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March 15, 2017
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Yahoo Inc. recently disclosed three massive data breaches, which compromised the personal information of 1.5 billion users and cost Yahoo $350 million in its acquisition by Verizon Communications Inc.  Additionally, the company’s general counsel lost his job, the CEO forfeited her annual bonus, and Yahoo spent $16 million on breach-related expenses in 2016 alone.  Yahoo also faces approximately 43 class action lawsuits and will remain on the hook for 50% of lawsuit-related liabilities after closing its deal with Verizon.

Although the news for Yahoo has not been good, Yahoo’s story offers several lessons from which other companies can learn.

1. Companies Remain Unprepared to Face Cybersecurity Threats
   First, even large sophisticated corporations are unprepared to face modern cybersecurity threats.  Although technological failures contribute to data breaches, Yahoo’s situation illustrates the consequences of having senior management that is ill-prepared to address cybersecurity.   An investigation by an independent committee of Yahoo’s board of directors concluded that, at the time of a 2014 breach, “certain senior executives did not properly comprehend or investigate, and therefore failed to act sufficiently upon, the full extent of knowledge known internally by the company’s information security team.”Yahoo, however, is not alone.  According to a recent survey by the National Association of Corporate Directors (NACD), only 14% of public-company directors reported that their boards have a high understanding of risks associated with cybersecurity.  This lack of understanding among senior executives contributes to a disconnect between information technology professionals and corporate decision-makers, which in Yahoo’s case led to costly errors.
2. Cybersecurity Due Diligence Plays an Increasing Role in Mergers & Acquisitions
   Second, the news that data breaches jeopardized Verizon’s acquisition of Yahoo, and ultimately  caused Verizon to cut $350 million from the price it will pay for Yahoo, underscores the increasing importance of cybersecurity due diligence during a merger or acquisition.  In a recent Mergermarket survey of senior executives, 77% of respondents reported walking away from a deal as a result of data security issues that were discovered in cybersecurity due diligence.  Executives identified the cost of correcting existing problems and the occurrence of frequent or recent data breaches as top concerns, which is not surprising considering that the average data breach costs a company an estimated $4 million, or approximately $200 per stolen record.Thus, when considering a merger or acquisition, due diligence should include a thorough review and analysis of the seller’s privacy and data security policies, programs, and procedures across all media; cyberinsurance policies; social media presence; vendor contracts; and industry-specific compliance obligations.  McNees Attorney Elaine Stanko’s recent article, Deals and Data:  Cybersecurity M&A Due Diligence, outlines additional steps companies should take during the due diligence process.  As the Yahoo example shows, cybersecurity due diligence can significantly affect the outcome of a deal.
3. The Data Breach:  It’s a Matter of “When,” not “If”
   Third, a recent Philadelphia Business Journal article quoted NACD CEO Peter Gleason as saying that “It’s not a matter of if you’re going to get hacked, it’s more ‘You’ve already been hacked, and you don’t know it, so what are you doing about it?’”  Yahoo’s data breaches occurred in 2013 and 2014, yet the full extent of those breaches was not disclosed until late 2016, demonstrating that even heavy investment in cybersecurity cannot prevent data breaches.  Although data breaches are inevitable, proper planning, timely detection, and a swift response can help organizations mitigate the fallout and minimize the losses, both financial and reputational.

In summary, Yahoo’s recent data breaches show that companies remain unprepared to face cybersecurity threats, which are of increasing importance in mergers and acquisitions.  Recognizing that data breaches are unavoidable, the attorneys in McNees Wallace & Nurick LLC’s Privacy & Data Security practice group counsel clients to be “compromise ready” by proactively planning for data breaches, and assisting clients with their response when breaches occur.

© 2017 McNees Wallace & Nurick LLC
McNees Privacy & Data Security Alert is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.