The sale of cybersecurity company Imperva, which was founded in Israel, to French conglomerate Thales for $3.6 billion earns great returns for US private equity firm Thoma Bravo, which bought the company for $2.1 billion in January 2019.
To be Palo Alto Networks
Over the past four years, Imperva has closed the gap with cybersecurity rivals. Imperva had been renowned for protecting company databases, and their connection to applications in corporate computing installed on local servers. However, with the cloud revolution, the company needed to make acquisitions in the field and develop its own technologies.
The acquisition by Thoma Bravo armed Imperva with cash and the ability to make those acquisitions. Shortly after, Imperva acquired Distil Networks, which developed a platform to protect websites from malicious bots, for $146 million. In 2020, Imperva acquired jSonar, a company that developed a similar solution for protecting database infrastructures in the cloud, for $200 million.
In this way, Imperva's annual revenue grew from $300 million on the eve of the purchase by Thoma Bravo in 2018 to more than $500 million today, with EBITDA of $110 million. In order to compete with Palo Alto Networks, which sells a discount package of cybersecurity products for the cloud, Imperva needed an even larger product offering. Hence the deal with Thales, which although known as a drone and air control systems company, also has respected cybersecurity activities in user management and data encryption.
Imperva, which was founded by Israeli cybersecurity pioneers Shlomo Kramer, Amichai Shulman and Mickey Boodaei, who are no longer active in the company and do not own any shares, is part of the prevailing trend in the cybersecurity industry: mergers and acquisitions that offer customers discount packages. This is due to the economic slowdown, which compels IT managers to cut costs.
A good deal for the Americans, less so for the Israelis
This second acquisition of Imperva is an excellent deal for the US investors but less good for Israel. Although the company was founded in Israel in 2002, ten years later its US subsidiary became the parent company and headquarters were moved to the US. Management gradually became American and today the company only has one Israeli board member - Moshe Lipsker, Imperva Israel general manager and head of the Tel Aviv development center that has about 500 employees, more than a third of Imperva's overall workforce.
From this latest acquisition, the Israeli tax authorities will earn very little, with the exception of capital gain that will accrue from the exercise of options by a small number of employees and executives.
Estimates are that all the company's patents are registered outside of Israel, with the exception of some product trademarks. Amit Pollak Matalon & Co. managing partners Adv. Racheli Guz-Lavi CPA says, "Even if the company has an Israeli background, the very fact that the seller is a US fund with no Israeli partners and no representation in Israel, then the sale is exempt from capital gains tax in Israel, even if the subsidiary had patents in Israel."
"Even if the fund had a representative office in Israel, and it would receive a rolling (exempt arrangement) of venture capital funds, it would still be able to receive an exemption from paying capital gains tax. At the same time, and in accordance with the recent ruling on Medtronic, in cases where the subsidiary company, in practice, has transferred to the parent company the functions and assets, including its intellectual property, and its business risks, turning it from a profit and loss center to a development center, then this is a sales transaction subject to payment of a higher tax on intellectual property registered in Israel."
A good deal that augurs a gloomier future
The process that Imperva decided to conduct in 2012 is now being initiated by more and more Israeli tech entrepreneurs, according to a survey by Start-up Nation Central published last week, 29% of tech companies questioned plan to transfer the company's registration abroad. 70% of the companies polled said they had already taken active steps to examine the legal and financial implications of moves to transfer money abroad. Previously, the Israel Innovation Authority had found that 80% of Israeli companies founded since the start of 2023, had done so abroad, most of them in Delaware in the US.
This means that the intellectual property, which usually constitutes the bulk of the company's value and may affect tax receipts from future acquisitions, will be registered in the US from the start. The companies will continue to exist in Israel, but as development centers of US companies, and for that reason the tax rate they will pay in Israel may be much lower. Moreover, instead of a capital gains tax on the sale of intellectual property, the state will have to make do with capital gains tax on Israeli investors and Israeli employees selling shares and options. This doesn't sound so bad, but in reality it is a much lower tax rate.
Published by Globes, Israel business news - en.globes.co.il - on July 26, 2023.
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