Managing Cybersecurity Risk in M&A
As Technology Audit Director at Cisco, Jacob Bolotin focuses on assessing Cisco’s technology, business, and strategic risk. Providing assurance that residual risk posture falls within business risk tolerance is critical to Cisco’s Audit Committee and executive leadership team, especially during the mergers and acquisitions (M&A) process.
Bolotin champions the continued advancement of the technology audit profession and received a master’s degree in cybersecurity from the University of California Berkeley. After completing the program in 2020, he spearheaded a grant from Cisco to fund research conducted by the university’s Center for Long-Term Cybersecurity, which included identifying best practices around cybersecurity risk and risk management in the M&A process, captured in this co-authored report.
Risk Management and Formula One
When asked about his approach to evaluating risk management, Bolotin likens the corporate dynamics to a Formula One racing team, whose success depends on the effective collaboration of experts to meet the challenges of the most demanding racecourses. In Bolotin’s analogy, a corporation (say, Cisco) is the Formula One vehicle, and the business (i.e., executive and functional leaders) races the car on the track. In the pit, you have IT and technology support, which maintains operations and optimizes efficiencies to ensure the vehicle’s peak performance. Meanwhile, InfoSec is the designer and implementor of risk management capabilities (for instance, ensuring the latest technology is deployed and within expected specifications). These groups converge to help keep the business running and help ensure the vehicle is race-day-worthy.
An M&A deal is a significant business opportunity and represents the transition to a new Formula One race car. In this scenario, the business cannot physically get behind the wheel and test drive it. Frequently, the car cannot be inspected, and critical data is not available for review before the deal. The competitive balance and sensitive nature of M&A deals require the business to trust that the car will perform as expected. “Laser-focused due diligence enables you to understand where the paved roads [the most efficient paths to data security, for example] may lie. This is where the Cisco Security and Trust M&A team plays an integral role,” says Bolotin. “They can look down those paved roads and determine, from a cybersecurity perspective, which capabilities Cisco should own, and which ones are better for the acquired business to manage. This team understands what to validate, so the audit committee and key stakeholders can be confident that the business will be able to drive the new Formula One car successfully and win the race.”
Risk management, assessment, and assurance are vital to establishing this confidence. The technology audit team conducts risk assessments across all of Cisco, including M&As, for key technology risk areas, including product build and operation. In addition to risk management oversight, Bolotin and the technology audit team are responsible for assuring the Audit Committee that the acquired entity can be operationalized within Cisco’s capabilities without undermining the asset’s valuation.
“We don’t want to run duplicate processes and systems, especially when we have bigger economies of scale to leverage,” Bolotin says. “We must operationalize the acquisition. That is table stakes. And we must do it while maintaining the integrity and security of the entity we are acquiring.”
Working It Out in a Working Group
In 2019, Bolotin resurrected a working group of technology audit director peers from companies, including Apple, Google, Microsoft, ServiceNow, and VMware, called the “Silicon Valley IT Audit Director Working Group”. The directors meet regularly to share insights and explore issues around technology risk, risk management, and business risk tolerance. “I wanted to get with my peers and understand how they do their job,” he says. “We collaborate on defining ‘what good looks like,’ as we co-develop audit and risk management programs to help move the industry forward”.
Bolotin, along with a few other members of the working group, was selected to participate in a separate research study conducted by the Center for Long-Term Cybersecurity, aimed at developing a generalized framework for improving cybersecurity risk management and oversight within M&A. Among the research questions, the working group members were asked to identify their key cybersecurity risks and where those risks sit in the M&A process.
“In my opinion, the biggest cybersecurity risks today are cloud security posture and third-party software inventory and bill of materials, or SBOM,” says Bolotin. “These risks impact not only product acquisitions but our ability to secure and operationalize business capabilities within Cisco. Whether we transition capabilities to run within Cisco or leave them for the acquired company to operate, we must have a thorough understanding of any third-party risks that may exist in IT, in the technologies and systems used by the acquired company, or anywhere else. Especially those that may impact the broader Cisco enterprise as the new entity is integrated.”
Cybersecurity risk is attached to talent management and moral hazards as well. “It’s not uncommon to lose talent in acquisition deals,” Bolotin says, “and these days, much of this talent is cybersecurity focused. This potential loss is a huge risk for us and can sometimes be due to cultural differences between Cisco and the acquired entity. People who would rather be on a swift and elegant sailboat do not readily choose to be a passenger on a massive cruise ship, no matter how grand or impressive.”
Moral hazards are always a concern in M&A. Red flags can include ongoing data breaches and either downplaying or providing misleading information about a security incident. The Cisco Security and Trust M&A team does a tremendous amount of due diligence around these hazards, sometimes augmented by investigative techniques from a Cisco security partner, such as trolling the dark web. Companies can protect themselves against the risk of moral hazards through clauses inserted in the acquisition contract.
Concerning contracts, Bolotin advises companies to ensure the risk management commitments they set down are realistic. “Companies need to be very sure they have received the right inputs to enable them to manage every relevant cybersecurity vulnerability, whether it is a misconfiguration on the acquisition’s security firewall, within their network, their product in the cloud, or any other significant vulnerability, based on contractual obligations. You need to be sure you can commit to privacy investigation and breach event readiness, and notification process the acquired entity needs and have a clear sense of how fast you can meet these requirements.”
Risk Management Requires Collective Ownership
Bolotin ardently reminds companies that risk management in cybersecurity is not owned by a solitary group. Managing risk is a collective effort that transcends different organizations, each of which should understand its role in helping to mitigate the risks.
“Risk management begins in the production environment, with the engineers building code and downloading software to help them create new products and capabilities,” says Bolotin. “It’s essential that everyone understands how to identify and properly manage cybersecurity risks in their everyday work, including the tools and services used to enable the business, and work to mitigate applicable risks, especially in these critical areas.”
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