ISRAEL: An Introduction to Corporate/M&A
2024 was a relatively strong year for Israeli M&A, bucking a downward trend in the local economy. According to research from PwC, Israeli M&A deals reached USD16.8 billion in volume, nearly 71% higher than in 2023 and not far behind the previous peak in 2021 (USD17.9 billion). Notably, this deal volume was achieved in a substantially lower number of deals (119) compared to the unprecedented record in 2021 (238). This is even more remarkable when considering that Israel has been fighting a war on seven fronts and suffered a series of credit rating downgrades during the last 12 months, not to mention the ongoing stagnation in the global M&A market.
Naturally, Israel’s extremely well-developed tech ecosystem – the so-called “Silicon Wadi” - formed the bulk of M&A activity. Israeli founders bolted for the exits earlier than expected, in part due to limited IPO opportunities and downwards pressure on valuations. It is no great surprise then that the most robust M&A activity in the Israeli tech space was in the “mid-market” (deals in the USD100m to USD500m range) or lower.
Cautious Optimism for 2025
Given the surprisingly positive data, there is a mood of cautious optimism for Israeli M&A prospects at the start of 2025. This is perhaps partly because of the shifting sands of regional geopolitics over the past few months, including Israel’s ceasefire deal with Lebanon and the latest regime changes in Syria. But there are more specific reasons for Israeli dealmakers to be wearing rose-tinted glasses.
Growing interest in privatisation
With soaring defence costs and a climbing fiscal deficit, privatisation of state assets might be an attractive option for the Israeli government in the coming years. In fact, 2024 was an important year for privatisation in Israel, with a major reform enabling domestic consumers to choose between the Israel Electric Corporation and seven private companies for their domestic electricity supply. Meanwhile, the acquisition of the Israeli Postal Company for USD125m by a consortium led by Milgam and Phoenix Insurance was the first full privatisation of a state-owned Israeli company in years. Although the proceeds fell short of some expectations, other privatisation deals could now be in the offing. The government has been pushing for the privatisation of the Israeli Public Broadcasting Corporation in recent months, although this is likely to meet with significant public opposition in the near term.
The rise of defence tech
As reservists slowly return to civilian life, an entirely new ecosystem is being created around defence tech. According to data from the Israeli Directorate of Defence R&D (DDR&D), start-ups in the space are enjoying significantly increased investments from Israel’s Defence Ministry. While Israel has a global reputation for cybersecurity, the new generation of start-ups focus on combat equipment, unmanned systems and even space technology. International VCs are increasingly taking interest in these start-ups, looking to capitalise on soaring military budgets and a global appetite for innovative defence technology. With the large defence companies benefiting from a significant uptick in orders and boasting increasingly healthy balance sheets, M&A activity in defence tech is likely to be a “hot” area for investment in 2025 and beyond.
A comeback for private equity transactions
As in other jurisdictions, the Israeli PE market has been relatively subdued the past few years given relatively high interest rates. However, 2025 could witness a comeback for Israeli PE deals considering the falling cost of capital globally. After sitting on the sidelines for the past couple of years due to geopolitical uncertainty, PE players may now take a fresh look at Israeli targets.
Take-private transactions
Multiple Israeli companies that previously went public on NASDAQ and other global markets, including through SPAC transactions, have lost significant value since 2021 (sometimes, over 50% of their initial trading price) and were vulnerable to takeover attempts and we have witnessed a relatively high number of take-private transactions between 2022 and the first part of 2024. While Israel’s domestic public market, the TASE, performed well compared to many of its international peers over the last six months, inflation and additional taxes (eg, the increase in VAT as of 1 January 2025) may start to weigh on domestic companies’ performance and create interesting opportunities in the space.
The AI arms race
According to a report by Startup Nation Central, AI-driven companies continue to play an oversized role in Israel’s tech ecosystem, with the sector attracting a 47% share of the total amount raised in recent years. 2024 also saw some large acquisitions of Israeli AI companies by the likes of Nvidia, Fortinet and JFrog. All of this bodes well for Israeli entrepreneurs in the AI space at a time when the global “AI arms race” gathers pace. To maintain the critical edge of Israeli AI companies, it will be important that the Israeli government address some of the criticisms levelled against it in the State Comptroller’s recent report on AI infrastructure.
Abraham Accords 2.0?
One of the great unknowns going into 2025 is how the new US administration will impact US–Israel relations and the wider region. The Abraham Accords, struck when Donald Trump was last in the Oval Office, led to bilateral ties between Israel and the UAE and other countries, following which significant investments have been made in both Israel’s technology sector and its offshore gas fields. Any extension to the Abraham Accords and normalisation of relations between Israel and Saudi Arabia could be a gamechanger for the Israeli economy and the wider region, opening vast opportunities for M&A.
Potential Headwinds for M&A
Despite the reasons for optimism, the Israeli economy still faces potential obstacles, some of which are tied to the current conflict. Despite the ceasefire with Lebanon, thousands of Israeli tech workers are still mobilised, depleting headcount and posing significant talent gaps. Meanwhile, major international airlines have still not restored routes to Israel, posing challenges for business executives looking to visit the country.
From a regulatory perspective, 2024 witnessed the Israeli Competition Commissioner (ICC) taking a far more muscular approach to compliance with Israel’s anti-trust regime. Notably, the ICC imposed an unprecedented financial penalty at the maximum statutory rate (approximately USD30 million) on the Israeli food giant Strauss Group, for so-called “gun-jumping” offences, in respect to its proposed merger with tofu-manufacturer Wyler Farm. The ICC’s approach to this transaction and others during 2024 (eg, Meta’s previous Israeli acquisitions) may cause acquirers to tread more carefully in the Israeli market going forward.
However, the greatest concern amongst Israel’s business community may be that the Israeli government will reintroduce its plans for judicial reform. These controversial reforms have been put on hold since the October 7th attacks on Israel and their reintroduction could yet again lead to public anger, strikes and demonstrations, all of which might hamper Israel’s economic recovery and lead to further credit downgrades.
Conclusion
It is hard for outside observers to square Israel’s impressive M&A stats over the past 12 months with the tumultuous political and economic backdrop and the slow global M&A environment. However, these difficult circumstances not only showcase the resilience of Israeli entrepreneurs but also act as a source of opportunity going forward. As the recovery picks up pace, foreign investors in Israel could stand to reap the rewards in 2025 and beyond.