EY, the Big Four accounting firm, valued secretive Israeli spyware company NSO Group at $2.3 billion just months before it needed emergency funding in a cash crisis and its capital was deemed worthless.
The valuation of EY, more than double what NSO had valued two years earlier, was made by analysts at the firm’s Luxembourg office in July last year, according to documents seen by the Financial Times. NSO’s enterprise value estimate was made without visiting the company or verifying information provided by its analysts.
By contrast, Berkeley Research Group, a consultancy that represents NSO’s private equity owners, said earlier this year that the company’s equity was “worthless.”
EY’s valuation was also much higher than what an unnamed potential buyer had offered just weeks earlier, when it proposed to take a minority stake in a deal that valued NSO at $1.6 billion, including $500 million in debt. That figure was presented to NSO investors at a July 2021 meeting, according to a separate document seen by the FT, although the deal fell through.
EY’s assessment was made as reports of the abuse of NSO’s Pegasus cyber weapon against activists and journalists ricocheted around the world. Around the same time, the private equity owner of NSO was torn by infighting, while Meta, Facebook’s parent group, was suing the spyware maker for hacking its secure messaging platform WhatsApp.
Investment bankers and defense officials are now trying to assess the value of the company once again, in a possible deal to spin off NSO’s core assets to L3Harris, a US defense contractor. That sale is designed to circumvent a US Department of Commerce blacklist in November 2021 that has further damaged the company’s reputation and operations.
In a 132-page report valuing NSO and the other companies owned by private equity group Novalpina Capital, EY described NSO as a “market leader” even though its revenues had fallen 17% in 2020 while its competitors had grown healthily.
Months later, Berkeley Research Group, which was hired to liquidate the private equity fund, concluded that the capital of NSO, once the jewel of Israel’s surveillance export industry, was worth zero.
In October 2021, BRG would provide a $10 million emergency loan to a sister company of NSO to help it pay payroll.
EY and NSO declined to comment for this article.
While it is not uncommon for private valuations of technology companies to rotate between valuation rounds and between acquisitions, the process by which such numbers are assigned, in closed-door deals often signed by large professional services firms but not public facts. – is under increasing scrutiny as valuations of publicly traded companies fall.
The EY report came at a crucial time. It was formally commissioned just two days before an international newspaper consortium drew attention to how NSO clients, which include Saudi Arabia, the United Arab Emirates, and other authoritarian countries, used Pegasus to surreptitiously puncture phone encryption and turn them into surveillance devices.
By August 6, when EY signed off on the valuation, the company had been on the front pages for weeks and new sales had begun to wither.
Still, EY said it was only valuing the company as of June 30, without assessing the impact of “increased adverse media attention” after that date. Even though that attention forced the company’s CEO to publicly commit to the reforms, EY decided that measuring their impact was outside its purview and chose to ignore any “governance or social” issues.
By November, NSO had been added to a US trade blacklist, a further blow to its operations. In December, a group of NSO’s creditors said in a letter to its majority shareholders that the company was insolvent.
Changes in NSO’s value estimates are also unique to the company, which has operated in the shadow of Israel’s military and diplomatic outreach to Arab and Gulf neighbors, while trying to attract the premiums investors were willing, until recently. little to pay for technology companies based in Israel.
Because it spanned both sides of the classified world of espionage and limited disclosures from a private equity-backed cyber weapons manufacturer, NSO managers have participated in roadshow debt filings. Chief Executive Shalev Hulio has told friends of his that the company’s peers include publicly traded surveillance giants like Palantir and Verint, while protecting crucial operational and financial information behind non-disclosure agreements.
Moody’s has tracked NSO’s $500 million in junk-rated debt since its issuance in 2019, but said this month it would withdraw its rating due to “inadequate” information.
At EY, the valuation came with a disclaimer: their complicated financial model was just a “desk valuation,” which meant they hadn’t visited the company. EY said it “depended on the accuracy and completeness of the underlying information provided to us” and did not verify it or verify its accuracy.
Even desk valuations can have important implications, especially as they indicate how much NSO officials could expect to receive in incentive payments, worth a total of $54.3 million if targets are hit, the EY report shows.
The EY assessment cast NSO as a thriving technology company, with revenue expected to rise 60 percent by 2023 to $400 million with sustained media focus on the abuse of its signature Pegasus spyware that has little or no impact on future sales. A counter-drone and data analytics business would complement Pegasus’ sales.
That differs sharply from the opinion of officials at the Berkeley Research Group, which was put forward by the original investors in Novalpina, including the Yorkshire and Oregon pension funds, and now oversees the fund.
BRG argued, according to correspondence seen by the FT, that NSO’s business could only continue to sell to “high risk customers”, deals that BRG refused to approve.