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Outlook for M&A in Israel: Momentum builds on record-breaking 2017

What's inside

Global demand for Israeli tech assets is pushing deal activity to new highs, while domestic firms increasingly seek scale abroad.

Introduction

Colin J. Diamond
Colin J. Diamond
Partner|New York
Services
Capital Markets, Power, Pharmaceuticals & Healthcare, Energy, US Public Company Advisory, Technology, Financial Institutions

Daniel Turgel
Daniel Turgel
Partner|London
Services
Mergers & Acquisitions, Technology, Telecommunications, Financial Institutions, Private Equity

Israel's thriving start-up scene continues to draw attention from around the globe, resulting in record M&A deal activity in 2017.

Israel is home to more start-ups per capita than any other nation in the world. It also spends more on research and development, as a share of GDP, than any other developed country. As such, it is a seedbed for high-growth firms, particularly in the tech, cybersecurity and fintech industries. The dynamism of its entrepreneurs, and their ability to address demand and solve modern day challenges with cutting-edge technologies, keeps foreign acquirers coming back year after year.

Yet Israel also poses distinct challenges to investors. Success depends on an ability to navigate intense geopolitical dynamics as well as an evolving regulatory environment.

To better understand where dealmaking is headed in Israel, White & Case partnered with Mergermarket to survey 58 senior-level executives at Israel-based companies and private equity (PE) firms about their outlook for M&A. This report, the second in an annual series, highlights recent deal trends in Israel, reveals investor sentiments about the future, and identifies likely opportunities and challenges for the coming year.

Key takeaways include:

  • Israel set new records for deal value and volume in 2017
    Investors poured US$25.7 billion into 109 transactions in 2017, marking a 33 percent uptick in value compared to the previous year, and the highest annual volume on record. This was led by foreign investment, which increased to its highest levels of volume on record. And figures suggest that Israel M&A is heading for another strong year – a total of US$4.3 billion worth of deals announced in Q1 almost doubled Q4 2017.
  • Stakeholders expect growth to accelerate
    Seventy-nine percent of respondents say their companies will be involved in more M&A in the next 12 months compared to the previous. That is twice the percentage who said they expected more activity in our previous report.
  • Stakeholders expect an increase in dominance of inbound deals
    In a shift from last year's findings, respondents expect foreign public companies and PE firms to be more active than domestic private companies and PE firms.
  • Regional instability is the top concern
    Legal and regulatory issues and the challenge of settling on valuations are also seen as significant potential barriers to closing deals. Global economic volatility, the top concern identified in last year’s survey, fell to fourth place this year.

M&A Overview: Israel dealmaking sets new records

Israel M&A set new records for value and volume in 2017, and 2018 is shaping up to be another banner year.

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Survey

Expectations are high for future growth

One in four respondents to our survey say their companies will be involved in more deals in 2018, compared to 2017.

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Dominance of inbound deals expected to increase

Compared to last year’s survey, more respondents said that foreign buyers will more active than domestic acquirers in the future.

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Regional instability is top concern

Sixty-eight percent of respondents chose regional instability as one of their top three challenges to dealmaking in Israel.

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Conclusion

Conclusion: Five trends to watch in the coming year

Trends related to technology, China, the US, outbound deals and regulations are most likely to shape the future of M&A in Israel.

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Dominance of inbound deals expected to increase

Insight
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Colin J. Diamond |
Daniel Turgel

HEADLINES

  • 43 percent of respondents believe overseas PE firms will be some of the most active participants in the M&A market
  • 33 percent expect foreign public companies to become more active
  • China withdrew from Israel's M&A scene in 2017, accounting for just one of the year's top-20 deals
  • But 51 percent of respondents expect Asia to provide the biggest annual increase to the number of foreign investors in the coming year

One of the most striking observations from this year's survey is the shift in expectations about which types of companies will drive M&A activity in the next year. In general, it is predicted that foreign buyers will be more active than domestic acquirers.

Specifically, 43 percent of respondents believe overseas PE firms will be some of the most active participants in the M&A market, a year-on-year increase of nine percent. Thirty-three percent of respondents say that foreign public companies will be the most active, a nine percent increase compared to last year.

Fewer see domestic PE firms as being the most active in the coming year—36 percent, down from 46 percent in our previous report. And the same goes for domestic/Israeli private companies, with only 23 percent saying domestic/Israeli private companies will be most active in M&A, down from 36 percent last year.

These views are consistent with market data, which shows a notable increase in inbound Israeli M&A activity in 2017. Domestic activity has been relatively flat for the past six years.

Compared to last year’s survey, more respondents said that foreign buyers will more active than domestic acquirers in the future.

 

China set to re-enter the market

China's role in Israel M&A dropped considerably in 2017. In 2016, China had four of the top ten largest deals in Israel. But there was only one Chinese transaction in the top 20 deals in 2017: the US$112 million acquisition of a 65 percent stake in Servotronix Motion Control by Chinese appliances giant Midea Group.

This is likely due to changes in regulations in China. At the end of 2016, China tightened its rules pertaining to outbound investments in order to control currency movements and curb investments that the government deemed overly speculative.

However, in December 2017, regulators made a number of improvements to promote the continuous development of overseas investments by simplifying and clarifying certain procedural requirements. These changes, which came into effect in March 2018, should allow Chinese M&A activity to increase in Israel in the future.

Indeed, 51 percent of survey respondents expect Asia to provide the biggest annual increase in the number of foreign investors in the coming year. Moreover, 85 percent of respondents expect the number of Asian bidders targeting Israeli companies to increase over the next 12 months compared with the previous 12 months; 35 percent expect a significant increase.


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Outlook for M&A in Israel: Momentum builds on record-breaking 2017

 

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Contacts

Colin J. Diamond
Colin J. Diamond
Partner|New York
Services
Capital Markets, Power, Pharmaceuticals & Healthcare, Energy, US Public Company Advisory, Technology, Financial Institutions
Daniel Turgel
Daniel Turgel
Partner|London
Services
Mergers & Acquisitions, Technology, Telecommunications, Financial Institutions, Private Equity

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