Israel M&A tracks global deal downturn in wake of crisis
Deal activity fell dramatically in 2020, but Q3 shows signs of recovery
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Global dealmaking slowed dramatically in 2020, as the world grappled with the health, economic and political consequences of the COVID-19 pandemic. Lockdowns hobbled economies across the globe, driving deal value and volume down to levels not seen since the global financial crisis.
Israel tracked the global trend. In 2019, the value of M&A in Israel reached US$17.1 billion on a record 131 transactions. In the first three quarters of 2020, value was down to US$7.19 billion, a 40 percent decline compared to the same period in 2019. Volume fell 33 percent to 66 deals over this period.
The devil is in the details: Q3 remains sluggish but trends up
A closer look at the numbers shows that Israel's path differed somewhat due to local dynamics. Globally, the second quarter was the bottom for both value and volume so far in 2020, with Q3 value up about 140 percent compared to Q2. A number of countries experienced a similar Q3 rebound, including the US and the UK. In China, Q1 was the bottom so far this year, with Q3 value spiking to near all-time record levels. But in Israel, Q3 has marked a low for both value and volume year-to-date.
The global spike in value was largely due to a resurgence in megadeals. Global volume rose only about 1 percent in Q3 compared to Q2. That helps to explain Israel's Q3 doldrums. Historically, megadeals have not been a prominent feature of the Israeli M&A market.
But the monthly figures show that there may be signs of a rebound in Israel. While Q3 totals are lower than Q2, figures rose month over month in Q3. Deal value in September reached US$489 million, nearly a 300 percent increase compared to August. And September volume returned to levels last seen in May and April.
Top sectors: TMT, industrials and chemicals, and energy
The TMT sector remains the most active sector for M&A in Israel. In the first three quarters of the year, there were 32 TMT transactions worth US$4.26 billion, making it the largest sector by both volume and value year-to-date.
But even TMT suffered significant declines in Israel this year. By volume, the sector was down 26 percent compared to the same period in 2019; globally, TMT M&A was down 17 percent. By value, the sector was down 38 percent—in contrast, global M&A value in the sector actually rose by 21 percent over the same period.
In a sign of the times, the deal announced by US-based Comtech to acquire Gilat Satellite networks for US$532.5 million ultimately fell through due to concerns about how COVID-19 would affect the business. (See the sections below on inbound and domestic activity for details about a number of successful deals in the TMT sector.)
Of course, TMT was not the only game in town. The industrials and chemicals sector was Israel's most active sector in Q3, racking up US$424.5 million in total value in the quarter (compared to US$108.7 million in the TMT sector). This was due in large part to the acquisition by Singapore's sovereign wealth fund of an 85 percent stake in Rivulis Irrigation for US$365 million.
The biggest deal of the year so far was the acquisition of the Ramat Hovav Power Plant by Shikun & Binui and Edeltech for US$1.24 billion, which was completed in June. Ramat Hovav is one of five power plants being sold by the Israel Electric Corporation (IEC) over the course of five years, as part of its ongoing reform plan to increase competition in the sector.
Also notable in the energy sector is Chevron's US$12.59 billion (net debt included) purchase of Houston-based Noble Energy, which has a large natural gas business in the eastern Mediterranean Sea, especially in Israel. The deal is another sign of burgeoning interest in the region driven by recent natural gas discoveries and improving relations among surrounding countries.
US leads the inbound charge
US companies were the top acquirers in Israel in 2020 by a wide margin. US companies invested US$4.18 billion in 25 Israeli M&A deals in 2020. That's almost twice what Israeli companies spent on 26 M&A deals through Q3. Indeed, US buyers were involved in six of the top-ten largest Israeli deals of the year so far—and all six of which were in the TMT sector.
The largest of these deals was the US$1.2 billion sale of Checkmarx, a developer of security tools for the software development process, to US-based PE houses Hellman & Friedman and TPG Capital. The deal was the second-largest in Israel over Q1 – Q3 and one of the largest ever for an application security firm, in another endorsement of Israel's status as a cybersecurity powerhouse.
The second-largest TMT transaction of the year was Intel's US$900 million acquisition of Moovit—a provider of traffic data to third parties. The startup applies AI and Big Data analytics to monitor traffic and provide recommendations to an estimated 800 million people globally. The acquisition marks the chipmaker's latest move in the autonomous driving space, following its landmark US$15 billion acquisition of Israeli autonomous vehicle sensor company Mobileye in 2017.
Automotive technology has proven to be one of the hottest subsectors in the Israeli tech sector in recent years—the country's expertise with both hardware and software has fueled its success in developing technology for the future of transportation.
In another bet on Israel's technological talent, Bain Capital's Tech Opportunities fund led an US$145 million Series C investment in behavioral biometrics startup Biocatch. The firm uses biometric technology to identify online users and prevent online fraud. As the COVID-19 pandemic pushed the global population online, vulnerabilities were left open for cyber-criminals to exploit. This trend will continue to drive interest in innovative cybersecurity solutions that protect online users from cybercrime.
Domestic deal activity loses momentum
Israel set a new record for the value of domestic deals in 2018, reaching US$6.88 billion on 50 deals. And it set a new record for the number of domestic deals in 2019, with a total of 58 deals worth US$2.48 billion. This trend was driven by the gathering strength of Israeli's home-grown companies, along with a boom in exports and growing technological capabilities of Israeli private corporates.
At US$2.14 billion, domestic value held up in 2020, with the year-to-date total coming in just under the entire year's total for 2019. This was largely due to the acquisition of the Ramat Hovav Power Plant by Shikun & Binui and Edeltech, which is mentioned above. But the number of domestic deals almost halved from 43 in the first three quarters of 2019 to 26 deals through September 2020.
Just four domestic deals were announced in the second quarter, the lowest quarterly deal count for Israel on Mergermarket record (dating back to 2006). Indeed, Israel's GDP dropped 28.7 percent in the second quarter. Many companies in Israel and around the world are focusing on maintaining their core businesses.
It is notable that the domestic deals that did make the 2020 top-deal table were announced in February, before the true impact of COVID-19 was felt in Israel's economy. These included telco Cellcom's acquisition of smaller rival Golan Telecom in a deal valued at US$159.3 million. Cellcom is Israel's largest mobile operator, and the deal—cleared by the Israel Competition Authority in June—will help the firm to build scale in a competitive market.
Strong fundamentals but uncertain future
Though the pandemic severely affected M&A activity in Israel, fundamental drivers of deal activity remained evident in the country. Israel is a center for technological innovation, and the TMT sector continued to perform solidly in 2020, providing a highlight for Israeli dealmaking in an otherwise unpredictable year. In particular, appetite for Israeli startups among US acquirers continues to be strong.
Increasing demand for approaches such as special-purpose acquisition companies (SPACs) suggests strong interest among investors. One such deal was the 2020 merger of US-based DraftKings with Israeli-based SBTech and the Diamond Eagle Acquisition Corp., a US-based SPAC. The resulting company, called DraftKings, was valued at about US$3 billion when the deal completed in April and reached US$13 billion by August.
Israel's deep culture of innovation and business-friendly regulatory environment will ensure it remains an attractive location for dealmaking, including for other countries in the region. The recently ratified Abraham Accords, which formally normalized relations between Israel and the United Arab Emirates (UAE), will open opportunities for investment between the two countries—and may serve as model for greater cooperation with other neighboring countries.
Yet the global recovery from COVID-19 is proving uneven, as governments look for ways to mitigate the risk posed by the virus while protecting their economies. Though many advanced economies have seen rates of COVID-19 cases decline, many are bracing for a second wave of infections in the winter months. In the second half of October, Israel began to open up again after having imposed its second lockdown since the onset of the pandemic. Before it began, Israel's finance ministry estimated that a second lockdown could cost the economy US$2 billion.
The macroeconomic environment remains difficult to predict. The next few months will be critical in determining the rate at which Israel's economy is able to recover from the recently imposed lockdown. Let's hope the rising monthly figures in Q3 are the beginning of a longer and accelerating trend for Israeli M&A.
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