The Growing Role of Data and Privacy Due Diligence in Transactions
In today's digital economy, data has quickly become one of the most valuable assets for businesses. With that value, however, comes significant complexity and responsibility, especially in the context of mergers, acquisitions and other corporate transactions. Data and privacy due diligence is no longer secondary consideration — it is quickly becoming a critical component of deal-making.
The consequences of underestimating data and privacy due diligence can be severe. In recent years a major deal in the technology sector was compromised by revelations of massive data breaches affecting billions of user accounts that had occurred prior to the transaction, and ultimately led to a reduction of hundreds of millions of dollars in the purchase price. Similarly, the importance of thorough due diligence was emphasized by the UK data protection regulator after a significant acquisition in the hospitality industry uncovered a prior data breach affecting half a billion customers. The consequences were substantial, involving a hefty financial penalty and potential reputational issues. While such high-profile cases have dominated headlines over the years, these cases highlight the need to thoughtfully consider data and privacy risks during transactions to prevent costly issues and safeguard long-term business success, regardless of scale and sector.
Data breach and resilience-related risks have undoubtedly heighted the need for thorough reviews of cybersecurity controls and exposure. However, beyond technical and organizational security controls, many other aspects of privacy and data regulations can carry significant financial and reputational consequences or otherwise impact and influence the operational use of data and its potential for value creation.
This article explores the increasing significance of data and privacy due diligence, highlights the dangers of ignoring the need for more granular reviews of data and privacy compliance, and describes how pre-deal evaluations of a target’s data handling practices can highlight both its risk profile and potential.
The Role of Data in Modern Transactions
Data assets such as customer information, intellectual property and operational data are often key determinants of a company’s value. Underestimating the importance of such data assets during transactions, specifically how personal data is used and governed, can lead to significant regulatory, financial and operational risks down the line.
For some deal teams, privacy and data compliance risks may be integral to assessing the true value of a data-driven target company. While the compliance posture of a target is typically covered by legal or regulatory due diligence, much like the increased focus on cybersecurity due diligence in recent years, privacy and data compliance is quickly spinning off as an area justifying deeper-dive reviews of a target company's data-handling practices.
Investment firms and acquirers are beginning to take a forward-looking perspective, understanding that compliance with growing data and privacy legislation is more than a regulatory or legal issue and can be the difference between whether the business can scale appropriately post-transaction. For example, if a target company’s data practices are not aligned with privacy laws or AI regulations, it may face restrictions in its ability to properly leverage personal data in the future. This could limit the ability to utilize, exchange or combine data for certain marketing, profiling, personalization and AI-driven initiatives to promote growth, innovation or customer engagement, with an ultimate impact on the business's long-term success.
For example, in one widely reported acquisition in the technology sector, modifications to privacy policies post-acquisition allowed for data sharing between the two companies which led to regulatory scrutiny and a fine in the region of €100 million. The move was found to be contrary to the antitrust and data protection commitments made to EU regulators, underscoring the importance of understanding and adhering to data protection law and regulatory demands.
Additionally, deeper dives into the use of data and controls may be necessary depending on how central data is to the target company’s products and services. For companies where data is an inherent part of the business model, such as technology companies, e-commerce platforms or AI-driven enterprises, data due diligence must go beyond surface-level checks to ensure that data practices are sound and scalable.
Rise of Global Privacy and Data Legislation
The landscape of data privacy regulations has grown more complex, with international data protection and privacy laws and enforcement rapidly increasing to address the challenges of the digital age. Regulations such as the General Data Protection Regulation (GDPR) in Europe, numerous state-level privacy laws like the California Consumer Privacy Act (CCPA) in the United States, as well as other comparable laws in Asia, Latin America and the Middle East impose strict requirements on how businesses collect, store, use and share personal data. These laws are designed to protect consumer rights and encourage accountability in data handling. Noncompliance with these regulations can result in sizable fines, legal liabilities and a significant loss of customer trust and loyalty.
In addition to the growing privacy regulations and enforcement, emerging digital and AI-specific regulations are adding new layers of complexity. For instance, the EU Data Act establishes new rules around data access and sharing across industries, promoting fair use of data while maintaining privacy and security, while the EU Digital Services Act (DSA) regulates online platforms to ensure online safety, control over content personalization and protection for children. As AI becomes more integral to business operations, laws governing AI systems, such as the EU AI Act and increasing international AI standards and frameworks, are indicative of worldwide efforts to set strict standards for transparency, accountability and ethical use of data, further complicating the compliance landscape.
With privacy, AI and digital regulations evolving at pace, it is important to examine how these regulatory requirements affect a target company to fully assess and understand their potential impact. This is particularly relevant in the context of increasingly common cross-border transactions, as most companies operate with an international footprint or manage cross-border data flows and often include expansion into new markets as a key part of their growth strategy.
Key Data and Privacy Risks
As the examples above demonstrate, a failure to place proper emphasis on data and privacy during a due diligence process can give rise to a variety of risks impacting the value or success of a deal, including:
- Regulatory Noncompliance: Failure to comply with privacy laws can lead to fines, lawsuits and restrictions on noncompliant business activities, potentially crippling the business model.
- Reputational Damage: Mishandling of personal data can rapidly erode trust, leading to extreme brand damage and negatively affecting customer loyalty and acquisition.
- Financial Liabilities: Post-acquisition costs, i.e., lawsuits or regulatory fines for privacy and data issues, or an inability to tap into the potential of personal data due to hidden issues, can ultimately negate the financial benefits of the deal.
- Operational or Strategic Constraints: Failure to maximize or utilize key data sets to drive services, products or innovation due to regulatory restrictions or poor data governance can compromise proposed value and strategic objectives in the future.
Structuring Effective Data and Privacy Due Diligence
Building on the foundations of technology, cybersecurity, legal and regulatory due diligence, further probing into data and privacy practices of a target can reveal not just a target's risk exposure, but also business potential.
As a supporting discipline, data and privacy due diligence enhances the overall due diligence process by providing valuable insights that may be particularly critical depending on the target’s business model and the significance of data in its operations. Review of the following key areas ensures a better-informed perspective of the target's data-related risks and opportunities.
1. Regulatory Compliance: Assessing the target's adherence and alignment to key privacy, AI and data regulations to identify any exposure to legal or regulatory risk based on its current or proposed geographical footprint.
2. Privacy Governance: Evaluating the target's privacy policies, governance structures and overall approach to meeting privacy-related obligations and oversight to understand the suitability for scaling in line with future business strategy.
3. Data Management: Examining how the target collects, stores and shares data to ensure that it is being managed appropriately and in accordance with applicable standards and cross-border sharing restrictions, potentially impacting its ability to recognize the full potential and value of the data it holds.
4. Data Usage: Reviewing the target's use of personal data, particularly in special use cases or higher risk areas, to ensure appropriate risk management practices, transparency and lawful grounds for data use and to identify any potential issues in relation to current or anticipated data use.
5. Third-Party Privacy Risk: Assessing the extent of the target's third-party relationships and data sharing practices to understand current standards and oversight of third-party data processors.
6. Customer and Regulatory Interactions: Assessing how the target manages privacy rights and requests, customer complaints and marketing efforts as well as understanding historical regulatory interactions to identify any systemic operational or data use issues.
7. Security and Technology: Evaluating the target's record of personal data breaches, its approach to handling and escalating incidents, alongside broader cyber resilience and business continuity planning for data and technology management, to assess the impact of incidents resulting in system downtime and inaccessible data on the business, customers and users — areas primarily driven by technology and cybersecurity teams but further assessed through a data and privacy regulatory lens.
The due diligence report findings and recommendations will also inform post-transaction integration, post-investment remediation or risk mitigation efforts and plans, providing a valuable head start in resolving identified risks, optimizing operations, and unlocking opportunities for improvement or synergy across these key areas.
Conclusion
Ultimately, effective data and privacy due diligence is not just about mitigating risks — it’s also about recognising potential.
As data becomes increasingly central to business value and innovation, and regulatory frameworks grow more complex, transaction teams can gain significant value from focused, critical insights into a target company’s compliance posture, regulatory exposure, and opportunities tied to its data practices. These insights not only inform decisions and help to shape deal terms to safeguard stakeholder interests but also position companies to navigate future challenges and possibilities with clarity and foresight.
