NSO founders sell low then buy high

NSO management Photo: Benny Sahar
NSO management Photo: Benny Sahar

It sounds like a gamble but Omri Lavie and Shalev Hulio's business record shows they know a thing or two about entrepreneurship.

Not every day do a company's founders buy back shares in a company after its exit. When it happens in a mysterious and controversial company, the plot becomes even thicker.

NSO Group reported last Thursday that its two founders, childhood friends and serial entrepreneurs Omri Lavie and Shalev Hulio (38), would acquire half of the controlling interest in the company from US private equity fund Francisco Partners. European private equity firm Novalpina Capital will acquire the other half.

Is the deal financially worthwhile for them? "Globes" found that Lavie and Hulio, who founded NSO in 2010 and sold the controlling interest to Francisco Partners in 2014 at a company value of $180 million, while each retaining 15% of the shares. This makes their proceeds from the exit $25-30 million in cash each.

The two founders' stakes have been diluted to 10% each since 2014. Sources close to NSO said that the company distributed a $230 million dividend in 2017, which gave Lavie and Hulio $25 million more. Taking into account that the founders sold more shares after 2014, their total proceeds from their holding in the cyber company since it was founded were $80 million.

Lavie and Hulio will reportedly invest $50 million each in buying back shares in the current deal (through a loan, among other things). This is more than half of the amount they have received through the company to date.

What can explain such a large gamble? It is hard to say, certainly in a situation in which the company's name has been mentioned more in connection with acquisition offers on the one hand and mysterious and controversial affairs on the other. At the same time, Lavie and Hulio's business record shows that they know a thing or two about entrepreneurship.

They founded their first startup, MediAnd, a concealed video advertising company, in 2007, when they were only 26 years old. The investor in this startup was Genesis Partners, with Eddy Shalev, who invested in all of Lavie and Hulio's ventures. They went on to their next venture only a year later, founding CommuniTech in 2008. This company developed technology facilitating remote support for mobile devices in which a technician takes over the device, thereby eliminating the need to visit a service station.

CommuniTech's remote control capability gave Lavie and Hulio the idea of taking over devices without permission as a tool likely to be of use to Israeli security agencies. Possession of just a telephone number enables the system developed to eavesdrop on people's device and view all of their calls, messages, e-mails, and activity on the social networks, without even knowing which mobile phone company they use or going through its servers. Thus was born Pegasus, NSO's flagship program, and the company began operating in 2010.

The company made its first significant deal with the Mexican government in 2011. It was revealed that the software sold was not used at all in the war against the drug cartels; it was used to spy on opponents of the regime and journalists all over the world.

NSO's name has since been mentioned in reports by human rights organizations and in the context of various scandals, including spying against opponents of ill-reputed regimes. It was recently reported that the program was used to spy on Saudi Arabian journalist Jamal Khashoggi and contributed to the decision to assassinate him.

Both NSO and Hulio and Lavie themselves denied any involvement in affairs of this type, claiming repeatedly that the company produced offensive cyber weapons exclusively for security purposes.

Simultaneously with all these matters, Lavie and Hulio founded a startup named Kaymera, which has been supplying cyber defense systems for mobile phones that protect against penetration attempts, especially against malware and industrial espionage, since 2013. To some extent, it can be said that Kaymera was founded in order to defend against NSO's Pegasus.

In November 2018, it was reported that NSO was considering the acquisition of cyber intelligence company Fifth Dimension, whose chairperson of former IDF Chief of Staff Benny Gantz, who is running in the current elections. The deal did not go through, however, and Fifth Dimension collapsed because of problems with its most prominent investor - an oligarch who ran afoul of the US administration.

Published by Globes, Israel business news - en.globes.co.il - on February 17, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

NSO management Photo: Benny Sahar
NSO management Photo: Benny Sahar
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