ISRAEL: An Introduction to Corporate/M&A

Chambers Global 2022 Practice Area Overview
Israel: Corporate/M&A

In a banner year for mergers, acquisitions and capital markets worldwide, Israel did not fail to deliver in 2021. The number of deals announced in the global M&A market shot up 24% year-over-year, with publicly disclosed deal values hitting an all-time high of $5.1 trillion, 57% higher than 2020. Economic optimism, abundance of capital, low interest rates and recovery from the COVID-19 pandemic have been cited as tailwinds driving an enthused global market, as well as accelerated cross-sector demand for digital technologies. In the "start-up nation" of Israel, the effect was even more pronounced, with 171 deals exceeding $10 million in transaction value, a 285% increase over 2020, and 259% greater than the 2015-2020 average. With a record average deal value of $482m, the total value of these deals was a record-shattering $82.49 billion, representing a 534% year-over-year gain. This represents a value nearly 10x greater than the 2015-2020 average, and exceeding the value of all such deals in 2012-2020 combined. An additional $25 billion raised in various disclosed start-up investment rounds brings the total of corporate transactions in 2021 to a value surpassing the $100 billion dollar mark.

The surge in capital for Israeli companies in 2021 was led by no less than 72 IPOs (including SPAC mergers) with a total investment amount of $70.9 billion, a more than 7x increase over 2020, and more than 32x over 2019. The parade was led by the public offerings of ironSource ($11b), SentinelOne ($9b), and monday.com ($6.6b), as well as 18 other IPOs which exceeded the $1b threshold. The local Tel Aviv Stock Exchange accounted for 45 IPOs claiming an aggregate value of $5 billion, another all-time high, led by unicorn Nayax (valued at $1b) and Glassbox (valued at $350m). Significantly, deals within Israel accounted for 32 of the $10m+ transactions, up from 11 in 2020 and 10 in 2019.

M&A transactions also surged, with 99 transactions over the $10m threshold, totalling over $11.5 billion in value. (This includes a number of transactions on which this firm acted, such as the acquisition of MyHeritage, a company which has developed DNA testing for ancestry and genetic testing through a platform with software, web and mobile products, by Francisco Partners (target company reportedly valued at $600-700 million), and the acquisition of Forescout Technologies, Inc., a Nasdaq-traded company which has an Israeli subsidiary, and which is a leader in device visibility and control, by Advent International, for a consideration in excess of $1.5 billion.)

This marked an increase of 141% in the number of transactions in this class compared to 2020 (80% compared to the 2017-2020 average), with an increase of 88% in transaction value (93% compared to the 2017-2020 average). While these numbers mark profound growth in their own right, some commentators attribute the (relatively) more modest rise in M&A growth to a change in the playbook of Israeli tech founders and entrepreneurs, who may be showing an increased appetite to take companies farther on their own.

As has been the case in past years, internet, IT and enterprise software companies continued their trend as the dominant sectors in M&A activity, commanding a combined 78% of the M&A value for 2021 (as opposed to 63% in 2020 and 56% in 2019), and 62% of the number of transactions exceeding the $10m threshold. The cleantech sector saw significant growth, claiming 14 deals of $10m+ with aggregate value of $1.2 billion, each a record for that sector.

As a small player with an outsized role on the world stage, foreign relations and investments continue to play a key role in Israel's economic environment. M&A activity is certainly no exception to that rule, as Israeli entrepreneurs continue to focus on foreign investors, including strategic investors, institutional investors and venture capital funds, as potential participants in exits and financing rounds. Scores of multinational tech giants maintain R&D centres in Israel, which can also assist in networking to source local talent and attractive targets.

The US remains the dominant source of investment, accounting for 43% of M&A deals by number, and 59% by value, but there has also been notable interest from Europe, Japan, and China, as well as a marked rise of Israeli companies on the buyer's side. The Abraham Accords of 2020 have continued to stimulate investment interest and cooperation with the UAE and Bahrain, with enhanced cultural exchange leading the path for long-term relationships with great promise for regional prosperity. Regional cooperation continued to move forward with the meeting of six foreign ministers from Bahrain, Egypt, Israel, Morocco, the UAE and the US at the historic Negev Summit of 2022. Free trade agreements are in negotiation with India and China, and there is speculation that negotiations currently in advanced stages could lead to a free trade agreement with the UAE as soon as the summer of 2022.

After an exuberant 2021, the first quarter of 2022 has been marked by investor concerns over rising inflation and interest rates, interrupted supply chains, and geopolitical instability including the conflict in Ukraine, and has seen significant corrections in the valuations of hi-tech companies in capital markets. It remains to be seen to what extent these headwinds will impact the growth of investments and M&A transactions in Israel. Despite the challenges, there is ample room for optimism, as Israel remains a hotbed of technology and innovation that continues to attract the world's foremost strategic players in their search for advanced technology, as well as the deepening of their Israeli footprint. In January 2022, Google parent Alphabet led the year's strategic transactions with its $500 million acquisition of Siemplify, a provider of cloud-native security orchestration, automation, and response ("SOAR") solutions, which will be integrated with Google Cloud as part of the tech giant's bid to compete with Amazon Web Services and Microsoft Azure. In February 2022, Intel announced a cash-funded $5.4 billion acquisition of Tower Semiconductor (Nasdaq: TSEM), which the chip giant intends to integrate with Intel Foundry Services to expand its global manufacturing capacity.

With an economy that has proven its ability to weather economic storms such as the financial crisis of 2008 and the COVID-19 pandemic of 2020, and a stable democracy with an educated workforce and a globally-oriented, self-starting culture, Israel has grown by leaps and bounds as a favoured arena for private equity investments, strategic acquisitions and public offerings. The secular trend toward worldwide deployment of advanced technology in multiple sectors, and Israel's continued and deepening leadership on the global innovation scene, augur well for optimism in this land of miracles.