Last month, amid reports that cyberattack company Paragon Solutions was being acquired by US private equity firm AE Industrial Partners for $900 million, Israel's Ministry of Defense published a dramatic announcement saying, "Contrary to reports the Ministry of Defense has not approved the sale of Paragon." However, it has become clear that when the statement was published, the deal had already been completed and payment had been transferred in compliance with the regulations of the Ministry of Defense, Defense Exports Control Agency (DECA).
The Ministry of Defense has confirmed to "Globes" that it did receive an official report from the company about the change of ownership - a report that by law is required only after the deal is signed. The Ministry of Defense says, "The Defense Export Control Law stipulates that any change in the identity of the controlling shareholder in a company registered as a defense exporter requires a retroactive report to the Ministry of Defense. Based on the report that was submitted, the Ministry of Defense is currently conducting an examination."
The Ministry of Defense's version
So why is there a gap between the initial announcement, which implied that the deal would be blocked, or at least would have to overcome obstacles, and the bureaucratic reality?
The content of the announcement at the time described the procedural process involved in selling a cyberattack company, a routine process that the company is currently undergoing. According to an industry source, "Although the content of the announcement itself was correct, its publication itself - that's what was unusual - because the company underwent the usual procedure without any irregularities."
A senior source told "Globes," "The deal was signed before the Ministry of Defense published the announcement. Everything was done according to protocols and rules." According to him, the announcement was likely due to an "Internal misunderstanding within the ministry. There was no need at any stage to publish such an announcement, as the deal had already been completed according to the law."
Another source added, ""The deal has taken place, and now there is a stage of administrative procedure for registering the new ownership in the Exporters' Registry. Everything has been carried out 100% according to Israeli law and its regulatory derivatives by both the company and the Ministry of Defense."
The Ministry of Defense said in response, "The Ministry of Defense received a report from the company about a change in the identity of the controlling shareholders in the company. The Ministry of Defense is conducting an examination of the implications, in order to ensure that the vital interests of the State of Israel are preserved. It should be stressed that the transfer of security knowledge, including knowledge used for development and production, to a foreign entity, including controlling shareholders in the company or members of the board of directors or management, requires an appropriate license from DECA, and is subject to compliance with the terms of the license. It must also be emphasized that any defense export deal with a foreign entity requires a specific export license."
In the deal, it was agreed that the US investment fund will acquire Paragon, which was founded by former 8200 commander, Brigadier General (res.) Ehud Schneorson, and former Prime Minister Ehud Barak, through the company Red Lattice, which it owns - an integrator that provides solutions to the US Department of Defense and the defense ministries of other English-speaking countries. The deal includes a cash payment of $500 million, and another $400 million subject to meeting targets.
According to sources, the money has already been transferred to the company, with estimates that $250 million will be divided between the 400 employees (20%) and the five entrepreneurs (30%), and an additional $250 million will be transferred to investors: the US fund Battery Ventures and Israeli fund Red Dot, founded by Yoram Oron. Ehud Barak's share in the deal was a few percent, so before taxes he is expected to bring in about $10-15 million.
Paragon adopted a different business model from other cyberattack companies early in 2019, amid a crisis in the industry at the time. While other companies were facing international criticism for misusing their technologies, "The company had pre-defined a list of about 30 stable democratic countries as its target market," the source explains.
This business move hit the right mark - according to sources, in recent months the DECA has reduced the list of countries approved for export for all cyberattack companies in Israel. The new list matches the countries that Paragon has chosen to work with since its inception.
Israeli supervision
Paragon has developed its "Graphite" software, designed to gather intelligence data from encrypted communication apps like WhatsApp, Telegram and Signal. After the acquisition by the US company, it was decided that Paragon would continue to operate from Israel, with the technology and knowhow staying under Israeli supervision.
According to a former military source, partly in response to the founding of the company by Schneorson, steps were taken in the IDF to prevent the transfer of knowhow from the army to cyber companies, including a temporary ban on recruiting company employees into the reserves.
No response has been forthcoming from Paragon to this report.
Published by Globes, Israel business news - en.globes.co.il - on January 30, 2025.
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