Corporate M&A 2021

Last Updated April 20, 2021

Israel

Law and Practice

Authors



Naschitz, Brandes, Amir & Co is one of the largest full-service law firms in Israel, with more than 190 lawyers in all areas of commercial practice, including 15 M&A partners and 55 M&A associates and other legal practitioners based in its Tel Aviv office. The firm has one of Israel’s powerhouse M&A practices, advising leading domestic and multinational corporations as well as investors and funds like FIMI, Israel’s largest private equity fund. With extensive experience in cross-border M&A, the firm’s lawyers are among the most experienced and effective in Israel. They have been involved on the buy and sell-side of public and private M&A transactions that include several of the largest cross-border M&A deals ever done in Israel, such as the USD7.1 billion recent public merger of Frutarom with NYSE-listed International Flavors & Fragrances Inc. The M&A practice is supplemented by the firm’s prominent capital markets, regulatory, competition, real estate, tax, labour and litigation practices.

The number of mergers and acquisitions (M&A) in Israel was down 26% in 2020, with 123 deals in the year compared to 166 deals in 2019 (according to the PwC Israel 2020 M&A Report). The overall value of deals reached USD17.0 billion in 2020, a decrease of 17% compared to the USD20.4 billion set in 2019. Excluding a USD6.9 billion deal from early 2019 that was completed in April 2020, the value of the 2020 M&A deals decreased by 50% compared to 2019, due to the COVID-19 pandemic.

The main effect was on the number of deals in the range of USD200 million to USD1 billion, which significantly decreased compared to 2019, while the number of deals with a value less than US100 million increased, accounting for more than 70% of all M&A deals compared to 58% in 2019. M&A deals with a price tag in excess of USD1 billion remained steady in 2020 at five deals.

The negative impact of COVID-19 on the M&A market was primarily experienced in the second half of 2020, with emphasis on the third quarter.

In line with the global travel restrictions, the number of cross-border M&A deals, both inbound and outbound, decreased in the second half of 2020, while the number of local Israeli deals experienced a hike.

A direct consequence of the decrease in non-Israeli buyers in 2020 was a significant increase in the number of M&A deals executed by Israeli financial institutions (such as our market-leading client FIMI Private Equity), which reached a record level, the largest number of deals since 2013.

The end of 2020 has also elevated the number of de-SPAC M&A deals (transactions consisting of a merger between a private operating company and a publicly traded special purpose acquisition companies (SPACs)), which based on the current Q1 2021 pipeline, is expected to continue to grow and reflect a significant portion of the overall 2021 M&A activity.

Similar to past years, hi-tech M&A deals dominated in 2020 with USD5.1 billion in deal value, with a few large deals leading the pack, such as the USD1.1 billion acquisition of internet of things (IoT) security company Armis by Insight Partners, in which our M&A practice represented several of the sellers.

Other active sectors included the irrigation sector, in which our firm was also active in 2020, representing FIMI Private Equity and Paine & Partners in their USD420 million sale of Rivulis Irrigation to Singapore-based Temasek.

There are three primary methods of acquiring a public company in Israel: a statutory merger, a tender offer and a court-approved merger.

Statutory Mergers

Pursuant to Israel’s Companies Law 5759-1999 (Companies Law), a merger may only be effected between two Israeli companies. Therefore, most acquisitions of Israeli companies by non-Israeli buyers are effected by means of a reverse triangular merger, whereby the acquiring company forms an Israeli subsidiary, which is then merged with and into the Israeli target company.

Tender Offers

The second method for acquiring public companies is by way of a tender offer commenced by the buyer and directed to all company shareholders. If, as a result of the tender offer:

  • shareholders holding less than 5% of the company’s shares had not accepted the offer and a majority of the shares held by shareholders that did not have a personal interest in the offer had accepted the offer; or
  • shareholders holding less than 2% of the company’s shares had not accepted the offer,

then, the Companies Law provides that the purchaser automatically acquires ownership of the remaining shares. However, if the purchaser is unable to purchase (together with the shares it holds) more than 95% or 98% (as applicable) of the company’s shares, the purchaser may not own more than 90% of the shares of the target company. In light of the high squeeze-out threshold, buyers rarely use a tender offer if the goal is to acquire 100% of a public company.

Court-Approved Mergers (Scheme of Arrangement)

The third method available for acquiring public companies is a court-approved merger. This procedure involves an application to a court in Israel on behalf of the target company. The court is authorised to approve the merger, after at least 75% of the shares participating in the vote of the target company, as well as a simple majority of those shareholders attending and voting at such a meeting (as well as creditors, if applicable), approve the merger.

In addition, Israeli law permits the acquisition of all or a significant portion of the assets of an Israeli public company, in which case the approval of the selling company’s shareholders is not required.

The primary regulators for M&A activity in Israel are the Israeli Securities Authority (ISA), the Israel Competition Authority and the Israel Tax Authority. In addition, the Supervisor of Capital Market, Insurance and Savings in the Ministry of Finance is the primary regulator responsible for approving acquisitions of regulated financial companies and fills a key role in such acquisitions.

There are no general restrictions on foreign ownership of shares in Israeli companies, other than restrictions on residents of countries at war with the State of Israel.

Israeli companies that participate in certain government funding programmes – eg, the research and development grants of the Israel Innovation Authority (formerly known as the Office of the Chief Scientist), and tax incentives of the Investment Centre – require the approval of these agencies prior to certain changes in their shareholding, including when non-Israeli shareholders acquire specified ownership levels.

Generally, an antitrust filing will be required in Israel for a transaction if each of the counterparties (together with controlling, controlled-by and under-common-control entities) has an annual turnover in Israel of at least ILS10 million (which the antitrust authority has proposed be increased to ILS20 million), and both parties together have an aggregate annual turnover in Israel of at least ILS360 million.

In addition, even if these thresholds are not met, a filing would still be required if:

  • one of the parties (together with controlling, controlled-by and under-common-control entities) holds a monopoly in any given defined market in Israel or worldwide; or
  • as a result of the acquisition, the market share of the combined companies (together with controlling, controlled-by and under-common-control entities) in the production, sale, marketing or purchase of a particular asset and similar assets or in the provision of a particular service and similar services, would exceed 50%.

Generally, the approval of employees is not required in M&A transactions. However, a change of control may, in certain circumstances, be deemed a termination of employment, entitling the employees to receive severance payment as if their employment had been terminated. It is also worth noting that employees cannot waive severance rights and certain other employee social rights, and that the enforceability of covenants not to compete in Israel is subject to limitations.

There is currently no general national security review of acquisitions in Israel. However, in October 2019, the Israeli government formed a new oversight committee to review national security aspects of foreign investments in Israel, which is tasked with evaluating and recommending whether, and in what scope, to implement such an acquisition review process. In addition, Israel may retain certain veto or other rights with respect to natural resources and companies providing essential services.

The COVID-19 pandemic has brought with it new challenges to the interpretation of material adverse change (MAC) clauses in M&A deals, with buyers seeking routes to walk away from deals signed in 2019 and early 2020, before the COVID-19 pandemic had spread.

A key Israeli M&A deal, which reached the Delaware Chancellery Court, was the unsuccessful attempt of NASDAQ-listed Comtech Telecommunications to walk away from its USD580 million acquisition of our client, Israeli-based and NASDAQ-listed Gilat Satellite, asserting a MAC. We were successful in defending the case and obtaining a record USD70 million settlement fee for our client.

Since the litigation was settled before the case was fully litigated, the opportunity for a significant court decision affecting the interpretation of MAC clauses in the Israeli M&A market was missed.

See 1 Trends.

The Companies Law provides that an acquisition of shares in a public company must be made by means of a "special tender offer" if, as a result of the acquisition, the purchaser would hold 25% or more of the voting rights in the company, unless there is already another shareholder of the company with 25% or more of the voting rights.

Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a special tender offer if, as a result of the acquisition, the purchaser would hold more than 45% of the voting rights in the company, unless there is already a shareholder with more than 45% of the voting rights in the company.

Accordingly, the ability to build a stake in a target that equals or exceeds 25% prior to launching a special tender offer or entering into merger discussions with the target is limited.

Any person who acquires an interest of greater than 5% in a company listed on the Tel Aviv Stock Exchange (TASE) is required to notify the company of the acquisition. The company is then required to file a notice of this acquisition with the TASE and the ISA. Thereafter, any further sales or purchases of shares by that shareholder, for so long as the shareholder holds an interest above 5%, are subject to similar disclosure requirements.

Shareholders seeking to cross the 25% or 45% ownership thresholds are required to commence a special tender offer as described in 4.1 Principal Stakebuilding Strategies.

Shareholders of public Israeli companies listed on stock exchanges in the USA or the UK are subject to the reporting requirements that apply in those jurisdictions.

Although there is no specific Israeli law that prohibits a company from introducing additional reporting thresholds beyond the mandatory statutory reporting requirements, Israeli companies do not introduce such requirements in their articles of association.

Exceptions apply for companies in industries that require special regulatory approval for passing ownership thresholds, such as companies with licences from the Ministry of Communications, or banks and other regulated financial companies that require the approval of the Supervisor of Capital Market, Insurance and Savings in the Ministry of Finance when passing specified thresholds.

Dealing in derivatives is permitted.

Generally, the reporting obligations for derivatives are similar to the reporting obligations that apply to the underlying securities, as described in the responses to prior sections.

A shareholder is required to make known the purpose of its acquisition and intention if the shareholder commences a special tender offer as described in 4.1 Principal Stakebuilding Strategies.

A TASE-listed company is generally required to disclose active negotiations and the receipt of a non-binding letter of interest. However, aside from public leakage, the company may defer disclosure until a definitive agreement is signed, if the board of directors determines that the disclosure of the negotiations and/or non-binding letter of intent may jeopardise the consummation of the transaction or have detrimental effect on its terms.

Generally, companies tend to rely on the exception described in 5.1 Requirement to Disclose a Deal to defer disclosure until a definitive agreement is signed.

In the context of friendly negotiated deals, it is common to perform detailed business, legal, accounting, finance, tax, intellectual property and other industry-specialised diligence, recognising that no post-closing indemnity obligations exist in public company deals.

Standstills are generally not common in the Israeli market. On the other hand, it is common for the board of directors of a public company to undertake a certain exclusivity period as part of its business judgement, particularly if the company has already undertaken a market check process. "Go shop" provisions have also been included in several Israeli public deals in recent years.

Tender offer terms are generally not documented in a definitive agreement other than in the case of agreements between the bidder and a significant shareholder agreeing to accept the tender offer.

Mergers

Following the execution of the definitive merger agreement, each merging party is required to convene a shareholders' meeting to approve the merger (with advance notice of at least 35 days), and to file a formal merger proposal with the Israeli Companies Registrar. The Companies Registrar will effect the merger and issue a certificate of merger after the later of:

  • 50 days after the filing of the merger proposal; or
  • 30 days after approval of the merger by the shareholders of both merging companies.

Tender Offers

A tender offer must remain open for at least 14 days, or if the offer qualifies as a "special tender offer", as discussed in the response to 4.1 Principal Stakebuilding Strategies, for at least 21 days. The maximum time period for maintaining a tender offer is 60 days, which may be extended if a competing bid is issued during that period.

Court-Approved Mergers (Schemes of Arrangement)

Following the execution of the definitive merger agreement, the company files a petition to the Israeli court to approve the convening of a shareholders' meeting and a creditors' meeting, which can take up to 30 days. The meetings to approve the merger are typically set within 30 days after the date of the court order.

See 2.1 Acquiring a Company and 4.1 Principal Stakebuilding Strategies.

Israeli law does not regulate the types of consideration that may be paid in a takeover. In recent years, cash has been the more common acquisition consideration but in periods when global interest rates are higher the number of deals that include share consideration tends to increase.

If the consideration is paid in the form of shares or other securities, the bidder must comply with the relevant provisions of the Israeli Securities Law 5728-1968 (Israeli Securities Law), including filing and obtaining the approval of the ISA to publish an Israeli prospectus, unless a prospectus exemption is available. An exemption may apply if the buyer dual-lists its securities on the TASE.

With regard to mergers, Israeli law does not restrict the type of closing conditions that the parties may agree to include in the definitive merger agreement.

Tender offers may be subject to conditions only with respect to the receipt of governmental consents, permits or licences that the bidder needs to acquire the shares; and to the affirmative offer acceptance by a minimum number of shares specified by the bidder in the tender offer document. A bidder may also withdraw a tender offer if unforeseen and unforeseeable circumstances have occurred since the announcement of the tender offer that have resulted in the offer terms being significantly different from those that a reasonable bidder would have offered had the conditions been known at the time of making the offer.

The level of approvals varies, based on the transaction structure.

Mergers

A merger requires the approval of the board of directors and the shareholders of each merging company. Generally, a simple majority vote is required. However, a merger involving a controlling shareholder’s personal interest may trigger special majority vote requirements. Furthermore, a company may provide in its articles of association for a higher majority vote threshold. Shares held by the other merging company or certain affiliates are generally excluded from the vote.

Tender Offers

In order for the bidder to cross the 90% threshold in the full tender offer, the bidder must acquire either:

  • more than 95% of the company’s shares (including the shares held by the bidder) and a majority of the shareholders that did not have a personal interest in the offer must have accepted the tender offer; or
  • more than 98% of the company’s shares (including the shares held by the bidder), and in this instance the remainder of the shares are squeezed out.

However, if the purchaser is unable to purchase more than 95% or 98%, as applicable, of the company’s shares, the purchaser may not own more than 90% of the shares. In the case of a special tender offer to cross the 25% or 45% ownership threshold, as described in 4.1 Principal Stakebuilding Strategies, at least 5% of the shares must accept the special tender offer.

Court-Approved Mergers (Scheme of Arrangement)

In addition to court approval, the merger is also subject to the approval of the holders of at least 75% of the shares present and voted as well as a simple majority of those shareholders attending and voting at the meeting. The approval of creditors may also be required in accordance with the court’s order.

The parties may agree to condition the merger upon the bidder obtaining financing. A bidder cannot condition a tender offer on obtaining financing.

Merger agreements may contain provisions for break-up fees in the event that the merger is not consummated, typically due to the target company’s board exercising its "fiduciary out". Non-solicitation, match-up rights and force-the-vote provisions are also common; however, in recent years, the inclusion of limited period "go shop" provisions, as an exception to the non-solicitation, are also becoming more common, particularly in cases where the company did not perform a comprehensive market check before entering into a definitive merger agreement.

Generally, any agreement between a public company and its controlling shareholder (defined for this purpose as the holder of more than 25% of the shares), requires the special approval of shareholders without a personal interest in the matter. Accordingly, it is difficult for the bidder to obtain special rights from the public company.

Shareholders can vote by proxy in Israel.

See 2.1 Acquiring a Company and 6.5 Minimum Acceptance Conditions. The squeeze-out threshold under Israeli law is very high and therefore the acquisition of 100% of a public company is typically conducted by way of a statutory merger or court-approved merger and not by a tender offer.

In many friendly negotiated merger transactions, significant shareholders execute voting or support agreements with the buyer undertaking to vote in favour of the merger at the general meeting of shareholders.

A voting or support undertaking typically provides that the shareholder may revoke its undertaking if the board of directors of the target company changes its recommendation in accordance with the terms of the merger agreement.

See 5.1 Requirement to Disclose a Deal.

As described in 6.3 Consideration, if the consideration is paid in the form of shares or other securities, the bidder must comply with the relevant provisions of the Israeli Securities Law, including filing and obtaining the approval of the ISA to publish an Israeli prospectus, unless a prospectus exemption is available. An exemption may apply if the buyer dual-lists its securities on the TASE.

Depending on the scope of the transaction, pro forma financial statements may be required to be included in the disclosure documents. Israeli law requires financial statements to be prepared in accordance with International Financial Reporting Standards (IFRS). However, in the event the Israeli company is listed on a US stock exchange and is therefore also subject to SEC rules, then the Israeli Securities Law permits the company to report using US generally accepted accounting principles (GAAP).

Generally, the Israeli Securities Law requires detailed disclosure of the key transaction documents, but it is not mandatory to file copies of the documents themselves. However, if the Israeli company, being listed on a US stock exchange, is also subject to SEC rules, then the Israeli Securities Law requires disclosure in the same manner as required under SEC rules, which would also include the filing of copies of the key transaction documents.

The approval of the board of directors is required with respect to a statutory merger and a court-approved merger. In fulfilling such a duty, the board of directors, by virtue of its duty of care and the duty of loyalty, has a duty to maximise shareholder value. In a statutory merger, the board of directors of each merging company is required to consider not only the interest of the shareholders but also the ability of the merged company to meet its obligations to its creditors.

With respect to a full tender offer, in the absence of a specific provision regarding the required conduct of the board of directors, there is uncertainty as to whether the board of directors is required to evaluate the price offered and express its view, or leave the shareholders to make their own independent determination on the proposed terms, being a direct transaction between the bidder and the shareholders to which the company is not a party.

In a special tender offer, the Companies Law requires the board of directors to either make a recommendation to its shareholders as to whether the offer is fair and, if it elects not to make such a recommendation, to disclose the reasons for not making a recommendation.

In transactions involving parties in which directors, officers or significant shareholders have a personal interest or a conflict of interest, it is common for the board of directors to establish a special ad hoc committee of non-interested directors (or appoint the audit committee of the board of directors) to negotiate the transaction and present recommendations to the board of directors.

Generally, in the absence of a conflict of interest, or of alleged self-dealing or conflict of interest scenarios, Israeli courts defer to the judgment of the board of directors of a target company in a takeover situation. It is also important to note that the Companies Law provides for specific approval procedures for transactions involving personal interests on the part of directors, officers or significant shareholders, which may trigger separate approval requirements by the independent audit committee and by a special majority vote of the non-interested shareholders. Israeli law also mandates personal interest disclosure by directors and prohibits a director from participating and voting at board and committee meetings on matters in which a director has a personal interest.

In many cases, the courts focus their involvement on the manner in which the personal interest was disclosed and addressed in the context of the transaction approval.

In transactions involving parties in which directors, officers or significant shareholders have a personal interest or a conflict of interest, it would be common for the special independent committee to engage its own legal counsel, separate from the target company’s counsel. In certain cases, the special committee would also engage a separate financial adviser, and – depending on the circumstances – that adviser would also provide a separate fairness opinion alongside, or instead of, the financial advisor of the entire board.

Conflicts of interest have been the subject of judicial scrutiny in Israel. As noted in 8.4 Independent Outside Advice, given the specific approval procedures for transactions involving personal interests in the Companies Law, Israeli courts focus their judicial review on the manner in which the personal interest was disclosed and addressed in the context of the transaction approval.

Hostile tender offers are permitted in Israel. However, if the intent of the bidder is to acquire 100% of a target company, it is difficult to reach that with a tender offer, bearing in mind the high threshold for squeezing out shareholders who do not accept the tender offer, as described in 2.1 Acquiring a Company and 6.5 Minimum Acceptance Conditions.

Accordingly, hostile M&A activity is typically used as an avenue to engage a resisting incumbent board of directors, and, if successful, eventually leads to a merger structure recommended by the board (in its new or old composition).

The board of directors, by virtue of its duty of loyalty and duty of care, has a duty to maximise shareholder value, and to act in good faith and for the benefit of the company, which, depending on the circumstances, may include the use of defensive measures.

A number of takeover defences are available to Israeli target companies, including a staggered board and the board’s ability to issue blank cheque preferred stock (which is not permitted for companies only traded on the TASE).

See 9.2 Directors' Use of Defensive Measures.

In taking any action to frustrate a takeover attempt, the board of directors must carefully exercise its fiduciary duties to evaluate the proposal together with appropriate advisers, particularly in a scenario in which members of the board may be deemed to have a personal interest. The right of directors to "just say no" has not been tested in an Israeli court.

Although it has increased in recent years – an example of this being the Delaware Chancellery Court MAC litigation of the Israeli M&A deal of Comtech and Gilat Satellite, as described in 3.1 Significant Court Decisions or Legal Developmentsand 10.3 “Broken-Deal” Disputes – litigation is not common in M&A deals in Israel. It usually occurs in alleged self-dealing and conflict of interest scenarios.

When litigation arises, it would typically be filed in the period after a definitive agreement is signed and announced and prior to the shareholders’ vote on the proposed transaction.

As described in 3.1 Significant Court Decisions or Legal Developments and 10.2 Stage of Deal, the COVID-19 pandemic has brought with it new challenges to the interpretation of material adverse change (MAC) clauses in M&A deals, with buyers seeking routes to walk away from deals signed in 2019 and in early 2020, before the COVID-19 pandemic had spread.

A key Israeli M&A deal that reached the Delaware Chancellery Court, was the unsuccessful attempt of NASDAQ-listed Comtech Telecommunications to walk away from its USD580 million acquisition of Israeli-based and NASDAQ-listed Gilat Satellite (represented by NBA), asserting a MAC. We were successful in defending the case and obtaining a record USD70 million settlement fee for our client.

Since the litigation was settled before the case was fully litigated, the opportunity for a significant court decision affecting the interpretation of MAC clauses in the Israeli M&A market was missed.

Activism has become more popular in Israel in recent years, particularly in Israeli companies traded on US stock exchanges. Since many of the largest Israeli companies are traded on the NYSE and NASDAQ, the scope of activity in such companies has increased.

Activists in Israeli companies typically focus on shaking up the board of directors, bringing in new blood to the board, encouraging M&A activity and cutting expenses.

Activism has encouraged some companies to enter into M&A transactions. A recent example is the stake-holding position Starboard acquired in Mellanox, an Israeli company traded on the NASDAQ. The activist attempted to replace the board of directors, and publicly encouraged Mellanox to reduce expenses and engage financial advisers to strategically evaluate M&A alternatives. Following such developments, Mellanox announced in March 2019 that its board of directors had accepted an offer to sell 100% of the company to Nvidia for US6.9 billion, and its delisting from the NASDAQ following completion of the recommended sale.

Although rare in the Israeli market, the USD800 million acquisition of NASDAQ-listed EZchip (represented by NBA) by Mellanox became the subject of activism interference by Raging Capital following the announcement of the definitive agreement and prior to the shareholders’ vote on the merger.

Naschitz, Brandes, Amir & Co

5 Tuval Street
Tel-Aviv 6789717
Israel

+972 3623 5000

+972 3623 5005

info@nblaw.com www.nblaw.com
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Trends and Developments


Authors



Yigal Arnon & Co continues to boast one of Israel’s leading M&A practices, handling M&A of all sizes from various fields and industries. The firm’s practical business approach enables it to handle Israeli aspects of global mega-acquisitions, as well as to deal with purely Israeli transactions. The firm has experience with deals of virtually every possible structure and size and is lauded for its interdisciplinary and savvy team. Yigal Arnon & Co's M&A practice numbers 34 partners and 43 associates. The firm has been involved in many of the largest M&A transactions to take place in Israel over the last decade, including as buyer's counsel in the biggest M&A deal in Israeli hi-tech history (Intel’s USD15.3 billion acquisition of Mobileye in 2017).

The year 2020 ushered in the era of COVID-19, one marked by tremendous global instability and uncertainty. Israeli law firms, as well as firms around the world, assumed that the combination of instability and uncertainty would significantly slow down the pace of corporate activity, encouraging companies and investors to preserve their funds instead of deploying them in new acquisitions and investments. Amazingly, however, while there was a decrease in M&A activity during the first few months of the pandemic, it was accompanied by an extraordinary increase in the amount of funds invested in Israeli companies and optimistic expectations for future growth in M&A.

A Record Year for the Israeli Tech Sector

According to the Israeli Tech Review by IVC Research Center, a record amount of USD10.2 billion was invested in private Israeli tech companies in 2020 in 578 transactions, compared to USD7.8 billion in 506 transactions in 2019. An additional sign of maturity and continued growth for Israeli tech firms was the increased size of individual investments this past year. In 2020 there were 98 investments above USD30 million (compared to 65 in 2019) and 20 investments above USD100 million (compared to 18 in 2019). There was also a surge of Israeli companies raising funds on public capital markets in 2020, reaching USD6.96 billion in 128 funding deals, compared to only USD1.95 billion in 2019 – an increase of over 300%. In 2020, nine tech companies consummated initial public offerings on the Tel Aviv Stock Exchange, compared to none in 2018–19. Also in 2020, seven tech companies completed IPOs in the USA, raising a combined total of USD1.2 billion (these included the IPOs of JFrog, an IT and enterprise software firm, on Nasdaq, and Lemonade, an AI-based insurance firm, on the NYSE), compared to five that raised only USD407 million in the aggregate in 2019.

Another global trend has been the return of special purpose acquisition companies (SPACs), with an unprecedented number of such transactions in the USA in 2020, which is another often-discussed potential source of funding for Israeli growth companies. Just last week (mid-March 2021), for example, Israeli trading platform eToro announced that it is going public via a merger with a SPAC at an estimated company valuation of USD10.4 billion in a deal that already has commitments for USD650 million. It was also reported this week (end of March 2021) that Israeli company ironSource, a platform for game and app developers, will be merged into a SPAC at a valuation of approximately USD11.1 billion, in a transaction that will yield USD2.3 billion for the company and its investors. The persistent injection of funds into Israeli innovation, and strategic partnerships between Israeli start-ups and multinational tech firms around the world, has made Israel’s already vibrant hi-tech market riper than ever for renewed and robust M&A activity.

Although there was a decrease in M&A activity during 2020 (in value: USD7.97 billion compared to USD21.67 billion in 2019, and in numbers: 99 deals compared to 145 in 2019), the IVC Review shows a relatively consistent breakdown in deal size over the past five years. There have consistently been a handful of mega-acquisitions with values of more than USD500 million, approximately 10–20 deals in the range of USD100–500 million and between 21 and 38 deals in the range of USD20–100 million. It is also expected that the steady increase in investments, funding and overall growth in the tech sector will have cultivated fertile ground and a strong pipeline for a continuation of the vibrant M&A activity that has been seen throughout the past decade.

The Impact of COVID-19

As noted at the beginning of this article, this recent wave of investment was far from predictable. The beginning of the pandemic was unnerving for everyone, including the hi-tech sector. The first half of 2020 showed signs of a slow-down in transactions across the board, but once investors and strategic acquirers became accustomed to the new reality, we experienced a significant upswing in deals, including in M&A. There are many reasons for this, but perhaps the most obvious one is that while many sectors were tragically devastated by COVID-19, the hi-tech sector that drives Israel’s vibrant investment and M&A activity became more attractive than ever.

Like everywhere else in the world, Israel’s tourism, transportation, culture and entertainment sectors were hit very hard. But as the world is looking for solutions in areas such as digital services, e-learning, fintech, cybersecurity, telemedicine, medtech, foodtech and autonomous driving, Israel’s renowned ecosystem of hi-tech innovation is an obvious focus for cross-border M&A acquisitions. This focus has been exacerbated by the massive and swift impact the pandemic has had on the way we conduct our daily lives in terms of remote working, healthcare, shopping and communication. Innovations that used to be thought of as luxuries have become a necessity during the pandemic and are likely here to stay.

Another acute consequence of the pandemic and the broad digitisation of all industries, coupled with working from remote devices has been the increased exposure to cyber-attacks. Due to Israel’s expertise in these areas, stemming largely from the many graduates of the Israeli military's intelligence units who enter Israel's cyber ecosystem of start-ups, Israel has become a world leader in cybersecurity. There has been a recent noticeable increase in the acquisition of Israeli cybersecurity companies during the pandemic. In this past year alone, the US private equity fund Advent International acquired Forescout Technologies, an Israeli provider of solutions for control and security devices, for USD1.9 billion; Hellman & Friedman acquired Checkmarx, a pioneer in the field of cybersecurity and data protection, for USD1.15 billion; and CapitalG and Insight Partners acquired the cybersecurity firm Armis for USD1.1 billion.

The "Start-Up Nation"

Worldwide, at least in developed countries, the adoption of digital technology in almost all industries across the board has made hi-tech the most durable sector in M&A during these challenging times. What is unique in this regard about Israel (sometimes referred to as the "Start-Up Nation") is that the overwhelming majority of M&A activity here is in tech. Perhaps partially due to Israel’s lack of natural resources, Israelis were forced to innovate. And due to the country’s very small size, the potential markets for such products are invariably located abroad. From the start, Israeli entrepreneurs have always had to focus on the world market and very often on foreign investors and acquirers for their potential financings and exits. For the past couple of decades Israel has been a breeding ground for innovation in these areas and subsequent M&A activity.

There is also a snowball effect for M&A activity in tech. Robust acquisitions in certain sectors tend to trigger chain reactions bringing more of such deals and investments in such areas. For example, in 2017, Intel Corporation acquired Mobileye Vision Technology, an Israeli leader in advanced driver assistance systems (ADAS) in a transaction valued at USD15.3 billion (we had the privilege of representing Intel in the transaction). To complement and accelerate Mobileye’s mobility-as-a-service capabilities, in 2020, shortly after the onset of the pandemic, Intel acquired the Israeli company Moovit App Global, known for its urban mobility application that offers public transport and mobility journey planning for USD900 million (we acted for Intel in this transaction too).

The increased investment and M&A activity in Israeli tech have also led many of these multinational buyers to convert their acquisitions into, or open their own, local research and development centres. In fact, Intel, Microsoft and Apple built their first overseas R&D facilities in Israel, and many other household names in hi-tech, such as Google, Amazon, Facebook, Alibaba, Oracle, Samsung, Baidu, IBM, HP, Cisco and Motorola have opened R&D centres in this small country, which is the size of New Jersey. For many of them, their Israeli R&D centre is their largest centre outside the USA. Israel today has the second-largest number of start-ups in the world after the USA, and these local headquarters become another source of interaction with local talent leading to follow-on acquisitions in similar fields.

Israel as an Attractive Destination for Foreign Direct Investment

The vast majority of Israeli M&A activity consists of local companies being acquired by foreign buyers, whether by the big-tech names mentioned above or private equity firms, primarily from the USA, UK, Europe and China. As a result, such acquisitions are typically affected less by changes in local law and economic factors than by worldwide fluctuations in markets, demands and economic factors, such as low interest rates. The structure of these transactions follows international standards, and solutions which help narrow the gap between purchasers and sellers are also becoming more prevalent in Israel. For example, recent years have witnessed an increase in the number of M&As that incorporate representations and warranties insurance (RWI). According to recent studies in the USA, in 20–2019, 52% of private company acquisitions used RWI, up from only 29% in 20–2017. In Israel the numbers are much lower, but they are rising. As it becomes more popular and insurance companies get more comfortable with Israel, the use of such policies in M&A transactions is expected to continue to grow.

In addition, there are many aspects of Israel’s legal system which make Israel comfortable and easily accessible to foreign buyers. Israel's corporate and securities laws are very similar to those in the USA, and Israeli courts often look to Delaware as a source of influence for new case law. Furthermore, despite Israel’s troubled relationship with many countries in the Middle East, there is no general security clearance process similar to the Committee on Foreign Investment in the United States. Israeli corporate law has no barriers on foreign individuals serving on boards of directors or holding a controlling interest in local companies. There are also no general restrictions on foreign investments or exits. Note, though, that if a company has received funding from the Israeli Innovation Authority, restrictions on the transfer outside of Israel of IP that was developed with such funding would apply.

Israel also makes an effort to be attractive to foreign investment. To that end, recently regulations were promulgated allowing the submission of a company’s articles of association (the Israeli equivalent to a certificate of incorporation in the USA) to the Israel Registrar of Companies in English. The Israeli Competition Authority has also, in the past couple of years, increased the revenue thresholds that (under certain circumstances) require approval for M&As from an antitrust perspective.

Hope for the Future: Peace Deals and Vaccination Programmes

This article about trends would not be complete without mentioning the landmark peace deals, referred to as the “Abraham Accords”, entered into in the second half of 2020 between Israel, the UAE and the USA, allowing trade and financial agreements between these countries to flourish. Israel’s subsequent normalisation agreements with Bahrain, Sudan and Morocco, and ongoing talks with Saudi Arabia are also expected to increase the interest of these countries and others in the Israeli tech sector, leading to increased M&A activity. Just this week (mid-March 2021), the Israeli Prime Minister, Binyamin Netanyahu, announced that that the UAE plans to invest USD10 billion in Israeli projects. Anyone familiar with the geopolitical climate in the Middle East can tell you that just a few years ago this would have been beyond any pundit’s imagination.

Finally, Israel, with its small population of 9 million, has been leading the world in administering the Pfizer vaccine against the coronavirus. As of the date of this article, over 5 million Israeli residents are already entitled to a “green pass”, ie, a certificate giving them access to public venues and events. In this regard, Israel has been a leader in giving the world a glimpse of what a post-COVID-19 world might look like. The recent full re-opening of the country (at least internally, but not yet allowing unrestricted entry to international travellers without specific permits for business reasons) gives hope that transactional activity will continue growing to unprecedented levels.

Living in Israel we have grown accustomed to the unpredictable. To quote Israel’s first prime minister, David Ben Gurion: “In Israel, in order to be a realist, you must believe in miracles”. Israel’s forever growing tech scene and M&A activity is a major part of that “reality”.

Yigal Arnon & Co

1 Azrieli Center
Tel Aviv 6702101
Israel

+972 2 623 9239

+972 2 623 9234

info@arnon.co.il www.arnon.co.il
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Law and Practice

Authors



Naschitz, Brandes, Amir & Co is one of the largest full-service law firms in Israel, with more than 190 lawyers in all areas of commercial practice, including 15 M&A partners and 55 M&A associates and other legal practitioners based in its Tel Aviv office. The firm has one of Israel’s powerhouse M&A practices, advising leading domestic and multinational corporations as well as investors and funds like FIMI, Israel’s largest private equity fund. With extensive experience in cross-border M&A, the firm’s lawyers are among the most experienced and effective in Israel. They have been involved on the buy and sell-side of public and private M&A transactions that include several of the largest cross-border M&A deals ever done in Israel, such as the USD7.1 billion recent public merger of Frutarom with NYSE-listed International Flavors & Fragrances Inc. The M&A practice is supplemented by the firm’s prominent capital markets, regulatory, competition, real estate, tax, labour and litigation practices.

Trends and Development

Authors



Yigal Arnon & Co continues to boast one of Israel’s leading M&A practices, handling M&A of all sizes from various fields and industries. The firm’s practical business approach enables it to handle Israeli aspects of global mega-acquisitions, as well as to deal with purely Israeli transactions. The firm has experience with deals of virtually every possible structure and size and is lauded for its interdisciplinary and savvy team. Yigal Arnon & Co's M&A practice numbers 34 partners and 43 associates. The firm has been involved in many of the largest M&A transactions to take place in Israel over the last decade, including as buyer's counsel in the biggest M&A deal in Israeli hi-tech history (Intel’s USD15.3 billion acquisition of Mobileye in 2017).

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