US private equity firm in talks to buy cyberattack co Paragon

A US private equity fund, which includes a group of security companies, is in talks to acquire Israeli cyber attack company Paragon Solutions. Headquartered in the Discount Bank Tower in Tel Aviv, the company was founded five years ago by the former commander of the IDF's 8200th Intelligence Unit, Brig. Gen. (res.) Ehud Schneurson, CEO Idan Nurik, and CTO Igor Pogodlov, both 8,200 veterans, with the active participation of former Prime Minister Ehud Barak as an investor, who is estimated to own several percent in the company. The small stake is likely worth several million dollars. Sources told Globes that the negotiations reflect a valuation of Paragon at more than $1 billion, and that the American fund will pay between $700 million and $1.1 billion to control the company.

In recent days, a potential US buyer has raised concerns that the deal would require Israeli government approval, as Paragon operates under the Defense Ministry. If that happens, the worry is that the political echelon will not approve the deal because of the political rivalry with Barak. During talks to sell Herzliya-based NSO Group, a competing cyber-attack company, to US firm L3, the deal was ultimately scrutinized by government officials for security considerations, but ultimately raised concerns with the US administration. Under the law, the acquisition of a weapons company or cyberattack company that sells products with the approval of the Department of Defense's Defense Export Control Agency (DECA) requires department approval, and sometimes approval from the political echelon.

The structure of the Paragon deal will consist of equal components of a cash investment in the company, purchase of shares from existing shareholders, and payments when milestones are achieved. For example, if a $900 million deal is signed, $300 million in cash will be allocated to shareholders: founders Schneurson, Norick, and Bogodlov, and investors including Barack, US venture capital fund Battery Ventures, Israeli fund Red Dot Capital Partners and investor Veteran Yoram Oron. An additional $300 million will be invested in the company, and another $300 million after several years, depending on the achievement of pre-set goals.

The US fund's acquisition of Paragon would mirror similar deals for internet companies that have been made in Israel in recent years. Private equity fund Francisco Partners previously controlled NSO Group, and Insight Partners acquired control of Aramis, a cybersecurity company, which does not engage in Trojan attacks. Eran Gourev, a partner at Francisco Partners and former CEO of NSO, invested in Paragon when the company was founded. However, Gourev will not benefit from the exit if the deal goes through, as he sold his shares years ago.

Sanctions that reduce the cyber attack sector in Israel

Paragon Solutions has kept a low profile, refuses to speak to the media, and does not even have a website containing details of the company's activities. Earlier, Globes revealed that Paragon developed a Trojan called Graphite that can extract data from encrypted messaging apps such as WhatsApp, Facebook Messenger, Signal and Telegram. Unlike other Israeli cyber attack companies such as NSO and Candiru, Paragon Solutions was founded with US investments initially in order to operate only in 34 countries defined as democratic in coordination with local security authorities and legal systems with minimal invasion of privacy.

In contrast to NSO's Pegasus, Paragon does not take photos of the user with their phone's camera and, to its knowledge, does not use the phone's microphone, but only records audio conversations in chat apps. The company began selling its products in the United States about two years ago, and its clients include the US Drug Enforcement Administration (DEA) and the security authorities in Singapore, where, according to the report on the Intelligence Online website, it replaced the technologies of Israeli companies. Blacklisted in the United States.

If the company is sold to a US private equity fund, it would be another blow to the Israeli cyber attack industry, which is suffering from US sanctions and significant sales restrictions designed to narrow the operational options of Israeli companies. Globes previously reported on the closure of the Israeli companies Nemesis and Quadream, which work in the field of electronic attacks. Many Israelis who worked for prominent companies in the industry in Israel chose to leave the field, immigrating to Europe or the United Arab Emirates and work for foreign cyber attack companies, such as Intellexa, which was founded by the former commander of the former commander of the IDF's 81st Tel. Delian and dark matter. These companies track suspected terrorists by obtaining important intelligence information.

There was no response to this report from Paragon.

Published by Globes, Israel Business News – en.globes.co.il – on June 13, 2024.

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