Deal leaks data protection during MA Financier Worldwide

pJOIN MAILING LIST ppCorporate DisputesppRisk ComplianceppppFollow UsppMarch 2025   FEATURE MERGERS ACQUISITIONSppFinancier Worldwide MagazineppMarch 2025 IssueppData integrity is a fundamental component of a successful MA transaction It is a requirement that spans the entire deal lifecycle from the evaluation of target companies through identifying areas of synergies to ensuring effective integrationppShould data be leaked however and integrity lost a transaction is potentially in jeopardy In many instances data leaks are the reason why some deals fail to get over the finish line entirely or are only completed with a substantially revised valuationppThe reality is that MA practitioners in their quest to negotiate the best possible deal may be less focused on the tools that are used to store and share confidential transactional data both internally and externally This can leave such data highly vulnerable to hackers with malicious intentppThreat actors often target companies in the midst of MA activity and more recently upon deal announcement aiming to exploit the urgency of the situation lack of integration or preparedness attests David Dunn senior managing director at FTI Consulting During an already highstakes time this places additional pressure on organisations to understand the nature of the breach and the scope of the data impactedppPersonal data intellectual property confidential company data and other sensitive information may be exposed all of which carry unique implications across legal regulatory reputational and financial and can delay or even prevent the completion of a transaction adds Nina Bryant a senior managing director at FTI Consulting A history of breaches fines and data protection failures can potentially erode a companys valueppPrevalenceppAs a wealth of research can testify the likelihood of a data leak occurring at some point during the MA lifecycle is high particularly given the range of interested parties typically involved in a transactionppA data leak can critically undermine the success of a transaction potentially derailing it entirely says Ms Bryant The exposure of sensitive data including financial details or proprietary information can damage trust between parties deter investors or result in regulatory scrutinyppAccording to a study by Forbes 40 percent of acquiring organisations involved in an MA transaction detected a cyber security vulnerability during the acquired companys postacquisition integration processppData breaches are becoming more common within the lifecycle of the MA process given that the success of a deal is dependent on both the investor company and the target company concurs Maggie Rose vice president of client solutions at K2 Integrity This increases the threat landscape and potential entry points for attackersppAs such the cyber security maturity postures of both companies must be considered she continues Separate entities even if in the same industry commonly have discrepancies among key areas in information technology and governance risk and compliance which can lead to unforeseen risks that were not previously relevantppMoreover notes Ms Rose the creation of a new entity also creates an opportunity for attackers to take advantage of reorganisation initiatives given that many new entities are primed for distraction by not prioritising cyber security as a key issueppTestifying to this contention is a 2023 survey by Aon Top 5 Cyber Threats To Mergers and Acquisitions which reveals that while 42 percent of respondents acknowledged that a failure to identify cyber security and technology risks in MA targets could prevent a successful deal only a quarter of said respondents cited cyber security as an important focus area for due diligenceppCyber security is critical to safeguarding sensitive information and ensuring the success of transactions argues Mr Dunn Ensuring robust data security measures is therefore crucial to protecting confidentiality and preserving a transactions integrity and successppLeaked transaction information may disrupt negotiations impact deal valuation or attract competing bidders he continues The harm caused by a leak can also have longterm consequences for stakeholder confidence and customer retentionppSecurity measuresppBefore the commencement of an MA transaction dealmakers are welladvised to have in place a series of security measures to help minimise the risks of a data leakppThe merging of two distinct companies with possibly varying information technology systems data handling processes and regulatory requirements makes it vital for companies to consider data protection measures during the preinvestment process of the MA lifecycle concurs Ms Rose The investor company and target company will need to integrate IT systems and other information security capabilities to ensure business continuity and align on incident response measuresppAccording to analysis by MergerWare there are a number of measures outlined below that dealmakers can take to help protect their companys interests and ensure a secure MA processppFirst identify and classify sensitive data MA deals involve vast amounts of data from financial records to intellectual property and customer information Companies should begin by identifying and categorising sensitive data especially crown jewel assets that require heightened protection By knowing what critical data is and what it contains organisations can apply more precise security measuresppSecond implement access controls Limiting access to sensitive data is essential in preventing leaks Only authorised team members should have access to specific types of information and access levels should be adjusted as the deal progresses Rolebased access controls and multifactor authentication add layers of security to ensure that only the right people have access to critical datappThird utilise secure MA technology Using a secure purposebuilt MA platform can provide the structure and tools needed to handle large volumes of sensitive data safely These platforms often include features for data discovery secure sharing compliance tracking and automated access controls which help reduce the risks of human error or unintentional exposureppFourth encrypt data in transit and at rest Encryption is crucial to protect data whether it is stored within the platform or shared across teams Encrypting data both in transit while being transmitted and at rest when stored ensures that even if data is intercepted it remains unreadable and secureppFifth monitor and audit activity Regular monitoring and auditing of user activity can help identify unusual access patterns or suspicious behaviour early By setting up alerts and reviewing access logs organisations can respond quickly to potential breaches or leaks minimising damageppLastly conduct education and training Data security is not just about technology it is also about people Training around data handling best practices phishing detection and secure collaboration practices can help reduce the risk of accidental data leaksppRegulatory requirements should also be considered given that companies may be subject to different data protection and privacy regulations and are therefore required to update policies and procedures accordingly to build a comprehensive new cyber security framework adds Ms RoseppAlso important to consider in the view of Merlin Piscitelli EMEA chief revenue officer at Datasite is the use of a virtual data room VDR to share and store documents and artifacts particularly for sensitive MA transactions VDRs provide highlevel security features such as data encryption access controls and audit logs to enable secure file sharing while also offering efficient process management he contends These measures ensure that sensitive information is protectedppIt is crucial for dealmakers to consider data protection from the outset he continues Leveraging a VDR demonstrates a high level of professionalism and preparedness and signals to the buyer that the seller is serious about the transaction This in turn cultivates a wellorganised due diligence process building trust and confidenceppPosture and cultureppA vital aspect of the MA process is that of culture management Given the probability of a data leak occurring it makes sense for organisations both buyer and seller to have a strong compliance culture in place to create a solid foundation for countering risks before they materialiseppThe culture of both organisations should not be overlooked affirms Ms Rose Implementing an employee training programme to motivate awareness as it relates to cyber security threats is key especially as the MA process can create uncertainty among employeesppWhile it is ideal to conduct cyberrelated due diligence prior to a deal risks should be considered throughout the lifecycle of the MA process she continues It can take a significant amount of time to properly integrate security systems and protocols which is why it is also recommended to implement ongoing monitoring of the IT environment via monitoring tools to continuously evaluate riskppAlso a key component in establishing a strong security posture and culture is to obtain information security management certification such as ISO27001 which helps companies set out a framework to establish implement operate monitor review maintain and continually improve an information security management systemppFollowing data minimisation principles is important and reduces the overall surface of potential exposure if a data breach occurs says Ms Bryant Encryption and anonymisation or pseudonymisation of all sensitive data and strong risk and control frameworks are also essentialppAdditionally companies engaging in MA should consider data protection risks and controls early in the transaction cycle conducting specific and detailed security and privacy due diligence assessments preacquisition she continues Any companies that expect an acquisition in the near future should take proactive steps to strengthen trust and compliance to reduce data risks and prevent downstream delaysppAn MA priorityppWith the growth of AI likely to increase the volume and heighten the impact of cyber attacks in the years to come the protection of data during the MA lifecycle should now be considered a priority for dealmakers essential rather than simply advisableppIndeed evaluating existing security measures identifying new vulnerabilities and assessing future risks is becoming more imperative than ever particularly given the rise in MA transactions in many jurisdictionsppA surge in deals is automatically accompanied by a vast amount of sensitive data which can include financial records customer personally identifiable information company proprietary information and trade secrets and needs to be properly accounted for says Ms Rose As tools and technologies supporting the sharing of data continue to evolve cyber security risks will follow suit which will make each MA transaction more complex than the lastppCertainly in many quarters MA deals have already attained a degree of complexity where it is now critical for dealmakers to prioritise data protection to reduce friction during the transaction process and ultimately protect company valueppAcquiring companies should see data protection due diligence as key to understanding and reducing risks associated with the target company concludes Ms Bryant This includes associating the targets data protection posture to the value of the company and the projected costs involved in remediating potential data protection issuespp Financier WorldwideppBYppFraser Tennantp