Israeli Drone Maker Gets Startup Makeover for Cyber Arms Race

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Key Speakers And Displays At The Singapore Airshow

The Hermes 900 unmanned aerial vehicle manufactured by Elbit Systems Ltd.

Photographer: Brent Lewin/Bloomberg

When Adi Dar goes to work each day, he’s greeted by ping-pong tables, arcade games and a big open workspace that encourages employees to collaborate.

Dar doesn’t work at a startup. He heads the new cybersecurity unit of Elbit Systems Ltd., the Israeli defense company known for making drones and avionics systems.

Dar, a 13-year company veteran, said the playful environs help him lure software engineers from elite intelligence units of the Israeli army who can work with him on developing new cybersecurity products.

“They’re trying to find something which will make their life interesting,” he said in an interview in Elbit’s Tel Aviv offices, which overlook the Israeli defense ministry. “One of the things we learned is, it’s easier to relate to something which is not a huge conglomerate.”

Defense companies like Elbit are learning they need a bit of startup culture to win a piece of the $35 billion corporate cybersecurity business. Resources for cyberwarfare have been growing in otherwise stagnant government defense budgets, while high-profile data breaches at targets like JPMorgan Chase & Co. have convinced some military contractors to sprout civilian arms to commercialize data-security technology.

“There’s a real arms race,” said Elik Ber, chief executive officer of Tel Aviv-based research firm Meidata. “All the governments are trying to develop or acquire tools to protect themselves, and to be able to attack if they need to. And on the commercial level, the defense giants and other companies are trying to get hold of the best patents and top innovations in the field.”

Data Security

Elbit’s new cyber unit, called Cyberbit, is trying to carve out a niche in corporate data security, a market that will surpass $40 billion in revenue by 2018, according to data compiled by IDC and Bloomberg Intelligence. The government cybersecurity market is forecast to reach $134 billion worldwide in the same period, according to consulting firm Frost & Sullivan.

Raytheon Co., the fourth-largest U.S. defense contractor, is also creating a new cybersecurity company by combining its cyber unit with Vista Equity Partners LLC’s Websense Inc. in a $1.9 billion deal to expand its commercial sales.

Cyberbit, which was formally established in April and sits in a separate office in Ra’anana, about 14 miles (23 kilometers) north of Tel Aviv, is split into two entities: one offers a kind of one-stop-shop for surveillance and data mining for government intelligence agencies and law enforcement, and is subject to export controls. The second houses Elbit’s CyberShield system, which allows nations, armies and large enterprises to identify, manage and deflect cyber-attacks.

Growing Faster

“The intelligence part is bigger now, but the cybersecurity part is growing faster,” Dar said. “This is the real future.”

Chief Executive Officer Bezhalel Machlis said in an interview last month he expects Cyberbit to generate as much as $150 million in revenue in 2015, or 5 percent of last year’s $2.96 billion in sales, and a “few hundred million” in the next few years. Elbit’s U.S. shares have climbed 39 percent this year, compared with a 8.5 percent jump in the Bloomberg Israel-US Equity index. Elbit’s shares rose 2.7% to $84.60 at 9:42 a.m. in New York.

Even defense companies sticking to government contracts are importing cyber expertise to stay competitive. State-owned Israel Aerospace Industries Ltd. formed a partnership with Cyberia Advanced Cyber Solutions Inc. two years ago to create a cyber research and development center in Israel. It has since opened another in Singapore, according to Esti Peshin, IAI’s director of cyber programs. IAI’s electronic warfare products, which can do things like jam radar or interfere with airplane communications, have evolved into cyberdefense tools, she said.

Cisco, IBM

Rafael Advanced Defense Systems Ltd., the maker of Israel’s Iron Dome anti-missile system, is teaming up with International Business Machines Corp., EMC Corp., and Cisco Systems Inc. to build a national computer emergency response team as part of Israel’s national cyber bureau, according to Brig. Gen. Ariel Karo, head of Rafael’s cyber directorate.

Defense contractors have a role to play in the current boom of corporate cybersecurity spending by building larger systems that integrate products from smaller tech companies, said Erik Suppiger, an analyst with JMP Securities LLC in San Francisco.

Dar is hoping the new corporate culture he’s fostering at Cyberbit, with two discrete sales teams for government and civilian clients, will help him adapt to the change.

“We’re trying to play in both worlds,” he said. “We know how to do big projects which, when you look at the future of cyber security, this is becoming more and more interesting and important.”

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