The Crucial Role of Cybersecurity in Mergers and Acquisitions

Mergers and acquisitions (M&A) have become a strategic imperative for many companies in the wake of the COVID-19 pandemic. As organizations seek to bolster their market positions and expand their capabilities, the pace of M&A activity has accelerated. However, this rapid growth brings with it a complex web of challenges, particularly in the realm of cybersecurity. As companies merge, they not only gain new assets and market opportunities but also inherit the cybersecurity vulnerabilities of the entities they acquire. This article delves into the essential role of cybersecurity in M&A, highlighting the challenges, best practices, and the evolving responsibilities of Chief Information Security Officers (CISOs) in navigating these risks.

Understanding the Cybersecurity Risks in M&A

Inherited Vulnerabilities: The Silent Threat

One of the most significant challenges in any M&A process is the risk of inheriting cybersecurity vulnerabilities. When a company acquires another, it does not merely gain new products or market share; it also adopts the target company’s cybersecurity posture. This includes any existing vulnerabilities, outdated systems, or insufficient security practices that could expose the parent company to cyber threats.

A notable example of this occurred during Verizon’s acquisition of Yahoo in 2017. The deal uncovered a previously undisclosed data breach at Yahoo, which compromised the personal information of over 3 billion users. This revelation not only led to a reduction in the acquisition price but also resulted in severe financial and reputational damage for Verizon.

The Complexity of Integration

Integrating disparate IT systems and security protocols is another major challenge in M&A. Large enterprises often have complex and highly customized IT infrastructures, and merging these with the systems of an acquired company can be a long and arduous process. This integration can take anywhere from two to four years, during which time the company remains vulnerable to cyber threats.

The complexity is further compounded when the acquired company operates in a different region with varying regulatory requirements, or when the acquired entity’s systems are outdated or incompatible with the parent company’s infrastructure. For instance, a financial institution acquiring a smaller bank may find that the latter’s cybersecurity measures are significantly less mature, leading to an increased risk of breaches during the integration process.

An Expanded Attack Surface

M&A activities inherently expand an organization’s attack surface, creating more opportunities for cybercriminals to exploit vulnerabilities. As new systems are connected and employees from the acquired company are integrated, the number of potential entry points for attackers increases. Moreover, the announcement of an acquisition itself can attract cybercriminals who see it as an opportunity to exploit any transitional weaknesses.

One private equity CISO revealed that phishing attempts on acquired companies increased by 400% in the months following the announcement of a deal. This surge in attacks is driven by the perception that newly merged entities may be distracted by the complexities of integration, making them prime targets for cyberattacks. This underscores the importance of maintaining rigorous cybersecurity measures throughout the M&A process.

Best Practices for Cybersecurity in M&A

Pre-Acquisition Due Diligence

Effective cybersecurity in M&A begins long before the deal is finalized. Pre-acquisition due diligence should include a comprehensive assessment of the target company’s cybersecurity posture. This involves evaluating their existing security measures, identifying any vulnerabilities, and assessing the potential risks that these might pose to the parent company.

Due diligence should also encompass a review of the target company’s compliance with relevant regulations and standards, as well as an assessment of their incident response capabilities. By thoroughly understanding the security risks involved, the acquiring company can make informed decisions about whether to proceed with the acquisition and how to mitigate any identified risks.

Developing a Post-Acquisition Integration Strategy

Once the acquisition is complete, the focus shifts to integrating the acquired company’s IT and security infrastructure into the parent company’s systems. This process should be guided by a well-defined integration strategy that prioritizes cybersecurity.

One effective approach is to implement a phased integration, where critical systems and assets are integrated first, followed by less critical ones. This allows for a more controlled and secure transition, reducing the risk of introducing vulnerabilities into the parent company’s environment. Additionally, employing cybersecurity tools that provide visibility across both the parent and acquired entities’ networks can help detect and mitigate potential threats during the integration process.

Colin O’Connor, president of field operations at ReliaQuest, notes, “What we’re seeing more and more of is organizations—and CISOs specifically—looking at putting programs in place to be more integrated into an acquisition, and taking much more aggressive timelines than what we’ve seen historically.” He emphasizes the urgency, stating, “Because there are a ton of examples out there where a newly acquired business is already breached or gets breached shortly after, and all of a sudden it’s now the parent company’s issue and liability.”

Continuous Monitoring and Risk Assessment

Even after the integration is complete, continuous monitoring and risk assessment are essential to maintaining a strong cybersecurity posture. The evolving nature of cyber threats means that organizations must remain vigilant, regularly assessing their security measures and making adjustments as needed.

Speed to detection and containment is vital, particularly during the vulnerable post-acquisition period. Integration challenges, such as mismatched technologies and data sources, can slow down a company’s visibility, leaving it exposed to threats for months or even years. A robust integration strategy that prioritizes swift technology alignment is key to mitigating these risks.

Continuous monitoring should include not only the parent company’s systems but also those of the acquired entity. This is particularly important in cases where the acquired company continues to operate semi-independently, as vulnerabilities in their systems could still pose a risk to the parent company.

However, monitoring alone is not enough; a more proactive approach, such as continuous threat hunting and real-time response mechanisms, is essential. This proactive stance ensures that potential vulnerabilities are not just observed but actively mitigated before they can be exploited.

Carl Lee, information security manager at APi Group, emphasizes the importance of flexibility and speed in integration. “Because our company is in a growth mode, we are constantly in a state of flux from a security perspective. It’s our job to make it work—not to slow it down or stop it. The two most important things are having the flexibility to plug and play with the tech stack they have in a secure way, and to do it quickly.”

The Evolving Role of CISOs in M&A

Early Involvement is Key

In the context of M&A, the role of the CISO has become increasingly important. To effectively manage cybersecurity risks, CISOs must be involved in the M&A process from the very beginning. This early involvement allows them to conduct thorough due diligence, assess potential risks, and develop strategies for mitigating those risks before the deal is finalized.

CISOs should also play a key role in the post-acquisition integration process, ensuring that cybersecurity remains a priority throughout. This includes overseeing the integration of IT systems, implementing necessary security measures, and ensuring that all employees are trained in cybersecurity best practices.

Building a Cybersecurity Framework for M&A

To effectively manage the cybersecurity risks associated with M&A, CISOs should develop a comprehensive cybersecurity framework specifically tailored to these activities. This framework should include guidelines for pre-acquisition due diligence, post-acquisition integration, and ongoing monitoring and risk assessment.

The framework should also emphasize the importance of communication and collaboration between the CISO and other key stakeholders, such as the CEO, CFO, and legal team. By working together, these stakeholders can ensure that cybersecurity is fully integrated into the M&A process, reducing the risk of breaches and other security incidents.

The Future of Cybersecurity in M&A

As the pace of M&A activity continues to accelerate, the importance of cybersecurity in these transactions cannot be overstated. Companies that prioritize cybersecurity from the outset are better positioned to protect their assets, maintain their reputation, and achieve long-term success.

In conclusion, organizations must remain vigilant, proactive, and adaptable as they navigate the complexities of mergers and acquisitions, ensuring that they are prepared to meet the challenges of today—and tomorrow. By embedding cybersecurity into the M&A process, companies can not only safeguard their interests but also foster a culture of security that extends beyond the acquisition itself.