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Israel’s Booming Hi-Tech Industry

About The Author

Oliver Norgrove (Guest Contributor)

Oliver is an Economics Graduate from the University of Manchester studying the GDL at BPP University in London. Oliver is interested in pursuing a career working in Company Law. Outside of Law Oliver follows Rugby and Cricket and plays both recreationally.

2014 was an astounding year for Israeli companies looking for foreign investment. Corporate transactions including both Mergers and Acquisitions (M&A) and Initial Public Offerings (IPOs) in Israel’s hi-tech market totalled $14.9bn (£9.8bn) across the year. This was a 94 per cent increase on the $7.6bn figure for 2013. M&A totalled the not insignificant amount of $5bn, but it was the volume of IPO’s that is of particular interest.

Stock market debuts by Israeli hi-tech companies totalled $9.8bn, eight times 2013’s $1.2bn figure. Eighteen Israeli or Israel-connected hi-tech companies floated on stock markets around the world in 2014.

This article will be considering to what extent this trend is set to continue, how sustainable it is, and its significance for UK law firms.

Is this IPO trend set to continue?

An IPO is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity. If the company has never issued equity to the public, it is known as an IPO. There are several benefits to becoming a publicly-traded company as opposed to a private limited company which can ensure continued growth of a business.

Going public raises cash, and being publicly traded also opens many financial doors. Public companies can usually get better rates when they issue debt, and as long as there is market demand, a public company can always issue more stock to the public, as opposed to a closed group of investors, as is the case for private companies (see s86 FSMA 2000 for the limited exemptions for UK private companies). Thus, mergers and acquisitions are easier to do because stock can be issued as part of any potential deal.

Essentially, trading in the open markets means liquidity. This makes schemes such as employee stock ownership plans more attractive, which in turn help to attract top talent. A further attraction to potential employees and customers is that being on a major stock exchange carries a considerable amount of prestige.

In the past, only private companies with strong fundamentals could qualify for an IPO and it was not easy to get listed. In recent years, in the UK at least, this has changed with the rise of the internet; firms now need neither such strong financials, nor a solid history to go public. Whilst they of course still need to meet the minimum share capital of £50,000 set out in the s763 Companies Act 2006, platforms such as AIM (The Alternative Investment Market) have made it far easier for smaller start-ups seeking to raise capital to expand their businesses. 

So is this trend set to continue? No is the simple answer. Many of the Israeli businesses that have reached maturity and are capable of floating have done so, such as Mobileye (MBLY), Rewalk Robotics (RWLK) and Marocure (MCUR), meaning the next transactions are expected to take the form of acquisitions. However, this is by no means a negative point for law firms looking for Israeli custom, as M&A work can produce equally extensive revenues.

Expected surge in M&A?

Activity this year so far already seems to support the argument that the next surge in corporate transactions will take the form of acquisitions. In January 2015 alone, foreign acquisitions of Israeli hi-tech companies totalled $862m, according to Israeli business newspaper Globes; a huge number for a country and economy of Israel’s size. 

This rise can by attributed in part to the Business Concentration Law that was passed in 2013. This is an antitrust (also known as competition law) economic reform which forces those with interests in both financial and non financial enterprises to dispose of one or the other with the intention of breaking up the control of Israeli industry and increasing competition. As the deadline for compliance draws closer (2020), we could very well see further increases in M&A activity.

However, there are some regulatory issues hindering this increase in M&A. One notable example is Israel’s Antitrust Authority’s (IAA) handling of the natural gas discoveries in the Mediterranean off the Israeli coast and the ensuing Delek Group/ Noble Energy debate. The two firms, Delek and Noble, discovered the large Tamar and Leviathan gas fields in Israeli waters in the eastern Mediterranean in 2009 and 2010, turning import-dependent Israel into a potential energy exporter. They are the main shareholders in both fields.  However, the Energy minister in Israel has said the two firms need to sell some acreage of these offshore gas fields in order to avoid being deemed a monopoly. Consequently, Noble and Delek have already agreed to sell their licenses to two smaller gas fields nearby. Officials have said other options are being discussed, such as splitting up the consortium so the partners sell gas as competitors, or selling stakes in either Tamar or Leviathan. Issues of this nature are not an encouraging sign for potential investors in the region.

Is the rise in investment sustainable?

This surge in M&A is being driven by American Investors with acquisitions in January 2015 from the likes of Amazon, Microsoft and Dropbox. This would indicate that the trend is sustainable providing the US economy continues to grow.

The US economy is leading the global economic recovery, seeing growth of 2.4% in 2014 which is the greatest advance since 2010. This growth is set to continue because, despite falling oil prices slowing investment by companies, consumer spending shows no signs of such a slowdown, increasing at a rate of 4.3%. As consumer spending accounts for 70% of the economy, the recovery ought not to be too badly affected by a fall in investments.

However, one can always argue that a lack of diversity in investment is always a worry and so we should expect to see a rise in investment in Israel from other areas; in particular China and possibly India. This upturn in Chinese investment could be seen last year with Weetabix owner Bright Food taking over Tnuva, Israel’s largest food company, for a reported $2.5bn.

Political Instability worry?

As with any investment in the Middle East political instability is always a concern. Whilst Israel is not in itself politically unstable one would be forgiven for feeling that its location surrounded by some of the most volatile nations on the planet is probably not conducive to a successful mitigation of risk.

However following the Israeli legal market being opened up to international firms in 2012, and with this rise in IPOs there has been a rise in the transparency of firms as they look to compete on an international scale. Israel can be viewed as a relaxing and growing economy with a highly educated workforce and a large amount of disposable capital; perhaps a more attractive investment than one might have originally considered.

It would appear that this trend in investment in Israeli High Tech companies is set to continue; providing they remain at the forefront of R&D and the US economy continues to grow as we expect.  Ultimately acquiring these high tech firms is easier for US firms than competing is; a perfect example of this is Dropbox choosing to purchase ‘CloudOn’, an Israeli based online storage start-up who may have grown to compete directly with the likes of Dropbox due to their superior R&D. This surge in investment can be nothing but positive for those international law firms such as Addelshaw Goddard, Berwin Leighton Paisner and Simmons & Simmons setting up offices in Israel as we speak.

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Tagged: Commercial Law, Company Law

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