Venture capital firms and acquiring companies need to pay more attention to cybersecurity and data privacy during the due diligence process of mergers and acquisitions (M&A). While traditional due diligence focuses on financial audits and market research, it often overlooks cybersecurity risks, leaving firms vulnerable to unidentified threats that can result in financial and reputational setbacks.
A prominent example of the consequences of neglecting cybersecurity in M&A is the case of Verizon and Yahoo. In 2016, Verizon discovered a massive data breach in Yahoo’s systems during their acquisition, leading to a $350 million reduction in Yahoo’s sale price. This incident highlights how cybersecurity incidents can have severe implications for acquiring companies, including lawsuits, regulatory actions, and reputational damage.
Moreover, when a company with inadequate cybersecurity measures is acquired or merged with a larger organization, the cost of bringing it up to compliance and regulatory standards can be time-consuming and expensive. Poor cybersecurity practices can lead to financial risks, such as fines and the cost of upgrading security infrastructure, as well as reputational damage that erodes customer trust.
Other cases demonstrate the impact of data breaches on M&A deals. For example, Marriott International’s acquisition of Starwood Hotels & Resorts was marred by a data breach affecting over 327 million guests. This breach resulted in class-action lawsuits, regulatory fines, and a reputational nightmare for Marriott.
In another case, Facebook walked away from acquiring the predecessor of TikTok, Musical.ly, due to concerns about compliance with US legislation and regulations, as well as potential legal action related to data privacy violations. These examples emphasize the financial and reputational risks associated with M&A transactions that neglect cybersecurity and data privacy.
To address these risks, venture capital firms and acquiring companies need to consider the role of digital risk monitoring solutions in their due diligence process. Traditional methods that rely on checklists and questionnaires are often ineffective in assessing the true cybersecurity posture and risk of an organization. Digital risk monitoring solutions offer deeper visibility and actionable intelligence by scanning both the dark web and surface web for potential threats and vulnerabilities.
These solutions provide real-time monitoring to identify threats and exposures related to the targeted acquisition. They can help companies make informed decisions during negotiations and even require cybersecurity improvements as a condition for finalizing the merger. Digital risk monitoring tools also integrate seamlessly into larger business intelligence or security monitoring ecosystems, allowing for continuity of data interpretation in the due diligence process.
Furthermore, these tools can focus on supply chains and third-party vendors, extending the monitoring to ensure cyber resilience throughout the entire ecosystem. By using digital risk monitoring solutions, venture capital firms and acquiring companies can conduct a cost-benefit analysis, negotiate better deals, and ensure the cyber resilience of their investments.
In conclusion, venture capital firms and acquiring companies must prioritize cybersecurity and data privacy during the due diligence process of mergers and acquisitions. Neglecting cybersecurity can have severe financial and reputational consequences, as demonstrated by high-profile cases. Digital risk monitoring solutions offer an effective way to identify hidden risks and make more informed decisions, ultimately protecting the interests of both the acquiring company and the target entity.