Mobileye's $15 Billion Deal Masks Drop in Israel Tech M&A
(Bloomberg) -- Israel’s technology industry got off to a roaring start this year when Mobileye NV was sold for $15 billion, smashing all precedents. That momentum has since petered out as entrepreneurs break the habit of cashing in and opt instead to grow their businesses.
Exits from tech startups through mergers and acquisitions or initial public offerings are on pace to decline a second year, according to data compiled by Start-Up Nation Central, which tracks the sector. Those figures don’t count Intel Corp.’s purchase of Mobileye in March, the largest acquisition of an Israeli tech company on record, because it already listed shares in 2014.
"Israeli entrepreneurs used to create startups in order to sell them as fast as possible," Guy Preminger, head of PwC Israel’s technology division, said on his way to a party celebrating the sale of an Israeli drugmaker for $1.1 billion, a deal that he worked on. "Now the companies and the venture-capital investors are after the large funding rounds, saying ‘let’s go and try to be unicorns and not make an early exit,’" he said, using the term referring to billion dollar tech companies.
Israel is not alone. Technology deals are down globally, declining about 59 percent to $110 billion this year compared with the same period in 2016, according to data compiled by Bloomberg, as targets become too expensive after years of climbing stock prices. Another hindrance is uncertainty over what direction U.S. President Donald Trump is going to take on global trade and tax reforms, spurring owners to rather hold on in the hopes of a positive outcome, Preminger said.
Business owners are opting to keep growing their companies with private investments instead. Startups raised $1.44 billion in funding last quarter, a 54 percent increase over the year-earlier period, a report from IVC Research Center last month shows.
By buying some shares from the startup founders, the American venture capital firms participating in the funding rounds are easing the financial pressures many entrepreneurs experience as they try to grow their businesses, Preminger said.
And The Kids?
"The entrepreneur used to sit and raise money at a high valuation, then go home to his wife and she would say ‘your company is worth $200 million, but we don’t have money for the kids’ extracurricular activities,’" he said.
Israel’s tech industry is one of the main drivers of the national economy, and its success has boosted business at law and accounting firms, attracted global investment banks, and breathed new life into private wealth managers. The slowdown has forced these firms to reallocate their resources.
The growth spurt in the country’s tech industry was a factor in the decision by Zwei Wealth Experts AG, a Zurich-based private banking firm that advises about $1.3 billion of client money, to open a local office in February. While business has quadrupled since, most of that has come from wealthy heirs and old money, according to Patrick Müller, Zwei’s chief executive officer.
"When you don’t have that many exits, that’s an indication that you are not in need for that particular service," Müller said in an interview in Tel Aviv.
The M&A flurry of recent years has drained the pool of Israeli startups that could garner big deals, according to Joshua Kiernan, a partner at law firm Latham & Watkins LLP. The number is slowly climbing, but investors want to see companies with annual revenues between $75 million and $100 million before they plan an IPO, he said.
"The bar has been raised," said Kiernan, who worked on last year’s $4.4 billion sale of the online casino-style games unit Playtika Ltd.
Signs of Life
There are signs of a turnaround. The number of delegations from multinational corporations scouting Israeli technologies is growing, and the $116 million IPO of ForeScout Technologies Inc., which develops its cyber-security software in Israel, could entice other startups to join suit, said Alan Feld, founder of technology-focused private equity firm Vintage Investment Partners.
There are between 15 to 20 startups that could list shares on Nasdaq in the next three years, he said, adding that cyber security and cloud software are areas big firms are looking at.
After a relatively quiet period, about $1 billion of deals have been signed in the past three to four months, Feld, whose Vintage manages $1.5 billion, said, highlighted by German car parts manufacturer Continental AG’s purchase of Argus Cyber Security Ltd. for a reported $400 million.
"A lot of the areas that Israel is strong in are now hot on the global corporate agenda," he said. "Israel is known for its capability in cyber security, for example, and companies want to create R&D centers here. The easiest way to do that is to buy a company."
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