from the July 2017 issue

Israeli high-tech exits hit 5-year low

Israeli high-tech exits totaled $1.95 billion in 57 deals in the first half of 2017, according to IVC- Meitar. IPOs rose.

In the first half of 2017, Israeli high-tech exits totaled $1.95 billion in 57 deals, according to the Exits Report published today by IVC and law firm Meitar Liquornik Geva Leshem Tal.

There were 46 merger and acquisition (M&A) deals in the first half of 2017, seven initial pub- lic offerings (IPOs) and four buyouts, totaling $1.51 billion, $227 million, and $218 million, respectively. The average exit deal in the first half of 2017 was only $34 million, much lower than the annual exit average of $87 million in 2016. Exits in the first half of 2017 were at a five-year low, both in terms of deal number and total amount.

The largest deals in the first half of 2017 were the $340 million acquisition of Valtech by Edwards Lifescience (US) and $200 million acquistion of Juno LAB by Gett (Israel), followed by the $170 million acquisition of Servotronix by Midea (China). The top three deals accounted for more than $700 million, nearly 36% of total exit deals in the first half of 2017.

IPOs showed a relative recovery in the first half of 2017, with seven IPOs grossing $227 million. Both the number of IPOs and amounts of money were higher than last year's figures, which reached a mere $22 million in five IPO transactions.

Meitar Liquornik Geva Leshem Tal partner Adv. Alon Sahar said that global changes, such as those related to a possible fundamental change in the US taxation regime, or regulatory chang- es in China related to the right of businesses to spend capital outside the country, partially explain the slowdown.

He said, "The current report, covering the first half of 2017, alongside the second half of 2016, indicate a clear trend - a decrease in the number of merger and acquisition deals, which requires an explanation. We believe that the possible change in taxation regime in United States forces American acquirers to rethink their capital management strategies, which greatly affects modelling the deals in process. The regulatory boundaries in China suspended significant activity by Chinese acquirers, or dis- couraged Israeli companies from negotiating with potential Chinese acquirers." Sahar added: "It is important to remember that a large portion of companies which were very active in the local acquisitions arena underwent significant organizational changes related to their core activities. Naturally, changes delay decision making on M&A deals, regardless of the Israeli market. When a corporate strategy matures, corporations implement it, usually through acquisitions. Sometimes the acquired company is at the core of the strategic change. A case in point is the Mobileye acquisition by Intel, which is expected to be closed by the end of this year. Sometimes, however, acquisitions are the missing piece in the puzzle."

According to Sahar, in recent years, that same Microsoft performed a series of cyber security acquisitions locally after having frozen virtually all M&A activity in Israel, becoming an active acquirer locally.

Meitar Liquornik Geva Leshem Tal partner Adv. Dan Shamgar suggests an additional explanation for the decrease in the number of M&As. "We should take into account the noticeable growth in the volume of investments and the availability of capital for growth stages. The number of deals in which companies raise tens of millions in dollars in proceeds has never been higher. The increasing variety of investors supporting late stage companies and the capital volume which has been available to companies for growth purposes - are the largest ever."

Shamgar mentions often-heard suggestions, according to which private company valuations are too high, which creates an unbridgeable gap between ask and bid prices. "Some claim this is the industry's way to support more significant companies, and that the value creation will occur later. Although we took part in a number of significant M&A deal negotiations that were not carried out due to price gaps, we believe that there are more mature companies in Israel than ever. We may only hope that this fact will be translated into deals with higher prices than we have seen in the past."

IVC Research Center CEO Koby Simana believes there are two sides to this coin. "A healthy industry needs the right mix, including growth-stage technology companies - which strengthen the industry, but also the ability to realize investments and return money to investors, with exits being one option. It is pos- sible that investment trends in growth companies created an overshooting of growth invest- ments, resulting in investor and entrepreneur reluctance to sell companies and realize their investments at current market value, in hope of possible better returns in the future. However, I believe that the first half-year has not seen enough company acquisitions, and among the ones that were acquired, we did not see enough medium to large deals, of the type the venture capital industry is after. We hope that the industry will regain a healthier balance in the second half of 2017."

Israeli companies continued their local shop- ping spree in the first half of 2017, though at lower volumes than in previous years. Two- sided Israeli M&A deals captured 40% of dollar volume in acquisition made by Israeli companies in 2017 so far, both in Israel and abroad. The most prominent Israeli through and through deal was with Gett acquiring Juno LAB for $200 million (the second largest deal closed in 2017 so far). A total of 15 such deals were recorded since the beginning of the year, garnering $256 million, which represents a 79% year-on-year decrease: in 2016, 34 deals involving Israeli companies on the both sides accounted for $1.2 billion in total. In the first half of 2017, Israeli companies spent $389 million on acquisi- tions of foreign companies, in 16 deals.

Reprinted from the Israel High-Tech & Investment Report July 2017

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