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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

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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M&A Overview: Israel dealmaking sets new records

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HEADLINES

  • Israel hit new heights for overall value and volume in 2017
  • Compared to 2016, the previous record year, value rose 33 percent to US$25.7 billion, and volume rose nine percent to 109 deals
  • Q1 deal value rose to US$4.3 billion, almost twice the value of the previous quarter
  • New records were also set for inbound deals, with US$26.35 billion invested across 79 deals in 2017-Q1 2018
  • Technology, media and telecommunications (TMT) was the most active sector by volume, with 37 deals announced in 2017-Q1 2018

Dealmaking from foreign investors set new records for value and volume in 2017-Q1 2018, with US$26 billion invested across 79 deals.

Deal statistics paint a positive picture for Israel's M&A landscape, with annual deal volume and value both setting new records in 2017. The country continues to benefit from its premier expertise and dense entrepreneurial ecosystem, particularly in the technology sector and in segments that are enhanced by the convergence with tech. This is drawing interest from both foreign companies and PE alike.

The 109 deals recorded in the year mark a notable uplift of nine percent compared to 2016, but value rocketed by 33 percent to US$25.7 billion. First quarter statistics indicate a promising year ahead for Israeli dealmaking, with US$4.3 billion spent across 17 deals almost doubling Q4 2017's deal value of US$2.2 billion and making it the second-highest first quarter on record, following 2017.

As in past years, the TMT sector claimed a clear majority of these transactions, with 37 deals in 2017-Q1 2018. "Israel has always been a hub for technology development," says an executive of a corporate that acquired one of the top 20 largest companies in 2017. "Some of the best technology is developed in Israel, yet its global outreach is limited. Businesses have taken note of this and are targeting technology companies in Israel for their hyperdeveloped technology."

Intel's acquisition of Mobileye highlights the demand for automotive assets among technology firms in the quest for driverless car technology. The developer of advanced driver assistance systems and autonomous driving was acquired by the tech giant in early 2017 for US$15 billion. The transaction marked the second-largest M&A deal in Israel's history (the largest being Teva Pharmaceuticals' US$40 billion acquisition of Actavis Generics, a unit of Allergan, in 2015).

Inbound influx

Dealmaking from foreign investors set new records for value and volume in 2017-Q1 2018, with US$26 billion invested across 79 deals.

The US was notably active, while China was notable for its absence. Of the ten largest deals, the US claimed three: Intel's acquisition of Mobileye; Foundation Consumer Healthcare's US$675 million purchase of women's health assets Theramex; and KLA-Tencor Corporation's US$3.1 billion purchase of semiconductor firm Orbotech.

The US$885 million acquisition of pharmaceutical company NeuroDerm by Japanese firm Mitsubishi Tanabe Pharma Corporation highlights the attractiveness of local Israeli firms to global players. This deal marks the largest sum ever to be paid for an Israeli biotech company, giving the Japanese firm access to the lucrative US market.

After taking four of the ten largest deals in 2016, it is notable that no Chinese investors made it to the leaderboard between 2017 and Q1 2018. Inbound bids from China evaporated following the country's decision to tighten regulation and approval of outbound M&A towards the end of 2016.

While 2017's domestic deal volume remained level with 2016 at 41 deals, an annual value of US$2.6 billion dropped 24 percent from US$3.5 billion a year prior. Israel is in the midst of a regulatory shift that is resulting in the restructuring of some of its largest conglomerates. M&A efforts at these companies have been curtailed as this process unfolds.

Yet some noteworthy transactions still took place between Israel-based firms, including Tamar Petroleum's purchase of stakes in the Dalit and Tamar natural gas fields from Noble Energy and Delek Drilling, for a total value of US$1.8 billion. A further two deals made it into the top 20: Mizrahi Tefahot Bank's US$404 million takeover of the Union Bank of Israel; and Frutarom Industries' acquisition of a majority stake in Enzymotec, a nutritional ingredients and medical foods manufacturer, for US$219 million.

47

Record number of outbound deals recorded in 2017

 

Outward bound

Rather than focusing on opportunities at home, Israeli capital was directed towards overseas M&A in the past year. Whereas foreign buyers often turn to Israel to acquire top technology, Israeli buyers often look overseas to enter larger markets and achieve scale.

There were 47 outbound deals in 2017, a new record that surpassed 2016 by 20. At US$3.2 billion, total value was more subdued, but nonetheless beat 2016 by just over US$1 billion. The largest deal, Delek Group's US$1.1 billion acquisition of a majority stake in Canada's Ithaca Energy, accounted for more than a third of this value.

Unlike in the past, US targets were not prominent. In 2016, six of the top outbound deals targeted US companies, as Israeli companies pursued scale in the world's largest market. But in 2017 until the end of Q1 2018, only three US deals featured in the top table, while the UK and Netherlands combined accounted for five top-ten deals.

This is probably a result of the unique strategic opportunities available in non-US markets in 2017, and should not be considered a trend that is likely to continue.

 

Activism rising

While Israeli firms have traditionally not been subject to the level of shareholder activism seen by their US counterparts, the picture is beginning to change. Israeli companies have been increasingly subject to shareholder activism and hostile bids over recent years, both from international activists and Israeli investors. And because Israeli law does not allow for "poison pill" strategies that would discourage hostile takeovers, Israeli companies are particularly vulnerable.

Israeli activist hedge fund Brosh Capital was particularly active in 2017, having targeted pharmaceutical companies Alcobra, Kamada, along with digital advertising agency Matomy, over the course of the year. In each of these cases, Brosh was able to successfully overturn senior management figures on the grounds of poor management and lack of strategy.

In 2017, investors witnessed one of the few examples of an Israeli company being acquired in what started as an unsolicited (hostile) transaction, Frutarom's acquisition of Enzymotec. The transaction was completed as a negotiated deal. The ability of an Israeli company to adopt a shareholder rights plan (frequently called a "poison pill") is significantly constrained, if it exists at all. A typical poison pill adopted by a US target company prevents a potential acquirer from acquiring more than 15 percent of the target's shares without negotiating with the target's board. Israeli law also gives shareholders the right to make the decision about whether a potential acquirer of a company's shares can exceed the 25 percent and 45 percent levels by mandating a pro rata tender offer to all shareholders in order to exceed those specific levels. Conversely, Israeli law makes it significantly harder to acquire the remaining minority interest after a hostile acquirer has exceeded the 50 percent ownership level.

Activist pressure has continued into 2018. Israeli chipmaker Mellanox came under pressure from US activist firm Starboard Value, which launched a proxy fight in January to unseat the entire board of the company on the grounds of insufficient revenue returns and overreliance on revenue growth.

The wave of shareholder activism targeting Israeli firms is likely to continue. Israeli activist activity is governed by the Israeli Companies Law, which contains more shareholder-friendly provisions than its US equivalent, making it likely that the nascent activist trend will continue in the future.


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© 2018 White & Case LLP

 

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