Case Study: The $20+ Million save through Cybersecurity M&A Due Diligence

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Nick Ashton

Introduction

In today’s digital age, cybersecurity is paramount, especially during mergers and acquisitions (M&A). NorthCap Cyber, a leading cybersecurity firm, recently undertook a critical project for a private equity house (PEH) involved in a high-stakes M&A deal. This case study explores how the team’s diligent assessment and strategic initiatives not only safeguarded the PEH’s interests but also saved them a staggering $20 million.

Client Challenges

The private equity house was eyeing the acquisition of a mid-sized tech company. While the target company showed promising growth and profitability, the PEH was concerned about potential cybersecurity risks that could compromise the deal’s value. Their primary challenges included:

  • Identifying latent cybersecurity vulnerabilities: Ensuring that there were no hidden cybersecurity risks that could lead to financial loss or reputational damage.
  • Assessing compliance: Verifying that the target company complied with relevant cybersecurity regulations and standards.
  • Evaluating incident response readiness: Understanding the target company’s preparedness to handle potential cyber incidents.

Solutions Implemented

The team executed a comprehensive cybersecurity due diligence assessment, encompassing the following key steps:

  1. In-depth Vulnerability Assessment: Experts performed a thorough vulnerability assessment of the target company’s IT infrastructure. This included penetration testing, network security evaluations, and a review of software applications.
  2. Regulatory Compliance Audit: The team audited the target company’s compliance with industry-specific regulations and standards such as GDPR, HIPAA, and ISO 27001. This audit identified gaps and provided a roadmap for achieving full compliance.
  3. Incident Response Evaluation: The team assessed the target’s incident response policies, procedures, and capabilities. This involved reviewing historical incident reports and conducting simulated attack exercises to gauge the company’s readiness.
  4. Risk Quantification and Reporting: The findings were quantified in financial terms, providing the PEH with a clear understanding of the potential risks and their impact on the acquisition’s value.

Outcomes Achieved

The cybersecurity due diligence assessment revealed significant vulnerabilities within the target company’s IT infrastructure, which included outdated software with known exploits, inadequate encryption practices, and insufficient incident response protocols. These findings had several critical outcomes:

  • Negotiation Leverage: Armed with the detailed report, the PEH renegotiated the acquisition terms, securing a $20 million reduction in the purchase price due to the identified risks.
  • Risk Mitigation Plan: The team provided a comprehensive risk mitigation plan, enabling the target company to address the identified vulnerabilities and improve their cybersecurity posture.
  • Enhanced Investment Value: By addressing the cybersecurity issues before finalizing the acquisition, the PEH not only saved money but also enhanced the long-term value of their investment.

Strategic Value and ROI

The strategic value of subject matter expertise in this M&A deal was immense. The project not only highlighted potential risks but also turned those risks into negotiation assets, directly translating into financial savings. The ROI on the cybersecurity measures was clear:

  • Cost Savings: $20 million saved on the acquisition price.
  • Future-proofing: Enhanced cybersecurity measures reduced the likelihood of future cyber incidents, protecting the PEH’s investment.
  • Regulatory Assurance: Ensuring compliance averted potential legal and financial penalties.

Samuel Brown, Managing Partner of NorthCap Cyber, emphasized the significance of strategic cybersecurity initiatives:

“When you’re about to acquire any company, it can often feel like exploring an unfamiliar house in the dark – you never know what’s lurking in the shadows and find yourself tripping over steps and hurting you feet on the dreaded ‘floor Lego’, leading to errors and avoidable pain.

Having an expert cyber partner like NorthCap is crucial. We slot in seemlessly with your normal M&A processes with the aim of uncovering hidden cyber risks. With this client, we flicked on a torch and showed them a fairly significant concern lurking in the shadows. As always, we talked them through the best path forwards and how to navigate this challenge.

It’s common to misunderstand, but our role isn’t just about ticking boxes; it’s about strategically protecting and enhancing value at every stage – and it’s tanglible value, as this example proves. With NorthCap, you get a clearer picture, avoid nasty surprises, and set the foundation for stronger, more secure investments.”

Conclusion

NorthCap Cyber’s successful programmes of investment due diligence for private equity houses exemplifies the critical role of cybersecurity in M&A due diligence. By identifying and addressing significant vulnerabilities, NorthCap Cyber save their clients 8-figure sums on their investments and set the stage for a more secure and profitable acquisition. This case study underscores the strategic value and high ROI of investing in robust cybersecurity measures during M&A transactions. If you work in M&A and want to understand the power of expert-led cyber assessments and governance, contact the NorthCap Cyber team here.

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