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Avishag Shaar-Yashuv
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WIZ AND SENTINELONE MERGER WILL CREATE A GLOBAL CYBER GIANT - WHAT STANDS IN ITS
WAY?


MARKET ESTIMATIONS SUGGEST THAT SENTINELONE WILL NOT AGREE TO A DEAL FOR LESS
THAN $18-20 PER SHARE, EQUATING TO AROUND $6 BILLION AND 25% ABOVE THE CURRENT
VALUE

Sophie Shulman
21:42, 26.08.23
TAGS:
Cybersecurity
SentinelOne
Wiz
This week, Assaf Rappaport, the prodigy of global cyber, will celebrate his 40th
birthday. There is no more impressive gift for such an event than what Rappaport
can give himself, which is the purchase of SentinelOne by Wiz - as reported on
Friday by Bloomberg - for an amount that is expected to reach at least $5
billion.
Many conventions will be broken if this transaction - the largest between two
Israeli high-tech companies to date - goes through. A startup company (Wiz) will
acquire a public company; a smaller and younger company, Wiz, founded in 2020
and employing 750 people, will acquire SentinelOne, which is ten years old and
employs nearly 2,000 people. And above all, these are big egos that will have to
find a way to work together.
To this day, the history of Israeli high-tech is mainly marked by dramatic
missed opportunities due to the inability of entrepreneurs on both sides to
agree who will lead the merged company. The Amdocs-NICE-Verint-Comverse axis,
which no longer exists, is the clearest and most famous example, but there are
many more cases.
2 View gallery

Wiz team.
(Avishag Shaar-Yashuv)
But if there is someone who is capable of breaking the conventions, it is
Rappaport who, after selling Adallum, which he founded together with Ami
Luttwak, and Roy Reznik, for $320 million, became the General Manager of
Microsoft Israel R&D.
Wiz, which he founded with roughly the same group that includes Luttwak, Reznik,
and Yinon Costica, also broke a record as the fastest-growing cyber company,
reaching $100 million in annual sales a year ago, when it was just two years
old. In Wiz's last funding round in February of this year, in which it was
valued at $10 billion, it had already hit an annual sales rate of $200 million,
and according to estimates, it may reach $300 million by the end of the year.
But Rappaport wants to break another barrier and take Wiz to Wall Street in the
next two years, but not before it reaches an annual revenue rate of one billion
dollars and becomes profitable. This is an almost impossible task to accomplish
solely through organic growth, as Wiz has done until now. The barrier standing
in its way is not only the difficulty of continuing to grow the customer base,
but also Wiz's own capabilities, as it is struggling in recruiting significant
numbers of quality personnel despite the slowdown in high-tech. Even today,
there are dozens of open positions in the company, and one of the shortcuts it
can take with the acquisition of SentinelOne is adding its technological
personnel to the ranks of Wiz. For the rest of the employees, who are not
involved in the core technology and marketing of the product, the future is less
rosy.
Wiz and SentinelOne complement each other technologically almost perfectly, and
since last March, they have been working in strategic cooperation to provide a
comprehensive cloud security solution. SentinelOne specializes in protecting
endpoints such as computers and smartphones that are connected to the corporate
cloud, while Wiz takes the security from there to the cloud itself. At the
current revenue rate of both, together they are already reaching Rappaport's
billion-dollar dream, and what remains is to improve the profitability rates of
SentinelOne, which is considered one of the most loss-making companies in the
cyber market. Together, the two companies can capture a considerable share of
the cloud cyber market, which, despite all the buzz around it, only 10% of
organizations have fully embraced, so the potential for growth is still
significant.
If the transaction goes through, it will also carry a dramatic meaning for
Israel, which will consolidate its position as the cyber capital of the world
with such giants as: Wiz-SentinelOne, which could be valued at about $20
billion; Palo Alto, which has a market cap of around $75 billion; Check Point,
which trades at $16 billion; and even the veteran CyberArk, currently valued at
$7 billion. Other notable names include Cato Networks, founded by Shlomo Kramer,
one of the founders of Check Point, and Imperva, which is targeting an IPO in
2024-2025 at a value estimated at around $3-5 billion.
2 View gallery

SentinelOne executives.
(Photo: SentinelOne)
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Weingarten and Rappaport's ego barrier
However, the road to the Wiz-SentinelOne deal is not easy, mainly because Wiz,
with about $900 million in its coffers today from the capital raisings it has
conducted since its establishment, will have to raise a significant amount to
finance such a move. Market estimates suggest that Wiz is already heading in
this direction, as one of the small investors in the company interested in
increasing their stake has proposed a funding round for Wiz that would provide
the required amount to acquire SentinelOne. This entity is apparently the large
European investment fund Index Ventures, which has increased its presence in
Israel in the past year. The fund has raised $12 billion during its lifetime,
and the person leading the efforts is Shardul Shah, who has been ranked several
times in the past on the list of the 100 best venture capital investors in the
world (the Midas List). Shah has been alongside Rappaport since the days of
Adallum and was among those who encouraged him to leave Microsoft to found Wiz,
in which he is invested and serves on the board of directors.
A non-financial, yet psychological and equally important barrier that has
hindered many deals in the past is the willingness of Tomer Weingarten, founder
and CEO of SentinelOne, to sell his company to Rapaport & Co., known in the
cyber market as a closed group that has been together since their military
service at units 8200 and 81. Weingarten, who has already achieved the holy
grail of founding a company, turning it into a unicorn, and realizing the dream
of an IPO on Wall Street, which was also the largest cyber IPO in history,
valuing it at $9 billion, will likely find it difficult to accept the new
reality. This is especially true when considering that SentinelOne had reached a
value of $20 billion at its peak, even surpassing Check Point. However, those
close to SentinelOne say that Weingarten has become somewhat weary, especially
since the company went public, turning him into the person responsible for
managing investors' expectations.
He and the veteran employees at SentinelOne have also received substantial
amounts of cash, making them ready to move on to the next startup. The final
straw for Weingarten was the last financial report published by SentinelOne in
June of this year, which significantly missed forecasts and lowered expectations
for the future. Despite its rapid growth, SentinelOne has struggled to improve
its operating performance, leading to significant losses and negative cash flow.
This situation is more forgivable for a private startup but less acceptable in
the current era on Wall Street.
Moreover, in these reports, SentinelOne made accounting errors, highlighting the
gap between a private company that can be content with ARR (annual recurring
revenue) and actual revenue. Customers reduced their usage of SentinelOne's
solutions, forcing the company to retroactively correct its reports. This
incident caused SentinelOne's stock to drop by 36% in a single day, and since
then, it has effectively been on the shelf, also resulting in a 5% reduction in
its workforce.
A glimpse at SentinelOne's future
Probably the most significant obstacle for Wiz, which also provides some
positive news for SentinelOne, is that there are numerous larger entities in the
cyber market than Wiz that are interested in acquiring Weingarten's company.
Earlier this week, news surfaced that SentinelOne was exploring the possibility
of a sale and had engaged Catalyst Partners to find a potential buyer. This leak
caused SentinelOne's battered stock to rise by 12%. However, there's an
understanding that SentinelOne had likely been in advanced talks with a
potential buyer who was unwilling to pay a substantial premium over the current
value. Nevertheless, it's evident that SentinelOne will attract interest from
private investment funds like Thoma Bravo, recognizing the opportunity to
streamline a growing company with solid technology, as well as from competitors
including CrowdStrike, Palo Alto, and Microsoft. For these companies, $5 billion
or even $7 billion is a small price to pay to eliminate a strong competitor with
promising technology.
With expected revenues of $600 million this year, SentinelOne is a significant
player in the market for small and medium-sized enterprises, holding about 3% of
the total endpoint protection market. Even the largest market players looking
for opportunities have started turning their attention in its direction due to
the slowdown. Market estimations suggest that SentinelOne will not agree to a
deal for less than $18-20 per share, equating to around $6 billion and 25% above
the current value. This price would still be 30% lower than its value at the
initial offering, yet it would enable major shareholders, including Insight
Partners (also a significant shareholder in Wiz), to earn substantial profits
from their investment.
Related articles:
 * A huge merger in Israeli cyber? Wiz considers potential bid for SentinelOne
 * SentinelOne looking into potential sale after becoming takeover target -
   Report
 * Wiz sets sights on $1 billion in revenue after quickly reaching $100 million


Understanding the challenge ahead for Wiz
To grasp how challenging the situation will be for Wiz, which probably has more
limited financial resources, one must consider the unfolding drama in the cyber
market. Just a week ago, Palo Alto, a prominent acquirer in the market known for
building a platform that encompasses nearly all elements required by
organizations to safeguard themselves from hacks, released its financial
reports. While these reports were solid, the real revelation came from the
accompanying 134-slide presentation delivered by the company's executives. This
presentation was a seminal moment in the cyber field. "The presentation
effectively set the tone for all players," note senior executives in the cyber
market. The most staggering number Palo Alto presented was 75—the average count
of cyber solutions an organization uses these days. This is an overwhelming
number that no CISO, no VP of security within an organization, can feasibly
manage.
After years of decentralization, the cyber landscape is on the cusp of a
transformation. When money was abundant and optimism reigned, security managers
in organizations didn't hesitate to experiment with the multitude of new
solutions offered by countless startups. Consequently, organizations found
themselves equipped with dozens of solutions that often did not communicate
effectively. Simultaneously, the macroeconomic landscape shifted, necessitating
spending discipline and maximal resource utilization. These profound shifts have
shaped the direction for cyber solution providers—consolidation. This market
sentiment has triggered the onset of merger fever, with instances like Perimeter
81 being acquired for half a billion dollars by Check Point in early August.
"Whereas there was once a debate, today it's clear that only platforms will
endure; feature companies will fade away. There's no cyber company today that
isn't on the market," assert senior officials in the cyber market.
In response, Wiz stated that "We've previously mentioned the possibility of
acquiring companies and are continually assessing the evolving market as we
strive to become the world's largest cloud security company. Various companies
possess complementary technologies to Wiz, potentially enabling us to offer a
broader product platform. Undoubtedly, SentinelOne stands out among the most
successful global cyber companies, and we've been monitoring their progress for
the past few years."

TAGS
Cybersecurity
SentinelOne
Wiz

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