In M&A transactions, a lot more changes hands than just companies and their assets. At every stage of a deal, copious amounts of data are passed between entities. The systems and practices companies use to collect, store, and transmit data and keep it safe are therefore critical to the process.
Whenever you enter into a data transaction with another organization, their data and their data culture become intertwined with yours. In today’s cybersecurity landscape, this can be a risky proposition.
Cybersecurity Risks and Regulations Are on the Rise
Today, it’s common to see headlines about data breaches and ransomware risks. While advanced software tools are helping organizations detect threats faster and protect data better, they’re also helping bad actors evolve their techniques. Cyber attackers are using artificial intelligence and machine learning to hack into more systems and intercept more data from more places.
The intensifying threat landscape has compelled regulatory bodies into action. Jurisdictions around the world are reacting to the rise and evolution of cyber threats with more stringent data privacy laws. The European Union’s General Data Protection Regulation (GDPR), for instance, requires companies to follow data protection guidelines and demonstrate maturity on specific data privacy provisions. They must keep records on data processing activities, conduct data protection impact assessments, and have data governance policies and procedures in place.
Also in the EU, a new Artificial Intelligence (AI) Act came into force in August 2024. The AI Act will be implemented gradually, with provisions on transparency and obligations coming in 2026 and 2027. Companies that use or develop AI systems will need to know the legislation and comply with its requirements, which include leadership obligations and management responsibilities for AI.
In Canada, the province of Quebec passed stricter legislation in 2023 to protect personal information in the private sector (PPIPS). Canadian organizations that collect or exchange personally identifiable data are required to follow certain provisions. If not, the Commission d’accès à l’information can impose penalties for violations – up to $10 million CAD or 2% of the company’s worldwide revenue.
These new and evolving regulatory regimes create more work for organizations, but when faced with the possibility of a devastating cyber attack, the extra steps are worth it. A ransomware attack can lock employees and management out of systems, causing financial losses due to an ensuing shutdown. The loss of consumer, employee, or company information could have serious financial, legal, and reputational implications.
Protecting Your Deal from Day One
It’s clearly in every organization’s best interest to set up a strong data perimeter. Nowadays, every company needs robust information security, cybersecurity, and personal data privacy practices. Cybersecurity needs to be top of mind from the very first day of a company’s operations.
Entering into an M&A scenario ups the ante. Dealmakers need a comprehensive understanding of the cyber risk posture of all sides of the deal. After all, acquiring companies are inheriting the security posture of incoming organizations, including data vulnerabilities and third-party relationships. In the best possible scenario, they’ll inherit a hack-proofed perimeter and a corporate culture that prioritizes strong data governance. However, they might absorb weak data hygiene practices, face financial fallout from a recent breach, or be staring down monetary penalties for non-observance of privacy laws.
If one party is involved in an ongoing data incident, has outdated systems, or has poor or non-compliant security practices, those are red flags. They could impact deal valuation, embroil the acquiring company in legal challenges, impact future growth, or damage the company brand.
Of course, those risks might not be apparent at the outset of the deal. Plus, there’s always a risk that parties will be exposed to cybersecurity threats during the deal process. If other parties have weak information security practices, you risk taking on vulnerable data during due diligence. To transact the deal, you might be asked to use insecure channels to exchange due diligence documentation.
To limit exposure, companies need to prioritize data privacy and security from the beginning of any M&A deal. Cybersecurity risk assessment is a fundamental part of every transaction, from the pre-deal stage, through due diligence, and continuing long into post-deal activities. To ensure the very best deal conditions, every single data exchange during the deal process needs to be optimized for regulatory compliance and cyber threat reduction.
Protect M&A Data by Using a Secure Virtual Data Room
To get the best protection for sensitive documents, you need to conduct transactions inside a secure virtual data room (VDR) that employs a trusted cloud service. Generic file-sharing platforms are unsuitable for this purpose. They may meet basic standards for regulatory compliance, but they’re notoriously simple for cyber hackers to break into.
Unfortunately, M&A deals often attract cyber criminals who find cracks and weaknesses in these moments of transition. Deals involve a larger attack surface, and new employees with new access privileges and credentials to exploit and target with phishing attacks. To complete M&A deals successfully, sensitive deal-related documents and data need safekeeping.
If the companies involved in a transaction are targeted by IP thieves or swept up in a data theft event, that could be the end of the deal. Fallout from a cyber breach could lower deal valuation, force a change to the deal terms, or tarnish your reputation as a deal partner. If a ransomware attack or breach occurs that’s only discovered after deal completion, there could be long-term legal and financial implications for the acquiring company.
When you’re studying deal points and digging into financial history and earning potential during due diligence, you’re sharing data beyond the corporate firewall. You cannot risk a data breach or hack.
VDRs with bank-level security encryption at rest and in transit are vital to ensure safe document sharing. It’s critical to choose a VDR with up-to-date security credentials in place, including SOC 2 and ISO/IEC 27001:2013. Verify that your VDR supports information and data privacy compliance in all jurisdictions implicated in your deal, such as GDPR, HIPAA, PPIPS, and other regulations.
Secure Due Diligence, Both Before and After the Deal
Pre-Deal Diligence
Once you’ve set up a secure collaboration space to carry out due diligence work, you can start assessing the cybersecurity preparedness of the deal parties. Involve the CISO from the very beginning to learn more about past data breaches and security systems that need upgrading. This knowledge helps you work out cost and timing implications for deal valuation and make plans to mitigate any vulnerabilities.
Ask questions about what data is gathered and how it’s used. Learn what data, if any, is shared with third parties, and find out if any cross-border data transfers occur and what protections are in place to secure them. Dig into the parties’ pseudonymization and encryption practices and find out what their incident response strategies involve.
Decide how cybersecurity and data protection risks impact the deal structure. If risks exist, consider including “risk allocation provisions” in the deal memo that indemnify buyers of potential lawsuits or penalties. If major issues can’t be handled before deal completion, specify a price correction in the contract or append an indemnity agreement.
Post-Deal Diligence
Once the deal’s gone through, cybersecurity concerns don’t disappear. Data and information security assessments are a critical part of post-deal due diligence. Conduct a gap analysis to learn what cybersecurity, AI, and data privacy practices need more attention. Where compliance and technical gaps exist, develop a compliance strategy and implement a plan to integrate and update critical systems.
Because cyber threats are always evolving, follow up with continuous monitoring. Develop and test systems to detect threats and implement effective incident response plans to contain them.
A Firmex VDR is Your Security Shield
When you add pre-deal and post-deal diligence to the equation, M&A transactions are often extended engagements. With so many information security questions to consider, it’s essential you house those activities inside a reliable and secure VDR.
As the most widely used virtual data room for diligence, compliance, and litigation, Firmex has had over 223,000 customers trust us with their data. Our platform has advanced security features and permission settings that control and monitor document access. Two-factor authentication and single sign on grant entry only to designated users. Dynamic watermarks and save, print, and share disabling ensure that sensitive documents don’t travel beyond the confines of your secure deal hub.
Whitelisted by major financial institutions, Firmex offers multiple levels of security and control to ensure safe document sharing at all stages of your M&A transaction.
To get started with a Firmex VDR to protect your ongoing M&A deals, book a demo.
