Corporate M&A 2023

Last Updated April 20, 2023

Israel

Law and Practice

Authors



Naschitz, Brandes, Amir & Co is one of the largest full-service law firms in Israel, with more than 240 lawyers in all areas of commercial practice, including over 20 M&A partners and 70 M&A associates and other legal practitioners based principally in its head office in Tel Aviv. The firm has one of Israel’s powerhouse M&A practices, advising leading domestic and multinational corporations as well as investors and funds such as FIMI, Israel’s largest and most successful 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 sides 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 public merger of Frutarom with NYSE-listed International Flavors & Fragrances Inc. and the recent ILS2.5 billion public merger of TASE-listed Veridis Environment Ltd. and Infinya Ltd. 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 decreased by approximately 40% in 2022, with 142 M&A deals in the year compared to 238 deals in 2021 (according to the PwC Israel 2022 M&A Report). However, the overall value of deals reached USD18 billion in 2022, an increase of 5% compared to the USD17.1 billion set in 2021 (excluding special purpose acquisition companies (SPACs) and IPOs).

Overall, the number of M&A deals in 2022 (142) was greater than in 2020 (123). However, since the number of M&A deals decreased over the quarters as 2022 progressed, it is too early to determine whether the M&A market is back to the pre-2021 spike level. Average deal value rose in 2022 to USD202 million, which represents a 61% increase over the previous year’s average deal value of USD126 million. The significant increase in average deal value resulted primarily from the surge in the values of companies and from the increase in the number of megadeals in excess of USD1 billion in 2022, with three megadeals representing 37% of total 2022 deal value.

Changes in the macro-economic environment in 2022 triggered high levels of market uncertainty, which, together with the increase in interest rates after a few years of “cheap” money, resulted in an unstable M&A market in 2022, with the number of deals decreasing as the year progressed. Given the high level of available capital that remains in the market and attractive target opportunities that are expected to surface as potential targets face cash flow concerns, the M&A volume is predicted to pick up in the mid to long term after a short-term breather to evaluate market uncertainties.

The market continued to experience growth in the number of Israeli companies acquired by Israeli companies, which accounted for 19% of the deal count in 2022, with a total value of USD3.5 billion, compared with 16% of the deal count in 2021, with a total value of USD2.8 billion.

An additional USD3.3 billion of deal value in 2022 was attributed to outbound M&A deals of Israeli companies acquiring targets outside of Israel. Overall, Israeli buyers contributed to 37% of the M&A deal value in 2022, reflecting the focus change of global Israeli players, shifting from M&A targets to M&A growth acquirers.

Leveraged deals were at a decade low with a total of 12 deals, or 8% of all deals, reflecting the difficulty of executing attractive deals with the target prices soaring and the cost of funding increasing due to the spike in interest rate levels.

As in previous years, hi-tech M&A deals dominated in 2022, with a deal value of USD9.3 billion – more than 50% of the total deal value in 2022. Finance, energy, consumer products and services also experienced growth in 2022 mainly due to a handful of high-value deals.

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 of 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 Israel Securities Authority (ISA), the Israel Competition Authority and the Israel Tax Authority. In addition, the Capital Market, Insurance and Savings Authority 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 Israeli Authority for Investments and Development of the Industry and Economy (formerly known as 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 ILS20 million, and both parties together have an aggregate annual turnover in Israel of at least ILS367 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
  • 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, the Israeli government has formed an oversight committee to review the 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 triggered 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 before the COVID-19 pandemic had spread.

A key Israeli M&A deal, which reached the Delaware Chancery 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. NBA was successful in defending the case and obtaining a record USD70 million settlement fee.

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 context 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 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 the Capital Market, Insurance and Savings Authority 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, other than in the case of 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 a 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 in general 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.

In an environment of deal uncertainty, parties may use caps, floors and collars to address fluctuation in share deals. 

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, matching 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 non-solicitation, is also becoming more common, particularly in cases where the company did not perform a comprehensive market check before entering into a definitive merger agreement.

As the COVID-19 pandemic has unfortunately become an ongoing concern, parties tend to negotiate the exclusion of COVID-19 pandemic effects in material adverse change (MAC) clauses, and to include representations, warranties and covenants to address compliance with COVID-19 measures. In certain cases, provisions are also included in the definitive agreements to address the need of the target and/or its global subsidiaries to repay COVID-related government grants and loans in different jurisdictions, such as the Paycheck Protection Program (PPP) loans in the USA. 

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 either to make a recommendation to its shareholders as to whether the offer is fair or, if it elects not to make such a recommendation, to disclose the reasons for not making one.

In transactions involving parties in which directors, officers or significant shareholders have a personal interest or a conflict of interests, 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 interests, or of alleged self-dealing or conflict of interests scenarios, Israeli courts defer to the judgement 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 the 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 interests, 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 adviser 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 Chancery Court MAC litigation of the Israeli M&A deal of Comtech and Gilat Satellite, as described in 3.1 Significant Court Decisions or Legal Developments – 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.

See 3.1 Significant Court Decisions or Legal Developments for an example.

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. One example is the stakeholding 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’s board of directors accepted an offer to sell 100% of the company to Nvidia for USD6.9 billion, and it delisted from the Nasdaq following completion of the recommended sale.

As noted in 11.1 Shareholder Activism, activism has become more popular in Israel in recent years, particularly in Israeli companies traded on US stock exchanges. However, we do not believe such increase resulted from, or was impacted by, the COVID-19 pandemic.

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



Arnon, Tadmor-Levy is a preeminent Israeli law firm. With approximately 450 lawyers and interns, including 140 partners, the law firm of Arnon, Tadmor-Levy is a leader in its areas of practice. The firm offers diverse legal services and a proven track record of success to its clients, which include many of Israel’s largest companies, government and public entities, premier investment funds, and leading multinational corporations. The firm integrates top-tier expertise, creativity and an unmatched level of service, with fairness, collegial conduct and uncompromising professional conduct. The firm’s practices, as well as many of its partners and lawyers, rank highly on international and Israeli legal directories, including Chambers and Partners. Its M&A practice group has represented private and publicly traded Israeli and foreign companies in some of the largest, most important and complex mergers and acquisitions in Israel’s history. In several cases, it has developed innovative transaction models, implemented strategies never before used in Israel and paved the road for others to follow.

Introduction

2022 will most likely be remembered as a year of financial and global uncertainties, posing challenges – both old and new – to the economic environment of M&A deals in Israel and worldwide.

The previous decade’s characteristic low interest rate levels suddenly shifted, with sharp rate hikes by central banks worldwide, causing a ripple effect across various industries. Soaring inflation, geopolitical turmoil, an energy crisis, supply chain disruptions, and general market volatility all curbed the rapid growth rates of 2021. They also contributed to investors’ growing lack of confidence and increased the gap between the perceptions and expectations of buyers and sellers in terms of deal prices and values.

These circumstances also led to higher acquisition financing costs, which posed an additional challenge for M&A transactions in 2022. Thus, buyers wishing to use debt financing had to deal with higher costs, hesitant lenders, longer diligence cycles, and stricter loan terms. The increasing costs of financing deals made accessing capital and borrowing money difficult, which eventually brought an additional cooling effect to the Israeli M&A market.

The uncertainties and instability that characterised 2022 for the M&A market seem even more extreme, considering how dramatically the market shifted from the record-breaking levels it saw just a year before. Therefore, a better understanding of the sharp turn the M&A market took in 2022 calls for a look back at some of the peaks that defined 2021 for the Israeli M&A market.

The thriving Israeli M&A market in 2021 demonstrated unprecedented strength and prosperity in both the public and private sectors, as reflected by the volume of deals and their value. For example, in the Israeli tech industry alone, there were 75 IPOs (and 23 on Wall Street) and 163 M&As, totalling over USD23.5 billion. This is impressive for a country about the size of New Jersey.

However, the M&A market was in for a rude awakening in 2022. The extreme changes in the global and local macroeconomic environment led to uncertainty in the market, pushing many investors and entrepreneurs to risk aversion. The record-breaking atmosphere for M&As and IPOs was over. 

For the Israeli tech industry, 2022 was a relatively tough year, with the number of Israeli M&A and IPO transactions dropping to 120. Despite these challenges and the drop in M&A and IPO transactions, and against the backdrop of the global market downturns, the Israeli tech industry demonstrated resilience, as capital proceeds from investments reached USD20.6 billion.

Below are some of the most significant challenges, trends, and developments that impacted the Israeli M&A market in 2022 and some key deal making insights and takeaways.

Target Valuations Drop

In the record-breaking year of 2021, the Israeli M&A market witnessed a resurgence of deal volume and value as Israeli tech M&As and IPOs skyrocketed to an unprecedented value, together with private companies raising capital at significantly higher valuations. This large flow of funds led to further increases in valuations and even overvaluations of companies not close to turning a profit. 

The 2022 circumstances all took a toll on M&A valuations and deal values, reversing some of the positive trends of 2021. Amid market volatility and the challenging market conditions of 2022, buyers and sellers alike became increasingly cautious and selective in their deal making approach. Many corporations chose to focus internally rather than make acquisitions, and some investors preferred safer, more traditional assets. This caused massive company valuation drops and substantially reduced capital flow for growth-stage private tech companies. The decline in company valuations widened the gap in deal price expectations between sellers and buyers. Potential sellers facing such declining valuations wished to avoid transactions priced significantly lower than the expected value. At the same time, buyers were hesitant to enter into deals at what could turn out to be overblown prices.

The valuation destruction of 2022 was particularly apparent in the public market, causing a steep drop in stock prices. Such a drop in valuation could potentially leave Israeli companies more vulnerable to takeovers.

Decline in “Going-Public” Transactions

In contrast to the exceptional IPO tide of 2021, the Israeli market for “going-public” transactions experienced a sharp downturn in 2022 following the global slowdown in IPO activity. Faced with unfavourable and uncertain market terms, investors became more risk averse and turned away from high-flying growth stocks in search of safer, profit-focused alternatives, favouring companies that could demonstrate resilient business models in terms of profitability and cash flow. In turn, companies became more hesitant to go public amid the volatility and uncertainty of the stock market, with some choosing to delay their IPOs or seek alternative methods of raising capital.

Compared with the 2021 IPO pipeline, the 2022 pipeline had distinctly fewer companies contemplating going public. As the pipeline continued to build, many companies entered wait-and-see mode, standing by for the right time to review their IPO plans. Part of the clog in the IPO pipeline and another reason for the IPO decline in 2022 could be the discouraging performance of Israeli companies that had gone public in 2021, many of which were trading significantly below their IPO value in 2022, leaving investors disappointed.

SPAC market saturation

IPOs in the US involving SPACs (special-purpose acquisition companies, a type of going-public transaction offering an alternative to traditional IPOs), which were all the rage in 2021, plummeted in 2022, in part because of increased regulatory scrutiny in the US. This made them a less appealing alternative for companies considering going public. In addition, the tightened market liquidity and the poor performance of stock prices of prior SPACs discouraged investors and dampened their enthusiasm for the SPAC market in 2022. As a result, this alternative pathway for private companies to go public, which was frequently employed by Israeli companies in 2021, became less accessible, creating a more challenging environment for Israeli companies considering a public offering.

Role of Israeli Buyers in the M&A Market

The resilience and strength of Israeli buyers demonstrated in 2021 continued in 2022, reaching a market share of 37% of total transactions that year, the highest rate since 2015 (aside from 2021, which was also a record year for M&A activity in general). This trend reflects a change in the role of Israeli entities in M&A transactions and a shift in their perception within the M&A market. No longer solely regarded as potential targets, Israeli entities are now increasingly recognised as growth-oriented buyers.

As Israeli companies grow and become more well-established, they seek to add to their organic growth, expand their reach, diversify their offerings, and improve their overall financial performance by acquiring or merging with other businesses. An all-Israeli merger (or “cultural merger”) offers significant added value for the parties because of their cultural similarities and shared values. This allows for a smoother, more organic post-merger integration process. This type of merger is also common in the tech industry, where many founders and investors have similar backgrounds in local tech verticals, shared army service, and academic experience.

Our firm witnessed this trend firsthand, as we had the privilege of representing an Israeli buyer and an Israeli target in two major Israeli M&As negotiated in 2022. The first was the acquisition of Isracard, Israel’s largest credit card company, by our client, Harel Insurance Investments and Financial Services Ltd, at a valuation of approximately ILS3 billion. The second was the acquisition of our client, Israeli credit card company Max IT Finance, by Clal Insurance Enterprises Holdings, at a valuation of approximately ILS2.5 billion. In the case of Max IT Finance, the Israeli target had previously been acquired by a foreign buyer as part of an earlier M&A transaction, which was followed a few years later by the recent M&A in which an Israeli buyer acquired it.

Key Takeaways

There is no denying that deal making became more challenging in 2022. The glorious highs we experienced in 2021 may not be in store for the immediate future, and the headwinds of 2022 are likely to continue to play out and impact the M&A market in 2023.

In navigating the market’s turbulent waters in 2023, deal makers may find value in some of the key takeaways below.

Long-term transactions

The uncertain economic environment of 2022 had particular implications for M&A transactions, including long-term elements, such as contingent or deferred payments (eg, earn-outs) or a substantial interim period between signing and closing.

Even in a “standard” M&A environment, the parties would have had to spend a considerable amount of time and effort negotiating to finalise the appropriate adjustment mechanisms and accounting methodologies – even more so in the uncertain market of 2022 – which made these adjustment mechanisms and methodologies both more important and more difficult to ascertain than in previous years.

Therefore, in the current economic environment, which includes unstable currency exchange rates in addition to the elements mentioned above, it is extremely important to carefully consider the right measures to ensure that the mutually accepted commercial terms will also be correctly reflected in subsequent payments and cash reserve provisions, by, for example, linking such payments or reserves to the appropriate currency or linking the relevant amounts to the appropriate indexes.

Prioritising extensive due diligence

One of the key takeaways from navigating the turbulent deal making environment of 2022 could be the heightened importance of well-performed due diligence. Amid substantial valuation declines, supply chain disruptions, and the other considerable headwinds mentioned earlier, investor risk sentiment noticeably cooled in 2022. 

Cautious investors may find that meticulous due diligence can offer the necessary reassurance and validate potential acquisitions or investment strategies presented for executive approval. Furthermore, robust, effective due diligence is vital for buyers to fully and accurately understand the value of a target business, with crucial implications on deal pricing and protective measures to mitigate the risks.

While some buyers may have sought to mitigate the market uncertainties of 2022 by incorporating the purchase price adjustments detailed above, as well as certain additional warranties and indemnities, the M&A market of 2022 frequently forced buyers to agree to less-than-ideal protections to finalise the deal. In such instances, meticulous business, financial, tax and legal due diligence investigation would be even more important.

MAC/force majeure

In many cases, “material adverse change” termination and force majeure provisions explicitly exclude macroeconomic effects or issues affecting an entire industry. In the current environment, especially if uncertainty and volatility intensify, such exclusion might have a dramatic effect. As such, we strongly recommend drafting such provisions carefully and considering the implications of such exceptions in these unstable times, taking into account the unique characteristics of the Israeli economy, the target company and the industry in which it operates.

Conclusion

The year 2022 was marked by extreme changes in the macroeconomic environment, leading to uncertainty in the market. Influenced by forces such as rising inflation, rapidly accelerating interest rates, falling stock prices, and persistent supply chain issues, the Israeli M&A market had its fair share of headwinds in 2022.

Amid such headwinds, the Israeli M&A market was fraught with risk and uncertainty in 2022, resulting in increased caution among buyers considering M&A transactions. In light of these potential risks, it is expected that in 2023, buyers will be able to continue to take a more cautious approach in evaluating potential target companies and transactions. This could include conducting more thorough due diligence and adjusting deal structures and terms in response to ongoing and new risks. Businesses will need to take a proactive approach to identifying and managing risks and work closely with their advisors to navigate the complex, evolving landscape of M&A transactions.

While the risks may seem daunting, the potential rewards of a successful M&A transaction can be significant. With careful planning and execution, businesses can still achieve their growth and profitability objectives in the current market.

As we move further into 2023, it will be interesting to see how businesses adapt to the changing market conditions and leverage M&A deals to drive growth and profitability.

Arnon, Tadmor-Levy

132 Begin Road
Azrieli Center
Tel Aviv 6702101
Israel

+972 684 6000

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

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Naschitz, Brandes, Amir & Co is one of the largest full-service law firms in Israel, with more than 240 lawyers in all areas of commercial practice, including over 20 M&A partners and 70 M&A associates and other legal practitioners based principally in its head office in Tel Aviv. The firm has one of Israel’s powerhouse M&A practices, advising leading domestic and multinational corporations as well as investors and funds such as FIMI, Israel’s largest and most successful 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 sides 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 public merger of Frutarom with NYSE-listed International Flavors & Fragrances Inc. and the recent ILS2.5 billion public merger of TASE-listed Veridis Environment Ltd. and Infinya Ltd. The M&A practice is supplemented by the firm’s prominent capital markets, regulatory, competition, real estate, tax, labour and litigation practices.

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Arnon, Tadmor-Levy is a preeminent Israeli law firm. With approximately 450 lawyers and interns, including 140 partners, the law firm of Arnon, Tadmor-Levy is a leader in its areas of practice. The firm offers diverse legal services and a proven track record of success to its clients, which include many of Israel’s largest companies, government and public entities, premier investment funds, and leading multinational corporations. The firm integrates top-tier expertise, creativity and an unmatched level of service, with fairness, collegial conduct and uncompromising professional conduct. The firm’s practices, as well as many of its partners and lawyers, rank highly on international and Israeli legal directories, including Chambers and Partners. Its M&A practice group has represented private and publicly traded Israeli and foreign companies in some of the largest, most important and complex mergers and acquisitions in Israel’s history. In several cases, it has developed innovative transaction models, implemented strategies never before used in Israel and paved the road for others to follow.

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