The Importance of Cybersecurity in Tech M&A Deals

The Importance of Cybersecurity in Tech M&A Deals

As technology firms know all too well, the ongoing shift to digital data renders organizations more vulnerable to cybersecurity threats than ever before. Tech M&A transactions place both parties in a vulnerable position, and attention to security concerns is critical. For sellers, an emphasis on cybersecurity also offers peace of mind to risk-averse buyers, potentially ensuring a smoother and more successful transaction.

These five cybersecurity considerations can help ensure a smooth and successful transaction.

Employee Cybersecurity Issues

Your employees are one of your areas of greatest cybersecurity exposure. So mitigating risk begins with shoring up your team. That requires training and testing to ensure your team knows the signs of phishing, social manipulation, and other common ploys. Clear policies and strong employment contracts are a good sign that owners take cybersecurity seriously.

Cybersecurity Insurance

Cybersecurity insurance may require extensive employee training, as well as clear investments in cybersecurity. An additional benefit is it shows that a company has taken cybersecurity seriously and met certain minimum thresholds.

The Right Technical Safeguards

Buyers must undertake the effort necessary to understand a company’s IT infrastructure, including its maintenance and potential security issues. And this requires honesty from sellers. Buyers must ask about security policies, prior security issues, and recent attacks over the past 2-3 years. If there are significant vulnerabilities, having a third party cybersecurity firm assess vulnerability can help mitigate risk.

Contractual Requirements

Due diligence should always involve a review of contractual agreements between the seller and third parties to assess cybersecurity obligations, as well as potential areas of exposure. For instance, if a company with a history of significant breaches has access to sensitive data, this poses a clear liability, and should be corrected if possible. It’s also important to assess whether any third parties own sensitive data or IP, such as is often the case when companies hire independent contractors.

The contractual requirements a company must follow can be quite onerous, and in some cases even contradictory. So a careful due diligence process under the guidance of an attorney knowledgeable about cybersecurity can offer the right assurances and identify issues before they become crises.

Data Protection and Privacy Compliance

A recent glut of data and privacy laws, both domestic and international, have complicated many tech M&A transactions. Moreover, regulators have become more stringent and more willing to enforce the law even when doing so has significant economic consequences.

Due diligence is critical here, since it can help with identifying which laws apply. Particularly when international acquisitions are involved, the parties may not even know that they are subject to a myriad of different laws. Therefore it is prudent to work with a skilled M&A lawyer early in the process.

General regulatory considerations aren’t enough, though. Buyers must also assess whether the company which they intend to buy may be the subject of additional regulatory scrutiny or areas of increased legal exposure. And sellers must be prepared to provide this information, lest an unpleasant surprise sideline the deal.