Last week, one of the world’s biggest tech companies, Lenovo, made its first strategic acquisition in Israel. The Chinese computer giant acquired Herzliya-based enterprise storage startup Infinidat for an undisclosed sum, estimated at over $500 million.
For Infinidat, which has about 500 employees, this is a drop in valuation considering that a decade ago it was valued at $1.2 billion according to PitchBook, and in 2017 it received a valuation of $1.7 billion, but for the Hong Kong-based computing company this is one of its most significant acquisitions.
For Infinidat Israel GM and CPO Shahar Bar-Or this is not his first exit. He has already seen two previously. He was VP development at M-Systems, which invented the disk-on-key and was sold to memory card company Sandisk for $1.55 billion, and subsequently he was behind the merger of Sandisk's Israel development center into storage products company Western Digital. But this exit is very different he tells "Globes" in an exclusive interview.
"This is a lesson in the resilience of a company," he says. "Four years ago, the company went through a near-death experience, and was very close to not being able to continue existing. We lost most of our employees, more people left than were laid off due to the crisis in early 2020. Even when I joined shortly after (as the manager of the Israeli site), it was not clear that the company would get out of this, but the employees who remained proved that they were determined."
He adds, "The fact that we haven’t raised money since 2020 forced us to think about every dollar we spend, and since then we have been one of the companies that has demonstrated profitable and healthy growth – long before the high-tech crisis of 2022 that led other companies to adopt a similar model."
The management was changed and 70% of employees left
Infinidat's story is not the usual one of an Israeli startup that grows and grows until it is eventually sold to a tech giant in an exit that is all smiles. The Herzliya-based company was founded 14 years ago and has been through a lot. Infinidat operated at a loss and had to raise $370 million over the years, wiping out the shares of several investors and employees along the way and only an organizational change it made near the outbreak of the Covid pandemic in early 2020 brought it to financial stability.
But that change rocked the company from end to end. It included a change in management, a wave of layoffs that saw 70% of employees leave, and the ousting of founder Moshe Yanai as chairman, although he remains a director. With new management led by American Phil Bollinger as CEO and Bar-Or as CPO and Israel GM, the company has managed to record positive EBITDA since 2021.
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The company competes with veteran giants like IBM, Hitachi and Dell, but the patents it developed for managing data storage between different storage technologies allows it to significantly reduce costs. Because of the elite niche chosen by Bar-Or and Bollinger, Infinidat only serves large companies that can finance storage machines that cost an estimated $1 million per unit. Although Lenovo is known for its laptops, it owns a server division, and the Israeli acquisition is expected to bring it into the premium server market for large companies.
Infinidat has estimated annual revenue of more than $300 million from machine sales, with annual growth in the single digits. Bar-Or declined to comment on the company’s revenue or valuation, but market estimates are that the low growth rate and high hardware costs have led the company to seek an exit. The deal, worth about $500 million, represents a substantial return for investors who invested in the company in June 2020 as part of its most recent financing round, which is defined as its "rescue" round. Several tens of millions of dollars were raised from TPG funds, the Bronfman family’s Claridge, Gilad Shani’s ION fund, and Goldman Sachs. These, along with the company’s remaining employees, became the main beneficiaries of the deal, despite having invested a total of $370 million in it since its inception, according to the IVC company database.
Lenovo's Chinese roots will represent a challenge
Lenovo has Chinese roots, and as a result is on the radar of several US congressmen who have accused it of having ties to the Chinese government. Mike Gallagher, head of the congressional committee dealing with defense against Chinese espionage, asked the US Navy to remove Lenovo computers from its catalog, but the company claimed that he relied on a report funded by rivals such as Dell and Micron.
In a statement published by Lenovo in the US, it stressed that it has no connection to the Chinese military and that the Chinese government does not have any control or even a single share in it. The company is traded on the Hong Kong Stock Exchange, with only 36% of its shares held by the company's founder, the Chinese company Legend, and the rest by the public. Legend does not even have control of the board of directors, but the company's CEO and president is the Chinese billionaire Yang Yuanqing.
"Lenovo's huge investment allows us to grow significantly, with the potential to at least double ourselves in the coming years in terms of employees and revenue," says Bar-Or.
Some are concerned about data security because of the company's country of origin.
"All the engineers who write the code for the product are based in Israel, and the intellectual property is here in Herzliya. In some ways, this allows for higher data security than a US company that is incorporated in the US but whose engineers are scattered worldwide. Lenovo is incorporated in Hong Kong and is not Chinese-owned. It has a Chinese heritage and a center in China, but the management of the division to which we belong is in North Carolina."
There are security customers or those for whom the Chinese issue is sensitive. What solution will you provide them?
"We work with American HP servers, and those who want to stay with the HP server – I don't see this as an obstacle."
The deal has been initialed, and now a final approval process for its acquisition is expected, which could take many months, during which the purchase amount may change. Unlike many exits in the field, in this case Lenovo is acquiring a business unit that includes not only a R&D division, but also sales, finance and administration personnel. "Deals of a million dollars per machine require management, service personnel, finance and legal personnel, and also production lines," explains Bar-Or.
"In order to double sales you need strong support"
Moshe Yanai founded the company in 2011, having previously sold three other companies, with a vision that this time he would not sell. Already a decade ago the company had the price tag of a unicorn, so what happened along the way?
"Today, you need a strong 'go-to market' with a mass and presence to double or triple your sales. And to make such a leap, you need strong support. As soon as a company like Lenovo, which operates in about 200 markets and sells $60 billion a year, joins us it gives us the push that allows for such high acceleration. Our product has proven itself, it has reached the biggest data center in the world."
Bar-Or refrained from addressing another issue that is looming for the company and its future buyer: a backlog of lawsuits filed with the Tel Aviv District Court and the Bat Yam Labor Court, alleging that the company, as part of a reorganization in 2020, refused to purchase the shares of veteran employees and then significantly diluted their holdings. Estimates are that Lenovo, which conducted thorough due diligence before the acquisition, is aware of the issue and may even be pricing in the lawsuits. However, it is believed that the lawsuits, which are still ongoing, will not jeopardize the deal or bring about a substantial change in it.
A response from the representative of most of the plaintiff employees, Adv. Yaron Alon, has not been forthcoming.
Published by Globes, Israel business news – en.globes.co.il – on January 22, 2025.
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