Risk

6/7/2017
01:30 PM
Connect Directly
Twitter
Twitter
RSS
E-Mail
50%
50%

Cybersecurity Stands as Big Sticking Point in Software M&A

The breach that was the fly in the ointment of the Yahoo-Verizon deal is one of many now surfacing as security of acquired firms starts to become a point of negotiation.

The mergers and acquisitions (M&A) market for software broke a lot of records last year, as investors took advantage of the convergence of cheap money and of society's growing dependence on software in every facet of personal and business life. But as the feeding frenzy continues, there's one big sticking point that rears its head more frequently than any other deal blocker in the software M&A game: cybersecurity.

A new study out today by West Monroe Partners and Mergermarket shows that cybersecurity issues frequently make problems both during due diligence and after the close of software M&A. The study found that cybersecurity was the number two reason why software deals were abandoned, only behind compliance, which in itself is usually wrapped up with existing security concerns.  

Meantime, more than half of respondents to the survey say that they discovered a cybersecurity problem after a deal closed, indicating that there's still lots of room for improvement in how well acquisition targets are scrutinized for security problems before stakeholders sign on the bottom line.

"It's a messy problem right now and the more competition in the marketplace the bigger that problem gets," says Sean Curran, senior director in West Monroe's security and infrastructure practice.

Curran explains that because the power of the marketplace is frequently with sellers who are often courted by a number of firms, they're much less likely to provide the necessary access to information and resources to conduct cybersecurity due diligence.

It's likely why the 16% of survey respondents say they were displeased with past experiences conducting cybersecurity due-diligence, compared to just 1% each for other forms of due diligence such as technology or operations. 

Nevertheless, the frequency of cybersecurity due diligence is on an upward trajectory. At Curran's firm, about 65% of the transactions they consult on each year now include some security due diligence - compared to zero just three years ago.

Technology attorney Randy Sabett agrees that security diligence is being brought up in greater frequency across not only many different types of M&A deals but also other types of formalized business agreements.

"We are seeing on an increasing basis situations where the acquirer says 'Hey, this is a big issue to me. I really want you to dig in on it,'" says Sabett, who is special counsel for Cooley LLP in Washington D.C. "In other cases, it's one of those things where the acquiring entity might say 'Yeah, it’s an issue, but just make sure that they have done the things that they should have done.' Not necessarily quite check the box, but not a deep dive. Somewhere in between." 

Both Curran and Sabett agree that one of the biggest impediments to a smooth transaction is the discovery of an ongoing or recently uncovered breach. Last year's announcement of a massive data breach at Yahoo that came right in the middle of the firm's buy-out by Verizon is a poster child for this. The previously undisclosed breach ended up leading to Verizon knocking a massive $350M off of its purchase price of Yahoo.

According to the survey released today, over 35% of respondents reported cybersecurity or compliance issues as the number one issue that led them to walk away from a deal. Sabett says that even if these two issues don't directly lead to an acquirer wanting to walk away, they can cause a cascading effect of consequences that can put a deal in jeopardy.

"They're the types of things that can crater the deal process - not necessarily the deal itself but they may significantly increase the time to close or maybe even change the deal terms in one form or another," he says. 

According to Curran, beyond that, some other significant findings in diligence that can impact a deal include the unprotected storage of data, hoarding of very sensitive data, and the complexity of fixing issues to meet the acquirer's risk tolerance levels. Take the case of software firms: if vulnerabilities exist within the fabric of the company's core architecture, that could be a big problem. 

"It really comes down to risk tolerance and why you're planning on buying the organization," he says. "If I have to redevelop the software from scratch to remove those weaknesses, then is it really worth me buying the product that I ultimately have to reguild anyway? Or am I better off finding a competitor?"

Related Content:

Ericka Chickowski specializes in coverage of information technology and business innovation. She has focused on information security for the better part of a decade and regularly writes about the security industry as a contributor to Dark Reading.  View Full Bio

Comment  | 
Print  | 
More Insights
Comments
Newest First  |  Oldest First  |  Threaded View
6 Ways Greed Has a Negative Effect on Cybersecurity
Joshua Goldfarb, Co-founder & Chief Product Officer, IDRRA ,  6/11/2018
Weaponizing IPv6 to Bypass IPv4 Security
John Anderson, Principal Security Consultant, Trustwave Spiderlabs,  6/12/2018
'Shift Left' & the Connected Car
Rohit Sethi, COO of Security Compass,  6/12/2018
Register for Dark Reading Newsletters
White Papers
Video
Cartoon
Current Issue
Flash Poll
Twitter Feed
Dark Reading - Bug Report
Bug Report
Enterprise Vulnerabilities
From DHS/US-CERT's National Vulnerability Database
CVE-2018-12026
PUBLISHED: 2018-06-17
During the spawning of a malicious Passenger-managed application, SpawningKit in Phusion Passenger 5.3.x before 5.3.2 allows such applications to replace key files or directories in the spawning communication directory with symlinks. This then could result in arbitrary reads and writes, which in tur...
CVE-2018-12027
PUBLISHED: 2018-06-17
An Insecure Permissions vulnerability in SpawningKit in Phusion Passenger 5.3.x before 5.3.2 causes information disclosure in the following situation: given a Passenger-spawned application process that reports that it listens on a certain Unix domain socket, if any of the parent directories of said ...
CVE-2018-12028
PUBLISHED: 2018-06-17
An Incorrect Access Control vulnerability in SpawningKit in Phusion Passenger 5.3.x before 5.3.2 allows a Passenger-managed malicious application, upon spawning a child process, to report an arbitrary different PID back to Passenger's process manager. If the malicious application then generates an e...
CVE-2018-12029
PUBLISHED: 2018-06-17
A race condition in the nginx module in Phusion Passenger 3.x through 5.x before 5.3.2 allows local escalation of privileges when a non-standard passenger_instance_registry_dir with insufficiently strict permissions is configured. Replacing a file with a symlink after the file was created, but befor...
CVE-2018-12071
PUBLISHED: 2018-06-17
A Session Fixation issue exists in CodeIgniter before 3.1.9 because session.use_strict_mode in the Session Library was mishandled.