Zscaler Is Said to Have Rebuffed Takeover Offers Before 2018 IPO

(Bloomberg) -- Zscaler Inc.'s co-founder and chief executive officer turned down takeover offers because he wanted the fifth company he founded to be the one he held on to, according to people familiar with the matter. So far, that decision has paid off.

Zscaler was in the midst of pitching its initial public offering to investors when Cisco Systems Inc. and at least one other suitor offered to buy the company, according to people familiar with the matter. Both offers were about $2 billion, said the people, who asked not to be identified because the matter is private.

Zscaler CEO Jay Chaudhry didn't engage in serious deal talks, believing the company could be worth more as a public company, the people said. Public market investors haven't let him down. Zscaler's March 15 IPO valued the company at $1.9 billion and the shares soared 106 percent on the first day of trading. The stock is now 68 percent above the offer price for a $3.2 billion valuation.

A representative for San Jose-based Zscaler declined to comment.

“We have no comment on rumor and speculation,” said Cisco spokeswoman Robyn Jenkins.

Chaudhry holds 22.5 percent of the shares in the company. After selling four earlier startups, he decided Zscaler would be different.

No More Flipping

“I have no more interest in doing one more company and flipping it,” Chaudhry said in an interview with Bloomberg TV on Zscaler's first day of trading on March 16. “From day one, the desire was to build a lasting company, to build a sales force of cloud security and take it public.”

Zscaler helps customers examine web traffic and protect them from cyber threats. The company counts EMC Corp., Lightspeed Ventures and private equity firm TPG among its early investors.

The company's revenue increased 57 percent to $126 million for the year ended July 31., according to a regulatory filing. Zscaler posted a net loss of $35 million in the fiscal year.

Tech Sell-Off

Zscaler's $221 million share sale was the first major Silicon Valley IPO of 2018 -- a year that's been busy for U.S. listings, but slow for the tech sector. A week later, Dropbox Inc. raised $869 million. Both totals include the overalottment to underwriters.

Even with the tech sell-off brought on by fears of a trade war, Facebook Inc. privacy worries and White House attacks on Amazon.com Inc., public market valuations remain favorable for IPOs. The Nasdaq 100 Index is up almost 20 percent in the past year and double that over the past two years. That helps lock in higher valuations for newly public companies, which get valued partially through comparisons to where public peers are trading.

--With assistance from Ian King

To contact the reporter on this story: Alex Barinka in New York at abarinka2@bloomberg.net.

To contact the editors responsible for this story: Elizabeth Fournier at efournier5@bloomberg.net, Michael Hytha, Andrew Pollack

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