The Role Of Cybersecurity In M&A

Cybersecurity M&A Activity Continues

Cybersecurity companies are attracting interest from buyers—whether they’re strategics, private equity firms or technology-driven acquirers looking for add-on acquisitions. This market growth creates a strong opportunity for cybersecurity businesses to optimize their valuations in the M&A process.

Performing effective cybersecurity due diligence during the M&A process benefits both parties in a deal. It reduces costs, product development time, productivity disruption, and lost revenue.

The Buyers

Although some industry observers were concerned about an impending M&A slowdown, the fourth quarter proved to be stronger than expected. For example, one of the largest cybersecurity deals was PE firm Thoma Bravo’s purchase of security analytics vendor ForgeRock for $2.3 billion on Oct. 11.

Regardless, overall deal and valuation trends appear to have slowed down from their 2021 peak, according to analysts. This may be due to the economic climate and concerns about possible interest rate increases, or it could be that larger vendors are focusing on product strategy and development.

Regardless, strategic buyers and financial sponsors are still attracted to the sector’s fundamentals, including stability, profitability and growth. The right M&A cybersecurity due diligence can help mitigate risk and ensure a smooth transition process. It’s vital that the acquiring company and target firm establish a plan for assessing cybersecurity gaps, identifying potential vulnerabilities, and homogenizing systems and procedures. By implementing this, M&As can avoid costly disruptions to workflow and productivity as well as prevent data breaches that could derail an acquisition.

The Targets

While the current market environment may be a bit more conservative than last year, fundamental changes continue to support strong cybersecurity sector M&A activity. The combination of increasing end-user demand for comprehensive solutions, early stage equity investor caution, lender conservatism and insatiable corporate acquirer appetites for quality assets should create a combustible mix for continued M&A activity.

Acquiring firms must make sure they are properly assessing the target firm’s security posture in a pre-acquisition due diligence process, which should include penetration testing and active threat hunting. This should also include assessment of the target firm’s suppliers, partners and third-party service providers to understand any vulnerabilities in the supply chain.

Once a deal is signed, significant risks increase as the two businesses integrate their networks. A breach during integration could result in costly research and legal fees, lost revenue, lowered staff morale and reputation damage. To mitigate these risks, a risk profiling assessment and continuous monitoring should be established to identify and remediate potential gaps in the target firm’s cyber defenses.

The Strategy

The growth in M&A activity has seen a wide range of buyers emerge, including strategics with existing cybersecurity operations and financial sponsors looking to add capabilities to their platform. These may be public or privately held and can be either management or founder owned or investment fund managed.

M&A deals present a unique set of risks that must be addressed proactively in order to ensure a successful integration process. This is especially true for the divestiture stage, when a detailed separation plan is required to deliver a transfer of security responsibilities and properly cost the sale of assets.

Effective due diligence through risk profiling will allow a buyer to uncover vulnerabilities and quantify residual risk that could impact deal value. It will also help a buyer understand what needs to be done after the acquisition in order to ensure a smooth post-merger transition. This will include integrating cybersecurity systems and cultures, ensuring a secure environment for the company to operate in and reducing the risk of exposing sensitive data.

The Transaction

As the broader business world struggles with uncertainty, both strategic and financial buyers have shown increased interest in the cybersecurity sector. This trend is likely due to the strong fundamentals in the space, including growth, profitability and scale.

Developing a proactive plan to conduct M&A due diligence through risk profiling will increase the value of your firm during the negotiation process. It can also help reduce the risk of a data breach, which can cost in terms of research and legal fees, lost market, damage to reputation, staff turnover, fines and more.

Excellent cybersecurity benefits both the acquiring and target firms during M&A, as it allows for a cleaner acquisition and transition period. Uncovering a cyber risk that was not previously disclosed, however, can dramatically alter the M&A valuation and potentially cause a deal to fail. This on-demand webinar will cover strategies and best practices for conducting M&A due diligence through risk profiling to mitigate risks and strengthen negotiations for optimal valuations.

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