Wiz team.

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

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.
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Wiz team
Wiz team
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.
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SentinelOne סנטינל וואן ביום ההנפקה בוול סטריט
SentinelOne סנטינל וואן ביום ההנפקה בוול סטריט
SentinelOne executives.
(Photo: SentinelOne)
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.
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."