Improved financial and operational efficiencies, reduced IT costs, and expanded market share are major drivers of M&A. However, these benefits can be diminished by the financial impact of integrating new IT systems, risks associated with new types of data management, and regulatory compliance requirements of the target. This underscores the benefit of integrating Cyber Risk Quantification (CRQ) pre- and post-merger.
Since 2019, the number of successful global M&A deals has exceeded 40,000 per year (S&P Global Market Intelligence). Digitalization has added complexity to the process because of the number of digital processes companies now depend on. Before closing a deal, cyber due diligence is a crucial step for a buyer. It is an opportunity to gain perspective on the potential operational and financial impact of integrating new IT systems, regulatory compliance risks, and any control gaps a target brings with them.
Our CRQ approach identifies the key digital assets (crown jewels) of the target and maps its value chain. Using our library of risk scenarios, we build a risk universe and then scope the top risks. The quantified results are the first step in identifying any new potential material risks that could result from a merger.
Case Study: A small health startup with valuable intellectual property is being acquired by a major health company
Before acquisition the buyer wants to ensure that they can integrate the target company while maintaining the target's support services for current customers and look at potential risk to IP and the cost of integration.
It is crucial to assess the target company's cyber and technology risk during the due diligence phase of an M&A process. Pre-merger, it is important to map the value chain with the critical digital assets. As with the example above, this could be intellectual property (IP), Protected Health Information (PHI), Personally Identifiable Information (PII) or other kinds of structured or unstructured data. New types of data can bring new regulatory compliance requirements as well as different security controls and new risk scenarios.
And in the post-merger period, it is important to know how quickly the IT systems can be connected or integrated.
Each stage–discovery, quantification, control assessment–informs the next. It is important to identify any new risk scenarios resulting from the merger and what mitigation actions need to be taken, such as increased controls or additional support, ––and at what cost. CRQ is a risk-based approach that identifies and quantifies the threats to your critical digital assets. It allows you to align your M&A investment strategy with your risk appetite.
Let's take a look at how we have addressed M&A pre-merger due diligence using CRQ.
Map the value chain of the target company, and acquiring company, if not yet done. And identify the critical digital assets.
-What are the differences between the buyer and the target company?
-Do any of the differences introduce new cyber risk scenarios for the buyer?
CRQ takes risk appetite into consideration when assessing the financial impact of cyber incidents and how to implement controls to reduce the potential impact, bringing value to your cybersecurity strategy.
Identify infosec practices and perform control assessment for both companies.
-Are there any gaps? If so, why?
With the results of quantification and the control assessment, you will be able to assess the cost of implementation and how much time it will take.
-Based on your investment strategy and risk appetite, does the acquisition price need to be adjusted?
-Does the acquisition fit with your growth strategy and timeline?
Don’t let cyber uncertainties diminish the value of your next acquisition. Cyber Risk Quantification will add value to your next M&A due diligence process by identifying the critical assets of the target and quantifying the most frequent and costly risks you will face post-acquisition.
IT integration can be costlier than anticipated or require more time to bring online, impacting the value of the acquisition price. While there can present unforeseen challenges, leveraging CRQ transforms these challenges into strategic opportunities.
Control gaps that result from disparate capabilities and data can manifest themselves in a number of ways. Addressing these gaps is critical to reducing the potential financial impact associated with risk management, security, and compliance.
The task of harmonizing regulatory compliance requirements and adapting to different legal jurisdictions requires strategic planning. Increased regulatory requirements could increase operating costs post merger.
Your critical digital assets are key to your value chain. During due diligence, it is important to identify the target's critical digital assets and map them to the value chain before quantifying any new risk scenarios.
We understand that asking the right questions is key to effective due diligence. Our approach is focused on identifying potential risks and opportunities, with each step providing actionable insights. We leverage our quantitative analysis to reduce bias and ensure that data is defendable.
Our team facilitates a risk-based M&A due diligence process, where risks are not only identified but quantified, informing your decisions.
We look forward to hearing from you.
Cyber risk due diligence is a critical part of any M&A process. Both the acquirer and the target may face issues. For example, combining IT systems or platforms can create vulnerabilities. There may be third-party risks, data privacy issues, and inadequate cybersecurity protocols. An understanding of the target's value chain, risk scenario scoping, and control assessment can help protect your investment.
Performing Cyber Risk Quantification (CRQ) analysis can be a strategic and regular undertaking. It can be valueable at the various phases of an organization’s lifecycle and decision-making processes. It can be used for strategic planning, M&A due diligence, when introducing new technologies, etc.
M&A failures can stem from challenges in integrating systems and managing diverse data, leading to breaches or non-compliance. Cyber due diligence, enhanced with quantification, allows buyers to validate the acquisition price and ensure a successful integration knowing the financial risks.
C-Risk is a recognized expert in Cyber Risk Quantification using the FAIR™ methodology. We provide CRQ consulting services, managed services, and training.
