Mergers and acquisitions of Israeli companies declined by 27% in value in 2017, according to a report by consulting firm PwC Israel published on Monday. Much of the decrease comes as a result of entrepreneurs postponing an early “exit” for start-ups, along with less activity by Chinese buyers.
The average price of each transaction fell by about 38%, but there was a slight 9% in the number of transactions this year, up to 131 M&A deals. The number of high-end transactions also increased, for M&As worth more than $100 million.
Some 9% of all transactions were for deals between $400m. and $1 billion.
The Israeli M&A market has trended downward in terms of pricing for a few reasons, said the report’s author, Liat Enzel-Aviel, who is a partner and transactions-services expert at PwC Israel.
“First, we see companies, we see investors, we see heads of companies waiting,” Enzel-Aviel told The Jerusalem Post. “We see more start-ups really waiting for the exit...
[Companies] would like to do mega-transactions, for more than $1 billion... Investors are bringing more money and they want to wait for the exit until the company is mature so it has a higher value.”
Total transactions in 2017 totaled some $12.2b., although the analysis tries to avoid statistical anomalies by excluding transactions totaling more than $10b. That leaves out Intel’s $15.4b.
purchase of Jerusalem-based Mobileye in March. The largest Israeli acquisition ever was debt-laden Teva Pharmaceutical’s purchase of Allergan’s generic-drug unit in 2016.
Enzel-Aviel added that a number of Israeli transactions have been postponed until the beginning of 2018, in industries ranging from insurance to hi-tech, as well as deals pertaining to Israel’s Netafim manufacturer of irrigation equipment.
This postponement is helping increase the value of companies being acquired or merged. Part of that is due to major multinational corporations sitting on hefty cash piles, along with global interest rates being relatively low.
At the same time, the study notes that new regulation in China has led to a decrease in transactions from East Asian companies and investors, falling to $2.7b. this year from $6.4b. last year.
The Chinese government has sought to redirect investments back home.
On the flip side, US companies are increasing the pace at which they acquire or merge with Israeli companies, and not just in hi-tech. It remains to be determined how US President Donald Trump’s cut in the corporate tax rate – from 35% to 21% – will reduce incentives for American investors, who once looked at Israel’s 23% rate as a relative bargain.
“If we saw in previous years a decline [the recession], we now see American companies becoming significant players in the Israeli market,” Enzel- Aviel noted. She also sounded optimistic as to how the US corporate-tax cut could help increase M&As in the Israeli market.
“In the medium-to-longterm, US companies will have more cash, since they’ll pay less tax in the US, and thus they’ll invest more,” she said. Deals with North American companies totaled some $3.9b. in 2016, more than doubling from $1.8b. in 2016.
Also in 2017, M&As in Israeli pharmaceutical companies out-valued deals with local hi-tech firms. Part of that is due to debt-battered Teva Pharmaceuticals selling some investments and selling part of Allergan’s businesses, after regulators intervened.
And Japanese investments in Israeli pharma and medical devices played a role.
Despite the study’s findings that Israeli M&A average values had declined, some attorneys continued to sound bullish.
“I think it’s a strong market,” said Bob Grossman, a shareholder at Greenberg Traurig and a co-chairman of its Israel practice. “I’m seeing a lot of deals in life sciences, in hi-tech – a lot of deals being talked about, a lot of deals being completed.
I think there’s significant interest in Israeli companies still. If I didn’t think so, I wouldn’t be spending three months a year traveling back and forth to Israel, meeting with clients.”