AnalysisCan a tweet derail a $900 million cyber-tech deal?
Analysis
Can a tweet derail a $900 million cyber-tech deal?
Paragon’s sale sparks debates over regulation, judiciary independence, and political influence.
The controversy surrounding the sale of the offensive cyber company Paragon threatens to become the first significant test of the business sector’s encounter with the fallout from the judicial overhaul. Is Israel in 2024 a country where an anonymous tweet filled with half-truths, amplified into a smear campaign by political interests, can derail a high-profile business deal? In this emerging reality, the need for an independent judiciary is more critical than ever—to determine whether the rules of the game can be retroactively altered to undermine such transactions.
Paragon specializes in offensive cyber tools and has developed a system called Graphite, which can penetrate devices and extract content from encrypted messaging platforms like WhatsApp, Telegram, and Signal. While its operations comply with Israeli and U.S. laws, the sensitive nature of offensive cyber technologies often invites scrutiny due to their potential misuse. However, critics suggest that objections to Paragon's sale may stem from interests beyond human rights concerns.
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Pargon founders alongside investor and former prime minister Ehud Barak.
(Photo: Courtesy)
The deal, signed on December 13 and disclosed last Monday, involves the acquisition of Paragon by the AE investment fund for an initial $500 million, with the total potentially reaching $900 million based on performance metrics. The sale is significant for Paragon's founders, Idan Nurick, Michael Bogudlov, and Liad Avraham, and its 400 employees, who collectively own about half the company. Notably, Paragon’s stakeholders include prominent figures like Ehud Schneerson, former commander of Unit 8200, and former Prime Minister Ehud Barak, who owns 3.5% of the company and serves as a director.
The sale of Paragon, led by the investment bank Jefferies, a major player in the local mergers and acquisitions market, was reported to have passed all necessary bureaucratic approvals. The deal followed months of negotiations, partly because Paragon is subject to the Defense Export Control Law enacted in 2007. This law requires companies holding a security export license to notify the Ministry of Defense within 30 days of a change in ownership. Accordingly, Paragon submitted notice to the Ministry of Defense on Sunday, confirming the deal with AE had been finalized.
However, on Thursday, the Ministry of Defense issued an unexpected statement to the media, claiming that the sale of Paragon had not been approved because no official request for the transaction had been submitted. The statement added that the Defense Export Controls Agency (DECA) was examining the matter and its implications. Notably, the Ministry of Defense emphasized, “All decisions made at the Ministry of Defense are based on professional considerations only, and the ministry has not received any inquiries regarding the matter from any political or private entity.”
This sequence of events highlights the controversy surrounding the deal. In the three days between the deal’s disclosure and the Ministry of Defense's announcement, the Paragon sale became a heated topic on social media. An anonymous user on X (formerly Twitter) published a theory blending fact with misinformation. The post alleged that former Prime Minister Ehud Barak, through his connections in the Biden administration, had ensured that all other Israeli offensive cyber companies were blacklisted in the U.S., leaving Paragon as the sole company allowed to operate in the West.
Although the anonymous poster is not politically affiliated, their evident expertise in Israel's security and intelligence sector led some to speculate a connection to Paragon’s competitor, NSO Group. Once Barak’s name was linked to the sale, political factions amplified the allegations, creating a conspiracy narrative that seemingly influenced the Ministry of Defense’s unusual response.
The Ministry of Defense currently has no clear reason to block the sale, as the buyer is a reputable American fund and all procedures appear to comply with legal requirements. The law only requires notification within 30 days of a transfer of ownership, not prior approval. While the Ministry has clarified that its announcement does not mean the deal will be rejected, it has hinted at potential changes to Paragon’s export license. Such a move could retroactively jeopardize the deal, prompting AE to pursue legal action in Israeli courts.
Even if this regulatory scrutiny proves to be little more than political posturing, it may nonetheless have significant consequences for Israel's defense-tech industry. Historically, venture capital funds have been hesitant to invest in defense-related startups due to the complex regulatory landscape. In recent years, global conflicts have heightened interest in innovative military technologies, with investors hoping for more agile regulatory frameworks in Western countries. However, if regulatory uncertainty continues to overshadow business considerations, investors may become wary of Israel's defense-tech sector, potentially cooling an otherwise dynamic field.
