With data breaches now a routine threat, evaluating cyber security posture is essential for managing risk. But many deal makers still limit due diligence to financials, lacking rigorous review of IT assets and vulnerabilities. This overlooks a primary source of value creation - and value erosion.
Robust cyber due diligence provides a comprehensive analysis of the target's data governance, network security, infrastructure, and susceptibility to cyber attacks. It quantifies cyber risk exposure, values data assets, and avoids liabilities. Here's what deal teams need to cover:
- Review the maturity of the cyber security program, including policies, controls, technologies, and staffing. Look for gaps or shortcomings compared to standards.
- Conduct external and internal penetration testing to probe for vulnerabilities. Hire ethical hackers to unmask flaws.
- Scrutinise source code, system logs, and architecture for backdoors, malware, and design weaknesses.
- Monitor the dark web for leaks of data, code, credentials, or IP. Subscribe to monitoring services.
- Stress test incident response planning. Ensure rapid containment and remediation capacity.
- Evaluate data governance frameworks for compliance, classification, retention and protection.
- Inspect physical security such as badge controls, CCTV monitoring, and log reviews.
- Analyze security training completion rates and phishing simulation results. Interview key staff.
- Review third-party security practices for vendors, partnerships, and connections.
- Discuss cyber insurance coverage, claiming history, and policy gaps.
Deal teams should engage technical cyber security experts to conduct the diligence. Allocate adequate time and budget. Bring in ethical hackers to independently test systems. And require remediation of issues uncovered.
The findings have direct implications for deal value and terms. Major gaps may require adjusting pricing or walking away entirely. Liabilities boost indemnities. Solid cyber posture allows higher valuation of data assets and IP.
In our digital world, cyber risks need to be front and centre in M&A, not an afterthought. Companies shortchange deals without thorough cyber diligence. Bring in the white hats, stress test the systems, quantify the risks. Cyber preparedness makes or breaks deals. Diligence is the first line of defence.
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