Cybersecurity Challenges in M&A Transactions: Safeguarding Digital Assets

Analysis

Dr. Ákos Mátés-Lányi LL.M., Head of Transactions / M&A, Noerr and Partners Law Firm

M&A transactions signify a pivotal moment for companies aiming to expand, consolidate, or diversify their business portfolios. In today’s digital era, the significance of cybersecurity in M&A dealings cannot be overstated.

As technology becomes integral to operations, the risks associated with cyber threats and data breaches amplify, making meticulous evaluation and mitigation of cybersecurity issues an imperative aspect of transactions.

Data Breach or Intellectual Property Theft

If a company experiences a significant data breach during the due diligence phase of an M&A deal, it can expose sensitive information, eroding trust between the parties involved. This breach of trust could ultimately lead the acquiring company to back out of the deal.

Financial Loss and Legal Liabilities

A cyber-attack that disrupts the operations or financial stability of the target company can also affect the valuation and terms of the deal. For instance, if a company’s systems are compromised, leading to a significant financial loss or potential legal liabilities, the acquiring company may reassess the financial implications of the acquisition, leading to a renegotiation of the deal terms or even a complete withdrawal.

Reputation Damage

A high-profile cyber-attack on the target company can result in severe reputation damage. If the breach becomes public knowledge, it could lead to a loss of customer trust, brand damage, and negative publicity. For an acquiring company, associating with a target company that has suffered such a breach might be detrimental to its own reputation and business prospects. Consequently, the acquiring company might abandon the M&A deal to protect its own brand and reputation.

Cybersecurity Issues in Due Diligence Phase

During the due diligence phase, potential acquirers scrutinize the target company’s operations, finances, and assets. Evaluating the cybersecurity posture assumes precedence as it involves assessing the target’s data privacy measures, system vulnerabilities, compliance with regulations, and prior history of cyber incidents.

One challenge encountered in this phase is obtaining comprehensive visibility into the target’s cybersecurity landscape. Often, companies lack transparency in disclosing their cybersecurity vulnerabilities, which can lead to overlooked risks. Conducting thorough cybersecurity assessments, including vulnerability scans, becomes imperative to identify potential threats and liabilities.

Cybersecurity Issues in Drafting Phase

In the drafting phase of M&A transactions, integrating cybersecurity concerns into legal agreements and contracts is crucial. Addressing cybersecurity aspects in contracts, including representations, warranties, and indemnities, is essential to allocate risks and responsibilities effectively between the parties involved.

Issues often arise regarding the disclosure of cybersecurity incidents and the allocation of liabilities for any undisclosed breaches post-transaction closure.

Current Trends

Recent trends in M&A transactions reflect an increased focus on cybersecurity risks. Buyers are becoming more vigilant, demanding robust cybersecurity assessments and warranties to safeguard their investments. Regulatory bodies are also tightening data protection laws, underscoring the importance of compliance in M&A transactions involving sensitive data. Additionally, emerging new technologies, such as cloud computing, IoT, and AI, introduce complex cybersecurity challenges.

As M&A transactions continue to shape the corporate landscape, the role of cybersecurity in ensuring the success and sustainability of these deals cannot be overstressed. Addressing cybersecurity issues comprehensively during due diligence and drafting phases is critical.

To thrive in an everevolving digital ecosystem, stakeholders involved in M&A transactions must prioritize cybersecurity diligence, compliance, and mitigation strategies. By doing so, they fortify their organizations against cyber threats, uphold regulatory compliance, and pave the way for successful and secure M&A transactions.

This article was first published in the Budapest Business Journal print issue of December 15, 2023.

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