matters
M&A cybersecurity due diligence has evolved from a nice-to-have technical review to an essential component of smart deal-making. The reason is straightforward: cybersecurity issues discovered after closing become your problems, and they can be expensive ones.
Research consistently shows that 80% of acquisitions uncover cybersecurity issues. These range from minor compliance gaps to significant vulnerabilities that require immediate attention and investment. The key insight for deal makers is that understanding these issues before closing allows you to factor them into your investment decision rather than discovering them as unpleasant surprises.
What Cybersecurity Due Diligence Actually Reveals
Compliance Status and Gaps
Most companies believe they're compliant with relevant regulations like HIPAA, PCI-DSS, or SOX. However, detailed review often reveals gaps between perception and reality. These gaps matter because they can trigger regulatory penalties or require immediate post-acquisition investment to address.
Technical Infrastructure Health
Every business depends on technology infrastructure, but not all infrastructure is created equal. Cybersecurity due diligence reveals the actual state of network security, data protection, access controls, and monitoring capabilities , information that's crucial for integration planning and risk assessment.
Historical Incident Patterns
Previous security incidents provide valuable insight into an organization's cybersecurity maturity and risk exposure. This includes both how they've handled incidents and what their incident history suggests about ongoing vulnerabilities.
Third-Party Risk Exposure
Modern businesses rely heavily on vendors and partners, each of which introduces cybersecurity considerations. Due diligence reveals the extent of these relationships and how well the target company manages third-party cybersecurity risks.
A Real-World Example
Recently, we assessed a healthcare technology company for a private equity acquisition. The target served 500+ medical practices and appeared to have strong HIPAA compliance based on their documentation.
Our assessment revealed a more complex picture:
The Good: Strong policies and procedures, regular staff training, and documented compliance processes.
The Concerning: Several technical vulnerabilities in patient portal systems and gaps in vendor oversight.
The Plan: Clear remediation roadmap with realistic cost estimates and timeline.
The acquisition proceeded successfully because the buyer understood exactly what they were purchasing and had a plan to address the identified issues. Without this visibility, the same problems would have emerged as costly surprises months later.
Industry-Specific Considerations
Healthcare Technology: HIPAA compliance is just the starting point. Healthcare technology acquisitions require deep understanding of how security controls interact with clinical workflows, plus knowledge of emerging healthcare cybersecurity regulations.
Financial Services: SEC, FINRA, and banking regulations create complex compliance landscapes. Financial services acquisitions must consider not just current compliance but also how regulatory requirements might evolve.
Software-as-a-Service: SaaS acquisitions involve unique considerations around multi-tenant security, customer data protection, and the cybersecurity expectations of enterprise customers.
The Integration Perspective
Cybersecurity due diligence isn't just about identifying problems , it's also about planning solutions. The best assessments provide clear guidance on:
- Which issues require immediate attention versus longer-term planning
- Realistic cost estimates for addressing identified gaps
- Integration considerations for combining security systems and policies
- Opportunities to improve the target's cybersecurity posture through the acquisition
Making It Practical
Effective cybersecurity due diligence requires balancing thoroughness with practical deal timelines. Here's what works:
Start Early: Begin cybersecurity assessment in parallel with financial and legal due diligence rather than waiting for other workstreams to complete.
Focus on Material Issues: Concentrate on cybersecurity issues that could significantly impact deal value, integration complexity, or post-acquisition operations.
Get Expert Help: Cybersecurity due diligence requires specialized expertise. The cost of expert assessment is minimal compared to the cost of missing significant issues.
Plan for Integration: Use due diligence findings to inform post-acquisition cybersecurity integration planning from day one.
The Bottom Line
Cybersecurity due diligence has become an essential component of smart M&A execution. The goal isn't to find perfect targets , it's to understand cybersecurity risks and opportunities so you can make informed investment decisions.
When done well, cybersecurity due diligence provides the visibility needed to proceed with confidence, knowing you understand what you're buying and have a plan to address any challenges you've identified.
