This blog is the second part of the discussion of security in mergers and acquisitions (M&A). I suggest to read Part 1 first, as I’m going to build on it and talk about what happens after the deal is finally signed.
Ok, it’s time to put that champagne glass down. I have bad news: closing the deal was the easy part. Now the hard work begins.
The purpose of the integration phase is to create value. More bad news: 83% of the M&A deals did not boost the shareholder value (according to KPMG global research report) and total average returns on M&A are negative (A.T. Kearney research).
All too often the root cause of these failures lies in poor integration.
There are ample opportunities to start losing the value right at the start during the handover between the deal and integration teams.
To alleviate this, I suggest identifying key resources and preparing implementation plans early in the process. Just like having an overall acquisition strategy and plan precedes the negotiation and due diligence phases, having an approach to integration is key to success. Deliverables, due dates, milestones, information flows are all need to be defined in advance. And cyber security plays a big role here.
A newly acquired company is a prime target for cyber criminals due to the magnitude of change it’s going through during the M&A process. Lack of governance, employee turnover, security vulnerabilities and many other factors can contribute to embarrassing security breaches that affect the reputation of the combined entity.
Key cyber security risks to consider:
- Regulatory compliance liabilities and impact (e.g. GDPR fines)
- Theft of intellectual property (data leaks, key employees leave with all the secrets, etc.)
- Repetitional damage (unwanted media attention due to data leaks)
The focus of cyber security post-deal is on protecting the value from internal and external threats, enabling secure integration, achieving long-term security and minimising cultural impact.
This can be attained in the following ways:
- Supporting the project team deployment (security education, secured laptops, secure remote connection, encryption, etc.)
- Identifying and prioritising key assets, systems, people and processes
- Assessing the security of these assets (a carefully scoped pentest might be a good idea)
- Ensuring confidentiality, integrity and availability of these assets (backups, antivirus, firewalls, patches, etc.)
- Establishing and controlling access
- Supporting the rationalisation of normalisation of processes
- Developing an approach to cyber risk management (including third-party risk)
- Rolling out security training
- Supporting secure migration of applications and data
- Supporting with incident management
- Supporting with achieving compliance with relevant laws and regulations
- Setting up a security monitoring capability of the merged entity
- Establishing governance
- Developing integrated security strategy and roadmap
Different cultures, attitudes to security and varying control frameworks are among many challenges to consider. Controls are typically relaxed to allow for the integration to go faster. This is where you need to be on a look out for increased threat levels.
To address these effectively, it’s a good idea to split your efforts in two stages: interim and long-term integration.
From the cyber security perspective, during the interim phase, the aim is to assess cyber maturity across the acquired entity rather than come up with a permanent solution.
High-risk areas should be addressed first by establishing interim controls. Long-term integration efforts should be initiated in parallel, starting with development of a security strategy, governance and roadmap.
Proportionality and risk-based approach is key here when integrating the acquired company into your governance structure and control framework. Focus on what matters most and prioritise security controls to protect the value and avoid backlash.
Don’t forget that people would need to still be able to carry out their duties with minimal disruption, but’s it’s a good idea to establish who needs access to what and why.
Some things can be outside of your control, like losing key employees after deal completion due to inadequate incentive structure. While it might not be your job to design the right retention mechanisms, it’s your responsibility to protect intellectual property, as mentioned above.
Above all, cyber security efforts during the integration process should be joined up with other functions and stakeholder groups. Work closely with the Legal team to minimise potential impact of compliance-related risks, engage Procurement for third-party risk management and align with the executive team to establish the right security culture.
Recently I’ve had an opportunity to support a number of high-profile mergers and acquisitions (M&A) from the cyber security perspective. Although, due to the confidentiality of these projects I won’t be able to share any details, I would like to talk about some learnings and common approaches that might be useful.
The focus of this blog will be on the due diligence process and the role of security in it. It’s written from the buyer’s perspective, but insight into this thought process can be useful if you’re selling too.
Acquiring firms usually seek to fill the gaps in their capabilities (e.g. new technologies) in line with their strategy or to find overlaps allowing for cost reductions through greater consolidation.
Due diligence during M&A is rarely simple, quick or 100% accurate. It aims to reduce risk for both parties involved in the transaction and identify value creation opportunities. Although it might feel brief due to the the business pressures, no amount of time will allow you to detect all the threats and identify every risk facing the business.
The main questions you would like to have clarity on from the security perspective are: “What security measures does the company have in place?” and “Are these the right measures?”
Sometimes, it feels like an art rather than a science. But there are ways to reduce the uncertainty surrounding this process.
Jason Weinstein, former Deputy Assistant Attorney General, U.S. Department of Justice, once said: “When you buy a company, you’re buying their data, and you could be buying their data-security problems.”
Security teams, however, are not always welcome during M&A activities. Why? For one thing, it takes time and costs money to involve them. They may also scare or annoy employees of the target company and can be perceived as slowing things down or, worse still, hampering the deal.
So even when security gets involved, it’s usually quite late in the process with a few days left before the deal needs to be finalised.
To make matters worse, access to the target company is often restricted and the best you can get is a (partially) filled questionnaire. Your security-related questions form a part a broader pre-deal survey, so it’s a good idea to put some thinking what you should ask and why.
A number of subject matter experts in the deal team are all scrambling for limited available time and priority is sometimes given to understanding financials, legal aspects or broader IT strategy, rather than security specifically. Cyber risks, however, should form a core part of the process.
To alleviate some of the challenges outlined above, it helps if the value of the security involvement is clearly articulated (yes, it’s your job to do that). In short, in brings additional expertise to the table, protects the negotiating position and informs senior executives about potential risks, providing recommendations on mitigating them.
To save time, I’ve developed a high-level assessment template that covers all the possible areas of interest from the cyber security perspective and helps identify key assets, systems, processes and employees, but I would never send it as is. You need to do your homework and learn as much about the company and its culture as you can using the information in the public domain.
There are paid-for services out there but Google often does the job, as many OSINT experts would argue. Assuming, of course, you know how to use it! Open source intelligence and research skills at this stage are more useful than ever. Checking the dark web to see if target’s confidential information is being sold by cybercriminals can be useful too.
After the initial research, you can now tailor the questionnaire to verify your initial thoughts. Don’t be shy to ask for evidence if you want to see their policies or latest pentest reports: there are usually secure data rooms set up to share these kinds of documents.
The aim here is to understand the target company risk profile and make the the deal team aware of the potential risks and opportunities. You can go one step further and quantify the risk, as this would help inform the value of the deal, potentially reducing the asking price to account for remediation activities during the post-deal phases. Despite the number of unknowns (believe me, it’s normal) it is also a good practice to provide recommendations.
It’s helpful to group your recommendations into three broad categories:
- Risks that should be addressed before the deal can be signed (red flags)
- Items that should be included in the contract (conditions on signing the deal)
- Post-deal activities as part of a 30-60-90 day plan that helps prioritise risks mitigation actions
Ask the target to disclose any known security flaws, issues and incidents. It’s probably also a good idea to reserve some funds for the remediation activities post deal. It shouldn’t be all negative; identify value creating opportunities too, if you can.
If you’re a seller, you can increase your marketability by assessing your own assets, discovering your own vulnerabilities and addressing these. Establishing processes to demonstrate compliance is a bonus. But don’t just focus on the current state, think about how your assets are going to stay so post-deal.
Congratulations! You successfully supported the business in making the right decision about this company. But the role of cyber security doesn’t end here. If the board decides to go ahead and the agreement is reached, we are moving into the post-deal stage.
Now, we need to ensure a smooth and secure integration.