Mergers and acquisitions (M&A) are transformative events for businesses, offering opportunities for growth, diversification, and increased market presence. However, while financial and legal due diligence often take centre stage, IT due diligence is just as critical. Neglecting the technological and cyber security aspects of a target company can lead to significant financial, operational, and reputational risks.
In this article, we explore the key IT risks associated with M&A transactions and why a robust due diligence process, including managed cyber security services, is essential to ensuring a smooth and secure integration.
The role of IT due diligence in M&A
IT due diligence is a comprehensive evaluation of a target company’s technology infrastructure. This process assesses IT systems, cyber security risks, software licensing, data compliance, and operational capabilities to identify any potential vulnerabilities that could impact the deal’s success.
A key component of IT due diligence is cyber due diligence, which focuses on uncovering cyber risks, such as security vulnerabilities, data breaches, and regulatory non-compliance. Without a thorough IT due diligence strategy, acquiring companies may unknowingly inherit technical debt, security gaps, or inefficient systems that lead to integration challenges, regulatory fines, and operational disruptions.
Key IT risks in mergers & acquisitions
Cyber security threats and vulnerabilities
Cyber security remains one of the most significant risks in any M&A deal. A target company’s IT security posture may be inadequate, exposing the acquiring organisation to:
Data breaches: The target company may have already suffered a cyber attack, with undetected breaches that could compromise sensitive information post-acquisition.
Ransomware risks: If the target organisation has weak cyber security controls, it could become an entry point for ransomware attacks that impact the entire business. Implementing managed cyber security services can help strengthen defences and mitigate these risks.
Third-party security risks: Suppliers, vendors, and partners associated with the acquired company may also introduce vulnerabilities that could put the acquiring business at risk.
A thorough cyber due diligence process, including a detailed security assessment, helps uncover significant cyber risks and ensures that necessary remediation steps are taken before finalising the deal. Addressing these risks effectively can also protect the acquiring company’s competitive advantage by preventing costly security incidents and reputational damage.
Legacy systems and technical debt
Many companies rely on outdated legacy systems that are difficult to integrate with modern IT infrastructure. If an acquiring organisation inherits an inefficient or unsupported system, it may face:
- Increased maintenance costs
- Compatibility issues with existing platforms
- Higher risks of system failures
- Increased exposure to security threats due to unsupported software
Identifying legacy system issues early in the due diligence process allows acquiring firms to plan for system upgrades or replacements, preventing costly surprises after the acquisition.
Compliance and regulatory issues
Data protection regulations, such as the UK’s General Data Protection Regulation (UK GDPR), impose strict requirements on how businesses collect, store, and process personal data. If a target company is non-compliant, the acquiring organisation may inherit substantial legal and financial liabilities.
Key compliance risks include:
- Improper handling of customer and employee data
- Lack of documented data protection policies
- Failure to meet industry-specific compliance standards (e.g., PCI DSS for payment data, HIPAA for healthcare data)
A comprehensive compliance review helps mitigate legal exposure and ensures that regulatory requirements are met before proceeding with the acquisition.
Intellectual property and software licensing risks
Many businesses rely on proprietary software, cloud-based applications, and third-party licensing agreements. Overlooking software ownership, licensing obligations, or open-source dependencies can lead to:
- Unintentional infringement of intellectual property rights
- Breaches of licensing agreements leading to financial penalties
- Unplanned costs for renegotiating or re-licensing software
For private equity firms, ensuring a smooth IT due diligence process is crucial. A diligent evaluation, guided by a detailed diligence checklist, helps uncover potential issues related to software ownership, licensing compliance, and intellectual property rights. Acquiring businesses should conduct a full audit of IT assets, software licenses, and intellectual property agreements to avoid legal and operational complications, which can otherwise result in unforeseen liabilities and costs.
IT integration challenges
One of the biggest post-M&A hurdles is the successful integration of IT systems. Poor planning and lack of IT alignment can lead to:
- Disruptions in business operations
- Loss of productivity due to incompatible systems
- Prolonged transition periods that impact revenue and customer experience
To mitigate these risks, businesses should develop a detailed IT integration roadmap, outlining the steps needed to consolidate systems, migrate data securely, and align IT processes with business objectives.
How IT due diligence strengthens M&A deals
A proactive approach to IT due diligence provides acquiring companies with critical insights into potential risks and challenges before a deal is finalised. The benefits include:
Enhanced risk management
By identifying IT vulnerabilities in advance, businesses can take corrective action to address security threats, compliance gaps, and technical limitations before they impact operations.
Cost and resource planning
A clear understanding of IT infrastructure, licensing costs, and system upgrades allows acquiring firms to budget more accurately and allocate resources effectively.
Stronger negotiation position
If IT risks are identified during due diligence, acquiring businesses can negotiate better deal terms, adjust purchase valuations, or request remediation measures before completion.
Seamless IT integration
Early planning ensures a structured approach to IT consolidation, minimising downtime, preventing data loss, and streamlining post-merger operations.
Leveraging Neuways’ expertise in IT due diligence
At Neuways, we understand the complexities of IT due diligence in M&A transactions. Our IT assessment solutions provide businesses with a tailored approach to identifying risks, strengthening cyber security, and ensuring a smooth technological transition during acquisitions.
Our services include:
Comprehensive IT Risk Assessments – Evaluating cybersecurity posture, compliance readiness, and system vulnerabilities.
Software and Licensing Audits – Ensuring all IT assets are properly documented and compliant with licensing agreements.
IT Integration Planning – Developing roadmaps for seamless system consolidation and data migration.
Ongoing IT Security Support – Providing proactive monitoring and protection against cyber threats post-acquisition.
Conclusion
IT due diligence is a critical component of any successful M&A transaction. Failing to assess IT risks can lead to costly security breaches, compliance failures, and integration challenges that hinder business success. By prioritising IT assessments, businesses can mitigate risks, protect their investments, and ensure a smooth transition during acquisitions.
For expert IT due diligence support during your next acquisition, contact Neuways today to learn how our tailored solutions can safeguard your business.
