The Liability That Transfers at Closing: Cybersecurity in M&A

Introduction

Deal teams examine financials line by line. Legal counsel reviews every contract, lease, and outstanding claim. Operational diligence covers customers, suppliers, and key personnel. All of it is rigorous, and all of it is standard.

Security usually gets a questionnaire and a copy of whatever certificate the target holds.

That gap has consequences, because an acquisition transfers more than assets and revenue. It transfers the target’s entire security history, including the parts the target doesn’t know about, and they become your problems the moment the deal closes.

What Actually Transfers

When a deal closes, the buyer inherits:

  • Any breach already underway. If an intruder is in the target’s environment on closing day, they’re in the buyer’s environment on the following Monday.
  • Regulatory exposure from past incidents, including ones that were never properly assessed or disclosed, and notification obligations that may still be unsatisfied.
  • Contractual security commitments the target made to its own customers, which now bind the acquirer.
  • Access nobody can account for. Former employees, former contractors, dormant vendor integrations, and shared credentials accumulated over years.
  • Technical debt with a security dimension. Unsupported systems, deferred patching, and applications that can’t be updated without breaking something the business depends on.

None of these appear on a balance sheet, and several of them cost real money to resolve.

Two Deals That Made the Point

The two most cited examples are worth knowing because they illustrate different failures.

Verizon’s acquisition of Yahoo was repriced after previously undisclosed breaches came to light during the transaction, reducing the purchase price by roughly $350 million. The issues surfaced before closing, which is the good outcome. The buyer had information and used it.

Marriott’s acquisition of Starwood went the other way. Attackers had been present in Starwood’s systems since 2014. The deal closed in 2016, and the intrusion wasn’t discovered until 2018, by which point it was Marriott’s breach, Marriott’s regulatory problem, and Marriott’s cost. Roughly 500 million guest records were involved, and the enforcement and litigation ran for years afterward.

Why a Questionnaire Doesn't Cover It

Security questionnaires in a deal context have three structural problems.

  1. They’re self-reported, which means the answers reflect what the target believes about itself.
  2. They describe policy rather than practice, so a documented access review process tells you nothing about whether reviews actually happen.
  3. And most importantly, a seller can answer every question honestly and still be wrong, because the great majority of companies don’t have an accurate picture of their own environment. Undisclosed doesn’t necessarily mean concealed, it can also just mean “unknown”.

Certifications have a related limit. A current SOC 2 or ISO 27001 tells you the organization passed an audit against a defined scope on a particular date. It doesn’t tell you what fell outside that scope, or what’s changed since the audit took place.

What a Real Review Looks For

Proper cyber diligence is investigative rather than administrative, and much of it can begin before a data room opens.

External attack surface review maps what the target exposes to the internet, which requires no cooperation from the seller and frequently contradicts the questionnaire. Credential exposure checks reveal whether the target’s accounts appear in known breach data, which is both a current risk and a signal about historical hygiene. Identity and access review examines who actually holds permissions versus who should. Incident history gets reconstructed from evidence rather than taken on description. And the whole thing gets priced: what remediation costs, how long it takes, and what it implies for integration timelines.

That last part is the one deal teams value most, because it converts a security finding into something the transaction can act on. A finding without a cost estimate gets noted and ignored. A finding with a credible number attached changes the price, the escrow, or the representations in the agreement.

This is specialist work. It requires someone who has examined a lot of environments and can distinguish a genuine problem from an ordinary one, under deal timelines that don’t allow for a leisurely assessment.

If You're on the Selling Side

The same exercise is worth running in reverse, and earlier.

Sellers who identify and remediate their own issues before going to market avoid the two worst outcomes: a late-stage price reduction and a buyer who walks. Surprises discovered by the other side’s advisors are always more expensive than ones you found yourself, because at that point you’re negotiating from a weaker position with less time.

Final Perspective

Cybersecurity has become a component of enterprise value, both in what it protects and in what it costs to fix. Treating it as a compliance checkbox in a transaction leaves one of the larger sources of post-close surprise unexamined.

At Secutor, we conduct security due diligence for buyers and sellers, and our Insider Direct program includes packages built for private equity firms and holding companies managing security across a portfolio. If you have a transaction in progress or coming up, we should talk before it closes.

The security problems you inherit at closing become yours, whether you knew about them or not.

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Jason Fruge

Consulting Chief Information Security Officer (CISO)

Jason Fruge is an accomplished Consulting Chief Information Security Officer at Secutor Cybersecurity, bringing over 25 years of deep expertise in information security. His storied career includes leading and managing robust security programs for Fortune 500 companies across retail, banking, and fintech sectors. His current role involves providing strategic guidance and advisory services to clients, focusing on security governance, risk management, and compliance.

Apart from his consulting responsibilities, Jason is an active member of the global cybersecurity community. He is a Villager at Team8, a prestigious collective of senior cybersecurity executives and thought leaders. Additionally, he serves as an Advisor at NightDragon, an innovative growth and venture capital firm specializing in cybersecurity and enterprise technologies.

Jason’s tenure as a CISO is marked by a proven track record in developing and implementing comprehensive security policies and procedures. He adeptly leverages security frameworks and industry best practices to mitigate risks, safeguarding sensitive data and assets. His expertise encompasses incident response and root cause analysis, where he has notably managed cyber incidents to prevent breaches and minimize business disruption and customer impact.

A key aspect of Jason’s role has been the creation and facilitation of executive and board-level cyber risk committees, ensuring organizational alignment and awareness. His responsibilities have extended to maintaining compliance programs for standards such as PCI and SOX, as well as leading privacy and business continuity programs. Holding prestigious certifications like CISSP, QSA, and QTE, Jason is also a recognized thought leader, contributing articles on cybersecurity to InformationWeek.

Jason’s passion lies in driving innovation and fostering collaboration in the cybersecurity field. He is currently seeking an executive CISO role in a leading retail, finance, or fintech organization, where he can continue to make significant contributions to the cybersecurity landscape.

Jennifer Bayuk

Cybersecurity Risk Management Expert

Jennifer Bayuk is a highly esteemed cybersecurity risk management thought leader and subject matter expert at Secutor Cybersecurity. Her extensive experience encompasses managing and measuring large-scale cybersecurity programs, system security architecture, and a wide array of cybersecurity tools and techniques. Jennifer’s expertise is further deepened with her proficiency in cybersecurity forensics, the audit of information systems and networks, and technology control processes.

Jennifer’s skill set is comprehensive, including specialization in cybersecurity risk and performance indicators, technology risk awareness education, risk management training curriculum, and system security research. Her academic achievements are noteworthy, holding Masters degrees in Philosophy and Computer Science, and a Ph.D. in Systems Engineering. This strong academic background provides a solid foundation for her practical and strategic approach to cybersecurity challenges.

Certified in Information Systems Audit, Information Systems Security, Information Security Management, and IT Governance, Jennifer is a well-rounded professional in the field. Her credentials are further enhanced by her license as a New Jersey Private Investigator, adding a unique dimension to her cybersecurity expertise.

At Secutor, Jennifer plays a pivotal role in steering cybersecurity initiatives, aligning them with organizational risk appetites and strategic objectives. Her ability to educate and train in the realm of technology risk has been instrumental in raising awareness and enhancing the cybersecurity posture of our clients. Her dedication to research and continual learning makes her an invaluable resource in navigating the ever-evolving cybersecurity landscape.

Jennifer Bayuk’s blend of academic prowess, practical experience, and certifications make her an indispensable part of our team, as she continues to drive forward-thinking cybersecurity solutions and risk management strategies.

Steve Blanding

CISO Consultant

CISSP, CISA, CGEIT, CRISC

Steve is an IT management consultant living in Dallas, TX. Steve has over 35 years of experience in executive IT leadership, IT governance, risk and compliance (GRC), systems auditing, quality assurance, information security, and business resumption planning for large corporations in the Big-4 professional services, financial services, manufacturing, retail electronics, and defense contract industries. He has extensive experience with industry best practices for adopting and implementing new technologies, IT service management frameworks, and GRC solutions that have dramatically improved customer satisfaction while reducing cost.

Industry Experience

  • State Government: 5 years
  • Retail: 5 years
  • Defense Contract: 5 years
  • Manufacturing: 2 years
  • Health Care: 2 years
  • Local Government: 2 years
  • Public Accounting (Big 4): 7 years
  • Insurance: 3 years
  • Financial Services: 5 years

Key Career Accomplishments

  • Conducted a full-scale ISO27000 audit 4 times over the past 6 years.  Also, conducted a “light” ISO27000 review of a small Dallas-based company in 2007.
  • Developed and authored a comprehensive IT security policy manual, incident response plans, training programs, security contingency plans and configuration management plans for FedRAMP regulatory compliance.
  • Conducted multiple DR and operational backup and recovery IT risk assessments of critical business systems on mainframe, LAN, and distributed system networks located across North America.
  • Conducted data centers audits for Tyco Corporation (Brussels, 2005 and Denver, 2006), Farmers Insurance (Los Angeles, 2006), Zurich Financial Services (Chicago, Kansas City, and Grand Rapids, 2006), and Convergys Corporation (Dallas, 2010, 2011, and 2012).
  • Led a project to remediate segregation of duties and streamline user access system security and HIPAA compliance administration across 5 regions in North America, resulting in cost savings of $700,000 per year (Kaiser Permanente).
  • Implemented Sarbanes-Oxley Section 302 and 404 IT general and application controls, reducing security administration costs and improving operational performance by 50% or $500,000 annually (Tyco Corporation).
  • Led the global SAP business-IT alignment, process re-design implementation initiative for financial accounting, materials management, production planning, quality management, sales and distribution, warehouse management, and plant maintenance, which resulted in creating $2,000,000 in cost savings.
  • Engaged by Arthur Andersen in Houston to transform the local IT organization and then direct 3 organizational mergers/consolidations, which resulted in a 25% reduction in operating costs, or $3,250,000, while improving customer satisfaction by 30%, and improving employee morale, technology availability and the quality of IT infrastructure and service delivery.
  • Assigned by Arthur Andersen global leadership to lead global project teams responsible for data center and customer support call center consolidation, which resulted in annual operational cost savings of 45% or $4,000,000.
  • Implemented ITIL service management practices for problem management, incident management, help desk, project management, and operations management.
  • Conducted SOX 404 audits at Duke Energy (6 months), Red Hat (3 months), Tyco (9 months), Zeon Chemicals (4 months), and Convergys (2 months). Experience includes control design/documentation and effectiveness testing.

Publications:

Author, various articles in EDPACS and Auerbach’s IT Audit Portfolio Series, 1981 – 2001

Author, various articles in the Handbook of Information Security Management, 1993 – 1995

Editor, Auerbach’s Enterprise Operations Management, 2002

Editor, Auerbach’s IT Audit Portfolio Series, 2000 – 2002

Consulting Editor, Auerbach’s EOM Portfolio Series, 1998 -2001

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