Wiz and SentinelOne merger will create a global cyber giant – What … – CTech

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.

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.

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.

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

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.