Yigal Arnon 

Why Israel's Booming M&A Market, is not about to Bust

The Israeli High Tech industry has experienced immense growth over the past two years. In 2021 a record $25.6 billion was raised in 773 deals, a 146% increase in capital raised and a 28% increase in the number of deals compared to 2020. While early-stage investments only accounted for 14% of the capital raised in 2021 (or a “mere” $3.69 billion), this was still an impressive portion of overall investment. While the majority of early-stage investments are still being led by Israeli investors, 2021 saw a significant increase in early-stage investments made by foreign investors. This shows the continuing and growing popularity of the Israeli eco-system with foreign investors hoping to get in on the ground floor of the next big Israeli success story. Another strong indicator of the growth focused environment is the increase in the number and sums of repeat investors which increased by approximately 55% in 2021 from 2020.

With the significant amount of capital raised in late stage investments in 2021 we also saw a significant increase in the average size of late state investment deals with 155 investments of over $50 Million each, and where late-stage investment accounted  for 74% of the capital raised in 2021. Market behavior would indicate foreign investors feel comfortable doing business here not just due to the financial promise but since the processes here are relatively straightforward and efficient for all investors. 

While from 2015-2020, the number of M&A transactions was fairly steady, 2021 saw records broken in this metric too, with a record of 155 M&A transactions. The almost $6 billion purchase of chip manufacturer Tower Semiconductors by Intel has set 2022 off to a strong start, in what we predict will be a strong year for M&A transactions. 

The Israeli legislators have not been blind to the market behavior and have taken measures to further streamline the M&A process starting from allowing the relevant filings for M&A transactions to be made online as well as cutting the processing time by 25%, through more substantial changes. On January 13th 2022, an amendment to the Merger Regulations was adopted by the Knesset, raising the minimum notification threshold for a merger transaction to NIS 367 million (approximately $117 million) in combined revenues of the merging parties (when at least two of the parties' revenue is higher than NIS 20 million (approximately $6.4 million) each). The Knesset is currently considering revising privacy regulations to better reflect the current technological environment, with new regulations focusing governmental oversight on "sustainably threatening" privacy issues, while alleviating requirements for most database registrations. All these changes are important and also reflect the desire of the Israel government to streamline process and remove remaining inefficiencies. 

We believe that 2022 will see a large number of M&A transactions, resulting from, among other reasons (i) the continuing appeal of Israeli tech, (ii) the significant amounts of capital that has already been deployed in Israeli technology companies, and (iii) and growing numbers of investors seeking liquidity through a sale, rather than from the capital markets; coupled with the slowdown in the capital markets further increasing the attractiveness of M&A transactions. Together with helpful legislative reform, we believe that 2022 should bring new opportunities for the Israeli technology sector.

Authors:

Simon Weintraub

Adrian Daniels

Partners @Yigal Arnon & Co