Global Private Equity in Israel: Where Innovation Meets Capital

Finance 626 – Professor David Brophy

Winter 13

Global Private Equity in Israel: Where Innovation Meets Capital

Kevin Crosby

Abby Gao

Alex Merz

Zakariah Nasser

Michael Walsh

Global Private Equity Israel: Where Innovation Meets Capital

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Table of Contents

Introduction and Overview ........................................................................................................................... 4

Creation of VC/PE Industry .......................................................................................................................... 4

Exhibit (1): New ITP Programs in Israel during the 1990s ............................................................ 5

How Tel Aviv Became the Entrepreneurial Hub ...................................................................................... 5

Factors in the Development of PE Market in Israel .................................................................................. 6

Exhibit (2): Yozma Funds – Capital, Foreign Investors and Portfolio .......................................... 7

Economic Stability and Global Competitiveness .......................................................................................... 8

Exhibit (3): Countries/Economies at Each Stage of Development .................................................. 9

Protection Reforms ................................................................................................................................. 10

International R&D Programs .................................................................................................................. 11

Foreign Direct Investment ...................................................................................................................... 11

Competitive Edge........................................................................................................................................ 12

Israeli Accounting Regulations ................................................................................................................... 12

Financial Statement Format .................................................................................................................... 13

Understandability .................................................................................................................................... 13

Global Comparability .............................................................................................................................. 13

Advantages .............................................................................................................................................. 13

Tax Rate Comparison, US and Israel. ......................................................................................................... 14

Exhibit (4): Marginal Corporate Tax Rates, 2001 - 2011 .............................................................. 14

Capital Markets ........................................................................................................................................... 15

Exhibit (5): TASE Trading Statistics (1998-2010) ......................................................................... 16

Exhibit (6): Israeli Companies Listed on NASDAQ by Sector ..................................................... 16

Exit Opportunities ....................................................................................................................................... 17

Exhibit (7): Israeli high-tech capital raising 2002-2012 ($M) ....................................................... 17

Exhibit (8): The Global Venture Capital and Private Equity Country ....................................... 18

Trends in Israeli Private Equity and Venture Capital ................................................................................. 18

Summary of Deals: Role of Public Companies and Private Equity Sponsorship ....................................... 19

Table (1): Deal Size Distribution ..................................................................................................... 19

Private Equity Involved In Transaction .................................................................................................. 21


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Table (2): PE Involvement in Deals ................................................................................................. 22

Table (3): PE Impact on Target/Acquirer or Sponsor on Deal Size ............................................. 22

Table (4): PE Firm Involvement ...................................................................................................... 23

Table (5): PE Involvement by Sector .............................................................................................. 24

Deal Solicitation...................................................................................................................................... 25

Table (6): PE Impact on Deal Solicitation ...................................................................................... 25

Tables (7): Share of Solicited Deals ................................................................................................. 25

Investment Banks and Legal Advisors .................................................................................................... 24

Table (10): Share of Deals and Impact with Bank Involvement ................................................... 26

Table (11): Share of Deals and Impact with Legal Involvement .................................................. 26

Exhibit (7): Key Bank and Legal Advisors by Number of Deals .................................................. 27

Impact of Cross-Border Transactions In Israel ....................................................................................... 28

Table (12): Cross Border M&A with Bank Involvement .............................................................. 28

Additional Detail Regarding Deal Activity ................................................................................................ 29

Table (13): 1998~2012 Israel PE M&A Transaction Value vs. Total M&A Value ..................... 29

Table (14): 1998~2012 Israel PE M&A Transaction ..................................................................... 29

Cumulative Abnormal Returns (CAR) ....................................................................................................... 31

Table (15): Calculated CAR by Transaction .................................................................................. 32

Overall Attractiveness and Challenges ....................................................................................................... 32

Conclusion .................................................................................................................................................. 33

Appendix: .................................................................................................................................................... 34

Trade Agreements ............................................................................................................................. 34

Differences between GAAP/IFRS .................................................................................................... 35

Active PE/VC Firms Israel ............................................................................................................... 36

Works Cited ................................................................................................................................................ 37


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Introduction and Overview Israeli Private Equity is traditionally centered in venture capital [referred to as “VC” going forward].

Since the 1950s, backed by heavy investment in R&D, government tax incentives, a burgeoning

intellectual environment, and entrepreneurship spirit, start-ups in Israel have flourished and attracted

investment from all corners of the world. A favorable political relationship between the U.S. and Israel

has increased access to capital, encouraged shared technology, and has created an environment where

venture capital flows easily in and out of Israel. This relationship culminated in the development of

industries in software, pharmaceutical/biotechnology, and IT infrastructure. While Israel has bred many

innovative companies, it has not developed and grown its own “Google” or “Facebook.” Despite this,

many U.S. tech-firms (EBay, Hewlett Packard, etc.) have made sizeable acquisitions of Israeli companies

that have bolstered their business portfolios. Our intent is to expose private equity [referred to as “PE”

hereafter] environment and its proliferation in Israel. The paper will outline both the development and

history of PE in Israel, and will highlight recent industry trends. Our discussion will illuminate the

reasons why both PE and VC investment opportunities in Israel are favorable alternatives to investing in a

firm’s home country, including: accounting practices, tax standards, and efficient capital markets which

enable exit through acquisition or IPO. Finally, we survey several key deals that provide insight to the

flow of capital within Israel and lay out how value is created for both the PE and VC funds, as well as for

public companies through acquisition.

Creation of VC/PE Industry Israel’s PE market is rooted in VC, with a long tradition of strong entrepreneurship. The unique VC

programs Israel used to kick start its PE market deserve some attention. The first attempt was through the

Inbal Program, where the government provided downside protection in the form of 70% guarantees to VC

funds1. However, this program did not create a free standing and fully functional VC industry. At the

time, Israeli’s lacked tech knowledge and the industry’s professionals were woefully inexperienced. The

second program, Yozma, led to much better results since it was executed by the Office of the Chief

Scientist at the Ministry of Trade. Here, the government provided 40% of fund capital which was sold

back to the managers at cost2.VC funds created by the Yozma Program are still among the top 20 Israeli

funds today and the program’s legacy continues through the Israeli Venture Association.

1

Rozenrot, Elnor. Note on Private Equity in Israel. Ed. Fred Wainwright. Center for Private Equity and Entrepreneurship. Tuck School of

Business at Dartmouth, 02 Aug. 2005. Web. <http://mba.tuck.dartmouth.edu/pecenter/research/pdfs/israel.pdf> 2 Rozenrot, Elnor. Note on Private Equity in Israel.


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Exhibit (1): New ITP Programs in Israel during the 1990s3

1) Inbal (1992-1998) - a Government owned Insurance company, which gave partial (70%) guarantees to traded VC

funds. Four VC companies were established under Inbal regulations.

2) Yozma (1993-1998)—a $ 100M Government owned VC company, which invested in 10 private early- phase oriented

VC Funds which operated in Israel (8M$ per fund).

3) Magnet Program (1992--)—a Horizontal Program supporting cooperative, generic R&D involving group of firms and

at least one University (annual budget 40-60M$).

4) Technological Incubators’ Program (1992--)—a program supporting startups during the first three years of their

operation. The incubators are privately managed (since 2001 they became also privately owned). Both they and the

projects approved get financial support from the Government (annual total program budget 25-30M$).

Companies in the market have traditionally received favorable support from government in the early

stages of development, in the form of tax incentives. Given outsized R&D expenditure, coupled with one

of the world’s most highly educated populations, Israeli VC is highly concentrated in the high-tech sector,

which includes: life science/pharmaceutical/biotechnology, software, communication and internet.

Venture firms traditionally plan exits through IPO, often targeting the NASDAQ or other major stock

markets. The Tel Aviv Stock Exchange [“TASE”] is another exit option, but is used less frequently due

to low valuation multiples and comparatively low post-IP liquidity4.

In contrast to well-developed VC markets, Israel’s PE sector is still in a relatively early stage, having

been born in 2004 with the establishment of Markstone Capital5. Most of the capital for early PE funds

was raised internationally until regulations were relaxed, allowing Israeli insurance companies to invest in

PE. Foreign investments have and will continue to play an active role in mergers and acquisitions

[“M&A” hereafter] activities in the Israeli PE market. Most foreign PE firms that invest in Israel are

established entities in the U.S. or Europe, that have extensive global networks. Given their strong

capability to raise capital and network advantage, most exit deals are made through portfolio divestiture to

international strategic buyers.

How Tel Aviv Became the Entrepreneurial Hub Tel Aviv has had a long history with business. In the early 1900s, Tel Aviv was built near the coastal city

of Jaffe, whose port was busy with trade. European middle-class immigrants arrived to the “White City”

in the 1920s leading the way to a modern city. A more recent growth accelerator came in the form of

3

Avnimelech, Gil. “VC POLICY: YOZMA PROGRAM 15-YEARS PERSPECTIVE.” Copenhagen School of Business. June 2009. Presented at

Druid Summer Conference Summer 2009. 4 Rozenrot, Elnor. Note on Private Equity in Israel.

5 No Author. ‘Spreading its wings: Private equity in Israel-growing internationally’, Hillel Schuster, KPMG in Israel, April 2011.


6 |F I N A N C E 6 2 6

wealthy Russian immigrants moving to the downtown area after the collapse of the Soviet Union, thus

creating capital sources that could fund ventures within the city. When the U.S. rejected most of the

Russian requests to immigrate, Tel Aviv reaped the benefits of intellectual capital when the Russians

moved there.

Today, Tel Aviv is the most secure location in Israel due to its surroundings: Jordan is immediately to the

east, the Mediterranean is on its west coast, and the rest of Israel stretches far into the north and south.

This positions Tel Aviv far from Gaza and other violent areas. Additionally, all foreign embassies are

located in the city. The international community counts Tel Aviv as the capital, not Jerusalem, and enjoys

the security of its location; investors are able to evacuate both the city and country safely through the

embassies, when Israel is under attack. This factor has attracted foreign investments to the city, and

mitigated fears that both financial and human capital would be casualties of foreign violence. Finally, the

city has developed into an urban-modern secular city, which attracts young people. Ultimately, it is these

young professionals that are the pioneers of innovation.

Factors in the Development of PE Market in Israel Regardless of political conflicts, security risks, or geographic disadvantage, Israel is widely recognized as

an innovative country where entrepreneurship is the engine of the economy. In Israel, setting up a new

business is considered a respectable, laudable, albeit challenging career track. While this avenue is risky,

many Israelis are rewarded for taking the change with high incomes, giving them economic

independence, social status, and prestige. According to GEM, in 2010, Israel ranked 47th among the 60

GEM countries in terms of total early-stage entrepreneurial activity, playing 13th among the 23

innovation-driven countries6.

Israel’s military advantage, which was built through the emphasis placed on self-sufficiency, provides

technology and talents that strengthen the Israeli high-tech industry. In the mid-1980s, after demise of the

Lavi Fighter Project, Israel’s defense industry shifted its focus toward auxiliary systems. This has

provided local technology innovators an advantage in producing civilian spin-offs in security, electronics,

software, and the burgeoning internet sectors7. Also, following dissolution of the Soviet Union,

immigration of Russian scientists and engineers helped fuel Israel’s GDP growth and increase the

business sector’s product growth.

6 No Author.‘GEM 2010 Israel National Entrepreneurship Report’, 2011

7 Rozenrot, Elnor. Note on Private Equity in Israel.


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Government’s support for R&D and start-up companies is another engineer of PE’s growth.

According to the OECD, Israel is ranked 1st in the world in R&D expenditure as a percentage of

GDP8. It is also ranked 1

st in the world in percent of scientists and technicians relative to total worker

population. On average, out of 10,000 workers in Israel, 140 are scientists and technicians9. Beyond

its continued support for R&D and education during the 1990s, government initiated the Yozma

Program by allocating $100M to funds specifically as capital to be called. Foreign funds were given

$8M to invest in businesses to attract foreign capital and limit the downside risk of investment in

Israeli innovation. Additionally, the government used $20M to invest directly as part of the Yozma

Fund. This led to $263M of initial VC in Israel10

. After the investment, Yozma took off:

There is wide consensus that one of the major factors triggering emergence of Israeli VCs was

Yozma. Four sets of factors seem to have been responsible for Yozma to become an effective trigger of

Israel's ICT Cluster: a) favorable background conditions; b) policy and market forces’ experimentation

during the pre-emergence period; c) timing - the time overlap between Yozma implementation on the

one hand and the rising Nasdaq index and expanding market for ICT on the other; and d) the

successful design and implementation of the Yozma program11.

Nearly 100 VC firms have been established using foreign and local investment capital. From 1993 to

2007, approximately $9.4B was raised12

. The highly developed VC market has created a good

infrastructure that serves as a significant comparative advantage for PE firms to make deals. A favorable

legal framework based in common law, which also incorporates facets of civil law and beneficial tax

policies also provide support for PE to grow.

Exhibit (2): Yozma Funds – Capital, Foreign Investors and Portfolio13

Name Est. Capital Foreign LP LP Orion Portfolio Exits

Eurofund 1994 $20M Daimler-Benz,

DEG

Germany 14 7 (50%)

Gemini 1993 $36M Advent USA 25 13 (52%)

Inventech 1993 $20M Van Leer Group Netherlands 33 16 (48%)

JVP 1993 $20M Oxton USA 12 10 (83%)

Medica 1995 $15M MVP USA 10 5 (50%)

Nitzanim 1994 $20M AVX, Kyocera Japan, Japan 13 7 (54%)

Polaris (Pitango) 1993 $20M CMS USA 19 13 (68%)

Star 1993 $20M TVM

Siemmens

Germany 27 15 (56%)

Vertex 1996 $39M Vertex Int.,

Singapore tech

USA ,

Singapore

29 16 (55%)

Walden 1993 $33M Walden

International

USA 21 10 (48%)

Yozma 1993 $20M None IL Gov. 16 10 (63%)

Total $263M 217 122 (56%)

8

No Author. OECD Factbook 2010: Economic Environmental and Social Statistics 9

Rozenrot, Elnor. Note on Private Equity in Israel. 10

Avnimelech, Gil. “VC POLICY: YOZMA PROGRAM 15-YEARS PERSPECTIVE.” 11 Avnimelech, Gil. “VC POLICY: YOZMA PROGRAM 15-YEARS PERSPECTIVE.” 12 No Author.‘Spreading its wings: Private equity in Israel-growing internationally’, Hillel Schuster, KPMG in Israel, April 2011 13

Avnimelech, Gil. “VC POLICY: YOZMA PROGRAM 15-YEARS PERSPECTIVE.”

http://en.wikipedia.org/wiki/Common_law

http://en.wikipedia.org/wiki/Civil_law_(legal_system)


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Without the success of Yozma, the VC/PE market in Israel would look vastly different today. The

infusion of capital spurred by Yozma’s success “triggered a cumulative process with positive feedback in

which more profitable VC activity at present spurred even more profitable VC activity in the future14

.” It

is important to understand the significance of this program’s success and note that this model is unique to

the Israeli business environment.

Economic Stability and Global Competitiveness The Swiss-based Institute for Management Development (IMD) has ranked Israel's economy 9

th highest

for its durability in the face of the global financial crisis15

. In 2010, it joined the OECD, a forum of

countries that are committed to democracy, free-market economics, and provide a platform to compare

policy experiences, seek answers to common problems, identify good practices, and co-ordinate domestic

and international policies of its members16

. Its free market economy is resilient, technically advanced, and

globally integrated, ranking as both the world's most durable economy in the face of crises as well as 1st

in the rate of R&D center investments17

. The economy’s strength and resilience is attributable to strong

fundamentals, active government agencies that protect private savings and promote continuous growth,

and a history of strong economic performance that attracts foreign investment.

The transition from the state-dominated, centralized, and protectionist economy that prevailed during the

1980s and 1990s, created significant opportunities for investors to buy good companies at deep discounts,

accounting for much of the cross-border M&A activity that was present during the first decade of the

2000s. Since becoming a free market, the country has become an even more attractive place for

multinationals to do business, led by a vigorous private sector and encouraged by government policy.

Israel currently ranks 3rd

in the region on the World Bank's Ease of Doing Business Index as well as in the

World Economic Forum's Global Competitiveness Report 18

,19

. It has the second-largest number of

14 Avnimelech, Gil. “VC POLICY: YOZMA PROGRAM 15-YEARS PERSPECTIVE.” 15

No Author. "Israel: A Resilient Global Economy." Invest in Israel. Ministry of Industry, Trade & Labor State of Israel, 5 Dec. 2012. Web.

<http://www.investinisrael.gov.il/NR/exeres/75A535CF-BCC7-4A06-9E24-88EAC7EC67C0.htm>. 16 No Author. List of OECD Member countries - Ratification of the Convention on the OECD. Organization for Economic Co-operation and

Development. Retrieved 12 August 2012. <http://www.oecd.org/general/listofoecdmembercountries-ratificationoftheconventionontheoecd.htm>

17 Viniar, Olga. "'Israel's Economy Most Durable in Face of Crises'" Ynet News.com. N.p., 20 May 2010. 03 Feb. 2013.

<http://www.ynetnews.com/articles/0,7340,L-3891801,00.html>. 18

No Author. Economy Rankings. Ease of Doing Business (World Bank). Retrieved 20 March 2012. <http://www.doingbusiness.org/rankings> 19

Bilbao-Osorio, Beñat, Ciara Browne, Roberto Crotti, Jennifer Blanke, Brindusa Fidanza, Thierry Geiger, Margareta Drzeniek Hanouz, and

Xavier Sala-i-Martin. The Global Competitiveness Report. Rep. Ed. Professor Klaus Schwab. World Economic Forum, 2012. Web.


9 |F I N A N C E 6 2 6

startup companies in the world, after the U.S.20

, and the largest number of NASDAQ-listed companies

outside North America21

. With a $17,000 per-capita domestic product, a 2.5% annual population growth

rate, and a 6% average real GDP growth rate over the last seven years, Israel has the characteristics of an

emerging economy22.

Its highly industrialized economy and its advanced technological infrastructure,

give Israel the stability normally associated with more developed economies23.

The country features a

unique capacity for innovation (3rd

), particularly in telecommunications, with other strengths in IT,

environmental sustainability, as well as electronics and life sciences. Israel’s highly innovative businesses

benefit from the presence of the world’s best research institutions. Israel’s excellent innovation capacity is

supported by the government’s public procurement policies24

. This has translated into the country’s high

number of patents (4th)

25. Further, the financial environment has become more inviting, evidenced in the

ease of access to VC (3rd

)26

.

Exhibit (3): Countries/Economies at Each Stage of Development

Source: The Global Competitiveness Report

20

Bounfour, Ahmed; Edvinsson, Leif (2005). Intellectual Capital for Communities: Nations, Regions, and Cities. Butterworth-Heinemann. p.

47. ISBN 978-0-7506-7773-8. <http://en.wikipedia.org/wiki/Special:BookSources/978-0-7506-7773-8> 21

No Author. NASDAQ Appoints Asaf Homossany as New Director for Israel. NASDAQ OMX Group. 6 February 2005. Retrieved 21 March

2012.No Author. Capital Market Research | Leumi Group. Web.<http://english.leumi.co.il/LEFullArt/Israel_Capital_Markets_Report/5756/>. 22 No Author. "Israeli Investment." Israeli Investment. Ahavat Israel, n.d. Web. 05 Feb. 2013. <http://www.ahavat-israel.com/eretz/invest.php>. 23 No Author. "Israeli Investment." 24 Bilbao-Osorio, et al. The Global Competitiveness Report. 25

Bilbao-Osorio, et al. The Global Competitiveness Report. 26 Bilbao-Osorio, et al. The Global Competitiveness Report.


10 |F I N A N C E 6 2 6

Protection Reforms To further promote the attractiveness and stability of its economy, Israel introduced some far reaching

reforms, attributable to conclusions drawn from the 2008-09 global recession27

. The reforms were

introduced despite the strength exhibited by the Israeli economy as a whole and, specifically, its financial

institutions, during which their mettle was tested. The steps taken by Israeli regulators and lawmakers

have resulted in two significant changes in Insurance and Savings, and in the Israel Securities Authority's

(ISA) enforcement mechanisms. The Insurance and Savings legislation is meant to put certain limitations

on and to set ground rules for the investment of institutional bodies in non-governmental bonds28

. The

second reform concerns the improvement in the efficiency of Israel Securities Authority's (ISA)

enforcement mechanisms29

. In addition to measures that strengthen the overall economy, the Israeli

capital markets have undergone tremendous change. The make-up of market participants and existing

relationships have materially changed as reforms in how both Israeli pension funds participate and non-

governmental bonds are traded on the TASE, have increased the volume and tradability of Israeli

securities. The capital markets are now more transparent as the ISA, the government’s market regulation

authority, has enforced heavy responsibility on publicly traded companies, their employees, controlling

shareholders and officers, licensed investment officers, trustees, and portfolio managers30

.Free Trade

Israel's extensive networks of international trade and economic cooperation agreements have increased

the global interest of doing business with Israeli companies. Free Trade Agreements [“FTAs”], R&D

programs, and tax incentives were all part of Israel’s progression towards a free-market economy. Its

trade policy aims to continue the expansion of its network of bilateral trade agreements. FTAs serve to

facilitate international trade in merchandise by eliminating or reducing tariffs and other trade barriers

between the participating parties. Israel enjoys FTAs with North America and most of Western Europe

that cover close to 80% of Israel's foreign trade31

. Another important FTA was recently signed with

MERCOSUR, the Latin American regional trade union (comprising of Brazil, Argentina, Uruguay and

Paraguay). This FTA gives Israel strategic access to Brazil, which is viewed globally as an emerging

economy. Please refer to Appendix for list of FTAs.

27 No Author. "Israel: A Resilient Global Economy." Invest in Israel. Ministry of Industry, Trade & Labor State of Israel, 5 Dec. 2012. Web.

<http://www.investinisrael.gov.il/NR/exeres/75A535CF-BCC7-4A06-9E24-88EAC7EC67C0.htm>. 28 No Author. "Israel: A Resilient Global Economy." 29

No Author. "Israel: A Resilient Global Economy." 30

No Author. "Israel: A Resilient Global Economy." 31

No Author. "Israel: A Resilient Global Economy."


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International R&D Programs Similar to its initiative to increase free trade, Israel has developed an extensive network of international

R&D accords that foster industrial and technological cooperation with many countries32

. Specifically,

Israel has created: Bi-national R&D funds, Bi-national R&D Agreements, and an E.U. Sixth Framework

Program, all of which allow foreign investors to take advantage of Israel’s highly talented labor force33

.

These programs have proven to be remarkably successful. Israel has established Bi-national funds with:

the U.S., Britain, Canada, Singapore, and Korea, as well as with the Canadian Province of Ontario, and

the Australian State of Victoria. Bi-national R&D Agreements have been established with 13 countries:

France, Germany, Italy, India, China, and others. The country is the prime vehicle for tech R&D of the

European Union with the E.U. Sixth Framework Program34

.

Foreign Direct Investment Removing barriers to trade and opening capital markets has served the Israeli economy extremely

well. Economic openness contributed significantly to Israel's growth and its increased economic

efficiency; growth has been fueled largely by steady increases in both exports and foreign

investment. The international investment community has continued to show faith in Israel's economic

potential, increasing investments in the country from abroad. Foreign Direct Investment [“FDI”] in Israel

reached $4.4Bin 2009, and $5.1B in 2010. By 2011, FDI reached $11 billion35

. The Bank of Israel was

ranked 1st among Central Banks for its efficient functioning, up from 8

th in 2009. Israel was also ranked as

the worldwide leader in its supply of skilled manpower.

The tangible result of all this is an economy valued by equity markets for its growth potential and by debt

markets for its maturity and stability. A wave of public stock offerings this decade in various global

capital markets has brought approximately 100 Israeli companies to the NYSE, NASDAQ and AMEX

equity markets. No other foreign country, apart from Canada, is so heavily represented on Wall Street.

Most of these stocks are of high-tech companies traded on NASDAQ, and over a dozen of them now have

market capitalizations [“market caps”] of over $500M. This exclusive “club” includes a number of well-

known world leaders in their fields, such as ECI Telecom, Comverse Technology and NICE Systems

(telecom equipment), Orbotech (optical inspection), Scitex and Indigo (digital imaging), and

pharmaceutical giant Teva.

32

No Author. "Israel: A Resilient Global Economy."

33 No Author. "Israel: A Resilient Global Economy."




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Competitive Edge Today, led by a vigorous private sector and encouraged by government policy, Israel has evolved into a

capitalistic economy, dominated by free-market forces, deregulation and competition. Israel invests about

4.25% of its GDP in R&D, which is the highest ratio of any country in the world36

. Due to high returns on

investment (ROI) and innovative technology development, Israel has become a preferred investment

choice among global leaders. Investments by multinational companies have been made in Israel by:

Microsoft, Berkshire-Hathaway, Motorola, Intel, HP, Siemens, Google, Samsung, GE, Philips, Lucent,

AOL, Cisco, IBM and J&J, among others. Israel is ranked 2nd

in the world for availability of qualified

scientists and engineers and second in terms of total public expenditure on education as a percentage of

GDP37

. However, Israeli innovation is borne of necessity: 1.) Israel is arid, so citizens excel at water and

agricultural technology, 2.) there is little oil, so Israelis had to find alternatives, 3.) the country is

surrounded by enemies, so military technology is superb and creates lucrative spin-offs (especially in

communications), 4.) the relationships that Israelis forge during military service have carried over into

civilian life and manifested in strong business relationships38

.

In addition to the intellectual capital that gives Israel a comparative advantage, Israeli managers were

ranked 2nd

in the world for their business entrepreneurship, according to IMD Global Competitiveness

Yearbook 201239

. Since its inception, and fortified by the resolve of the nation, post Yom-Kippur War, to

become more self-sufficient (late 1960s and early 1970s), Israel has been a hotbed for both start-ups and

VC. Between the ideal conditions for innovation (education and workforce), Israel will continue to be 1st

in the world for number of start-ups per capita (currently 4,000 active technology start-ups), providing its

entrepreneurs with the necessary backing to turn their innovative ideas into profitable businesses40

.

Israeli Accounting Regulations41

Since January 1, 2008, Israeli companies have been required to follow the International Financial

Reporting Standards (IFRS) for all organizations, with a few notable exceptions:

1. Banks must follow United States style GAAP Accounting Standards, which has become the de-

facto world standard to ensure comparables.

36 No Author. 2012 Results: World Competitiveness Yearbook. Publication. IMD, n.d. Web. 05 Feb. 2013.

<http://www.imd.org/research/publications/wcy/World-Competitiveness-Yearbook-Results/>. 37

2012 Results: World Competitiveness Yearbook. Publication 38

The Economist Staff. "What next for the Start-up Nation." Theeconomist.com. N.p., 21 Jan. 2012. Web.

<http://www.economist.com/node/21543151>. 39 "Israel: A Resilient Global Economy." 40 No Author. 2012 Results: World Competitiveness Yearbook. Publication 41 "IAS Plus." Israel -. N.p., n.d. Web. 18 Feb. 2013.


13 |F I N A N C E 6 2 6

2. Companies who have joint operations and are cross listed between the United States and Israel

may elect to use GAAP or IFRS standards for their listings.

Israeli Accounting Standards (IAS) are now listed as fully compliant with IFRS, and any changes in the

IFRS will automatically cascade down to the IAS. For a list of IFRS/GAAP Comparisons, please refer

to Appendix.

Financial Statement Format Companies adhering to IFRS use a similar format for their financial statements; investors who compare

financial statements from companies operating in different countries can place the statements next to each

other. The gross margin, operating income and net income fall in the same locations on the statements.

The balance sheet, the statement of cash flows and the retained earnings statement also follow similar

formats. Investors enjoy the advantage of evaluating financial statements with east due to format

similarity. 42

Understandability End users also enjoy the advantage of understanding the financial data communicated, whether it comes

from their country or a different one. IFRS accounting principles require that all companies follow the

same guidelines. When the end user understands these guidelines for a company in one country, she can

assume that all companies in compliance with IFRS follow the same guidelines. 43

Global Comparability The international community reaps the reward of comparing the financial statements from a company in

one country to a company in another country. They can access the financial statements either as a hard

copy or electronically via the Internet. The end user compares the net income and calculates financial

ratios for different companies.44

Advantages Two of the key advantages this system can provide in the context of Israel are the R&D capitalization vs.

expense difference, and the revenue recognition element. Because R&D costs can be capitalized, firms

that heavily rely on new and emerging technologies to drive their future development will appear to be

more favorable vis-a-vis a US firm with identical products. Additionally, revenues can be recognized with

greater flexibility, allowing for potentially faster revenues hitting the top line, with massive downstream

impacts. Over the last few years, more nations have converted to the IFRS standards. As an emerging

42 "IFRS and US GAAP: Similarities and Differences." PwC. N.p., n.d. Web. 18 Feb. 2013. 43 "IFRS and US GAAP: Similarities and Differences." PwC. N.p., n.d. Web. 18 Feb. 2013. 44 "IFRS and US GAAP: Similarities and Differences." PwC. N.p., n.d. Web. 18 Feb. 2013.


14 |F I N A N C E 6 2 6

economy, the advantages in comparability to other established economies have profound impacts on PE,

as informational equality makes it easier to vet potential investments, and due to their compliance with

these standards through the required audits, a high degree of insurance as to the informational integrity

allows for greater investor confidence. 45

Tax Rate Comparison, US and Israel46

Israel has a lower marginal corporate tax rate than the United States. Over the last decade, Israel has been

consistently cutting its marginal rate with the intention of continuing to spur investments and encourage

greater profitability vis-a-vis their US counterparts. The exhibit below traces these marginal rates over the

10 year period from 2001 through 2011.

Exhibit (4): Marginal Corporate Tax Rates, 2001 - 2011

Country 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Israel (%) 36 36 36 36 34 31 29 27 26 25 24

United States (%) 30 30 35 30 30 30 30 25 25 40 40

Allowing more corporations to retain a greater amount of their earnings, more capital would be available

for further R&D, employment, and exploratory research for new markets. This corporate income tax

differential creates a competitive advantage when it comes to Foreign Direct Investment (FDI), and

makes Israel a favorable tax haven relative to many areas in the west. Israel’s personal income tax is a

graduated tax scale that is a steeper rate than the United States, with the marginal tax rate in Israel for

2012 listed at 48% (U.S. Rate: 35%)47

.

Further enticing foreign investment in Israel, the tax code allows for those that reside outside of Israel for

183 days a year or more, to be exempt from paying Israeli tax on capital gains, dividends and interest

paid. This is based on the assumption that taxes will be paid in the resident’s home country. For Israeli

residents, there is a relatively low tax on capital gains: 15% for gains on adjustable and fixed-rate bonds

as well as on non-inflation-indexed interest, and 20% on all other gains. These rates apply to all holding

durations. 48

45

"IFRS and US GAAP: Similarities and Differences." PwC. N.p., n.d. Web. 18 Feb. 2013. 46 http://www.investinisrael.gov.il/NR/exeres/51BFA8E2-F457-4E6A-B282-3D714A1A047A.htm 47

http://www.investinisrael.gov.il/NR/exeres/51BFA8E2-F457-4E6A-B282-3D714A1A047A.htm 48

http://www.investinisrael.gov.il/NR/exeres/51BFA8E2-F457-4E6A-B282-3D714A1A047A.htm


15 |F I N A N C E 6 2 6

Capital Markets The Tel Aviv Stock Exchange [“TASE”] is the only public market for trading securities in Israel, and as

such, plays a major role in the economy. TASE lists 736 companies, 130 of which are also listed on stock

exchanges in other countries. TASE also lists some 180 exchange-traded funds, 60 government bonds,

500 corporate bonds, and more than 1000 mutual funds49

. However, due to international interest in Israeli

companies, many Israeli start-ups are not listed on the TASE.

Bonds

In addition to a stock market, the Tel Aviv Stock exchange boasts a liquid market for both government

and corporate bonds. Structurally, bonds can be bought and sold instantaneously online, like stocks, and

typically feature small bid-ask spreads. Like the U.S., Israeli Government Bonds and corporate

debentures include short, mid and long-term fix-rate and variable-rate bonds, as well as the cost-of-living

indexed bonds50

. Daily bond trading volume is $760 million51

. Bonds, and more specifically High-Yield

Bonds, increase PE firm’s ability to enter into deals with Israeli companies, access debt, and “lever-up.”

As PE matures in Israel, we believe this access to debt will be a discerning factor for cross-border PE

firms looking to do business with Israeli companies. Just recently (December 17, 2012), the first Israeli

High-Yield Bonds were listed on an exchange, the Luxembourg Stock Exchange52

. We believe this listing

indicates the business environment is becoming more attractive for cross-border PE.

Stocks

There are 736 companies listed on the TASE. Some of the listed companies are local corporations with

less than $2.5M market caps, while others are international powerhouses with over $50B in market cap,

such as Teva Pharmaceutical Industries53

. Including convertible bonds (which behave like stocks), there

are over 1,000 stocks traded in the Israeli stock market, with a total daily volume of $800 million54

.

Securities on the TASE are bought and sold in Israeli Shekels (NIS)55

. This is an advantage to

participating in the TASE, as it provides foreign investors currency diversification. For PE companies that

are interested in making an investment in public Israeli companies, the TASE has an automated exchange

49

"TASE." TASE. Tel Aviv Stock Exchange, n.d. Web. 05 Feb. 2013. <http://www.tase.co.il/eng/pages/homepage.aspx>. 50

No Author. "Israeli Investment." 51

No Author. "Israeli Investment." 52

No Author. "Listing News." Luxembourg Stock Exchange. N.p., 17 Dec. 2012. Web. 15 Feb. 2013. <https://www.bourse.lu/listing-news/high-

yield-israeli-bonds>.

53 "TASE." TASE. Tel Aviv Stock Exchange, n.d. Web. 05 Feb. 2013. <http://www.tase.co.il/eng/pages/homepage.aspx>.

54 No Author. "Israeli Investment."

55 No Author. "Israeli Investment."

http://www.wisemoneyisrael.com/2011/06/08/why-government-bonds-are-not-boring/


16 |F I N A N C E 6 2 6

system that allows for continuous, simultaneous and instantaneous electronic trading. This system ranks

with the most advanced trading systems used by the world’s leading stock exchanges56

.

Exhibit (5): TASE Trading Statistics (1998-2010)

Year

Daily Turnover

(US$ millions)

Capital Raised in Israel

(US$ billions)

Number of Listed

Companies

Thereof: New Listed

Companies

1998 62 2.0 662 14

1999 86 0.8 654 13

2000 115 2.6 665 37

2001 64 0.8 649 14

2002 51 0.7 624 9

2003 80 0.7 577 4

2004 147 1.6 578 25

2005 223 2.7 584 32

2006 326 2.7 606 44

2007 505 5.2 654 62

2008 547 5.0 642 2

2009 432 2.0 622 4

2010 547 3.6 613 22

Source: TASE57

Additionally, unique to Israel, is access to U.S. capital markets. Currently, there are 60 Israeli companies

listed on the NASDAQ exchange totaling $60.3B in market cap.

Exhibit (6): Israeli Companies Listed on NASDAQ by Sector58

Specifically, pharmaceutical (largely Teva Pharmaceuticals) and technology companies have the highest

ranking market caps. This implies that the political structure and relationship between Israel and the U.S.

enables better access to capital as well as exit opportunities for those that invest in Israeli start-ups

focusing in pharmaceuticals, biotech, or technology. Given the large R&D spend in Israel along with

56

"TASE." 57

"TASE."

58 No Author. Israeli Companies Listed on Nasdaq. 07 Feb. 2013. Online. http://www.nasdaq.com/screening/companies-by-

region.aspx?region=Middle+East&country=Israel

Industry Nasdaq Market Cap

Major Pharmaceuticals 35,236,504,692$

Computer Software: Prepackaged Software 11,672,487,527$

Computer Manufacturing 2,277,594,178$

Telecommunications Equipment 1,739,584,212$

Military/Government/Technical 1,572,672,003$

Computer Communications Equipment 1,491,945,910$

Biotechnology: Biological Products (No Diagnostic Substances) 888,768,281$

Business Services 857,787,699$

Building Materials 655,345,318$

Electronic Components 635,674,666$

Semiconductors 623,528,876$

Medical/Dental Instruments 507,586,031$

EDP Services 494,911,848$

Industrial Machinery/Components 481,985,761$

Radio And Television Broadcasting And Communications Equipment 402,997,304$

Biotechnology: Electromedical & Electrotherapeutic Apparatus 365,404,585$

Department/Specialty Retail Stores 164,088,029$

Food Distributors 70,969,120$

Computer peripheral equipment 64,852,421$

Aerospace 61,196,627$

Building operators 39,817,333$

Real Estate 21,765,798$

Electrical Products 7,620,131$

Grand Total 60,335,088,347$


17 |F I N A N C E 6 2 6

great access to public capital for IPOs, both domestically and in the U.S., VC in Israel (both international

and domestic) as an industry has been able to flourish. As it relates to PE, access to both foreign and

domestic stock markets give PE firms exit opportunities.

Exit Opportunities The TASE includes market makers to provide liquidity for traded securities, which is good in the event

that an International PE/VC investor needs to exit its position. The market provides investment

mechanisms for both long and short sellers, margin account, and leveraged investments59

. According

to IVC, 2012 was Israel’s best year for hi-tech M&A in a decade, yielding $9.95Bin exits60

. After years of

“tightening the belt” at U.S. tech firms, which saw the decimation of R&D departments in order to satisfy

investors and Wall Street analysts alike, many have turned to Israel as a solution. Israel is more than

happy to sell. Another popular exit strategy amongst PE/VC investors is the IPO. In 2012, however, there

was not a single IPO of a current or former Israeli company61

. This is atypical, especially since NASDAQ

IPOs soared 13.6%62

. Despite 2012, which is in our estimation, an anomaly, IPO, either in or outside of

Israel remains an efficient and an attractive exit opportunity. With the fiscal cliff solved, and the

willingness of investors to deploy capital, as well as PE/VC firms ready to exit (knowing where the

capital gains tax has settled), 2013 and has the makings of prosperous IPO market.

Exhibit (7): Israeli high-tech capital raising 2002-2012 ($M)

59

Shapiro, Levi. "Israeli Tech Funding & Exits in 2012: Plenty of Chutzpah but Show Me Your Instagram | Jerusalem Post - Blogs." Israeli Tech

Funding & Exits in 2012: Plenty of Chutzpah but Show Me Your Instagram | Jerusalem Post - Blogs. The Jerusalem Post, 14 Jan. 2013. Web.

05 Feb. 2013. <http://blogs.jpost.com/content/israeli-tech-funding-exits-2012-plenty-chutzpah-show-me-your-instagram>. 60

Shapiro, Levi. “Israeli tech funding & exits in 2012: Plenty of chutzpah but show me your Instagram”. 61

Shapiro, Levi. “Israeli tech funding & exits in 2012: Plenty of chutzpah but show me your Instagram”. 62

Shapiro, Levi. “Israeli tech funding & exits in 2012: Plenty of chutzpah but show me your Instagram”.


18 |F I N A N C E 6 2 6

Exhibit (8): The Global Venture Capital and Private Equity Country

Attractiveness Index - 2012

Source: http://blog.iese.edu/vcpeindex/63

Trends in Israeli Private Equity and Venture Capital

According to IVC research and corporate law firm GKH, buyout activity in Israel is increasing with the

software sector as the biggest driver. In 2012, Apax and JMI Equity bought out Paradigm Geophysical, an

Israeli oil and gas software specialist, for $1 billion64, 65

. According to Rick Mann, managing of GKH, two

recent drivers were seen in the Israeli M&A market. Given the economic downturn after financial crisis, a

number of larger Israeli shareholder groups needed to de-lever and improve liquidity. In response, Israel’s

Concentration Committee proposed legislation in early 2012 that would restrict the use of pyramid

holding structures as well as prohibit cross-holding in financial and non-financial companies. The thought

is that this promotes the break-up of cross-economy conglomerates66

the proposed legislation requires the

sale – during a limited transition period - of several large Israeli companies, particularly in the fields of

insurance, banking and asset management67

. Although the high-tech sector still attracts most of the

attention from private equity firms, given the pending regulatory reforms, openness to foreign investment

and growing familiarity with private equity, more opportunities for private equity firms will result from

proposed legislation.

63

No Author. http://blog.iese.edu/vcpeindex/ 64

Kiel Porter ,‘Tech sector boosts Israeli buyout industry’, Feb 2, 2013 65

Shelach, Shmulik. “Apax, JMI buy Paradigm Geophysical for $1b.” Globes. 11 Jun. 2012.

http://www.globes.co.il/serveen/globes/docview.asp?did=1000756260&fid=1725 66

Bruclhaus, Deringer, Freshfields, ‘Focus on Israel: trends in private equity activity.’ 67

Kiel Porter ,‘Tech sector boosts Israeli buyout industry.’


19 |F I N A N C E 6 2 6

Summary of Deals: Role of Public Companies and Private Equity Sponsorship

Israeli Deal Statistics Summary

To summarize the deal statistics, out of a sample of 513 deals, the biggest deal was $8.8B and smallest

deal was $1M. The average deal size was $151.5M with a standard deviation of $687.5M. The deal

statistics is highly skewed towards the top 10 deals, which collectively were $38.1B, which is 55.9% of

all deal dollar volume. A total of 57 deals (11.1% of all deals) made up 80% of deal volume. For deals

involving PE, the average deal size was $129.5M with a standard deviation of $339.0M. This shows that

PE deals in Israel have not reached the same magnitude of deals witnessed within the U.S. and is likely to

continue developing and grow over time.

Table (1): Deal Size Distribution

The pharmaceutical industry was the most active M&A sector in between 1998-2012 and was led by Teva

Pharmaceuticals, a public large scale generic drug manufacturer through strategic acquisitions to bolster

its generic business portfolio. Acquisitions have enabled Teva to extend the reach of its generic drug

businesses internationally, while increasing its ability to partner with large international pharmaceutical

companies and develop better generics. However, most of Teva’s acquisitions were public companies, but

none included PE. Specifically, the $6.3B acquisition of Cephalon, helped Teva expand into branded

pharmaceuticals. In total, Teva Pharmaceuticals drove 39.4% of total deal M&A dollar volume ($27.6B

out of $69.9B) during 1998-2012 through 9 total acquisitions. Six deals were U.S. Targets, only one deal

was domestic, and 8 out of their 9 deals were friendly transactions where they were the sole bidder. The

$-

$1,000.0

$2,000.0

$3,000.0

$4,000.0

$5,000.0

$6,000.0

$7,000.0

$8,000.0

$9,000.0

$10,000.0

Distibution of Deals by Size ($M)

PE Not Involved PE Involved


20 |F I N A N C E 6 2 6

remaining deals, excluding Teva, total $38.6B, with $21.8B driven around semiconductors ($5.4B),

software ($4.3B), machine tools ($4B), telecom ($5.2B), IT Services ($1.6B), and real estate operations

($1.3B), all totaling $21.8B.

During 1998-2012, only 29 deals involved PE firms, totaling $3.8B out of $69.9B (M&A dollar volume)

total transaction value. Most deals were centered in the prepackaged software and computer facilities

management industries. The largest deal involving PE took place in the telecommunication industry by

012 Smile Communications Ltd.’s in 2010. The strategic acquisition of Bezeq: The Israeli

Telecommunications Corp. Ltd, in which 012 Smile Communications purchased the company from

Apax-Saban-Arkin Group, was valued at $1.8B. 012 Smile Communications then rolled Bezeq into B

Communications as a publicly traded entity. A consortium of PE firms, Apax-Saban-Arkin Group, had

privatized Bezeq in 2005 from the Israeli government by acquiring a 30% stake valued at $923M68

. After

five year holding period, the exit of this deal led to an IRR of only 14% with an absolute return of nearly

91%.

The most active firm involving PE was Ness Technologies, which focuses on software engineering,

enterprise applications and services, and distribution of other software businesses. The Israeli based

company based was backed by U.S. PE firms Warburg Pincus and Warburg Pincus Ventures. In 1999,

Warburg Pincus Ventures made its first Israeli outlay, a $35M investment in Ness, enabling the company

to make several strategic acquisitions prior to going public on the NASDAQ69

. These acquisitions allowed

the company to scale up operations with hopes of a higher exit multiples for the PE investors and

founders. On October 1, 2004 Ness held a share price of $12.75 with 38.29 million shares valuing the

company at $488M 70,71,72,73,74,75

. Even when Ness was public, Warburg was still one of its largest holders.

Ness continued to grow via strategic acquisition. During 2006-2010, Ness Technologies made 6

68

No Author. Apax Partners. http://www.apax.com/news/apax-news/2005/october/apax-partners-funds,-saban-capital-group-and-arkin-

communications-(apax-saban-arkin-group)-completes-acquisition-of-controlling-interest-in-leading-israeli-telecom-company-bezeq.aspx 69

Yacoby, Ella. “Warburg Pincus Ventures Leads $35 Mln Investment in Ness Technologies.” Globes, 22 Nov. 1999. Online.

http://archive.globes.co.il/searchgl/Warburg%20Pincus%20Ventures%20Leads%20$35%20Mln%20Investment%20in_h_hd_0L38tDJ0pN3CtEJarE2veT6ri.html

70 Alfassy, Yanay. “Ness Technologies buys BlueFlame for $5 mln.” Globes. 04 Nov. 2001. Online.

http://archive.globes.co.il/searchgl/Ness%20Technologies%20buys%20BlueFlame%20for%20$5%20mln_h_hd_0L3GoD30rN3KpCp4uDove

T6ri.html 71

The Market.com Staff. “Ness paying $16m for Czech company APP Group.” The Street. 24 Sept. 2002. Online.

http://www.thestreet.com/story/10043872/1/ness-paying-16m-for-czech-company-app-group.html 72

No Author. IANS. “Israel's Ness buys APAR Infotech for $78 M.” Silicon India News. 14 May 2003. Online.

http://www.siliconindia.com/shownews/Israels_Ness_buys_APAR_Infotech_for_78_M-nid-19478-cid-2.html 73

Konfortas, Yehuda. “Ness Technologies Targets Global Growth”. InformationWeek. 01 Aug. 2005. Online.

http://www.informationweek.com/ness-technologies-targets-global-growth/165700804 74

Yachin, Dan. “Pulling the strings: Warburg Pincus and Ness Technologies share a vision of global expansion.” Globes, 13 May 2003.

http://archive.globes.co.il/searchgl/Warburg%20Pincus%20and%20Ness%20Technologies%20share%20a%20vision_s_hd_0L3KrCZOsN3Ou

DpamDYveT6ri.html 75

Google Finance, Ness Technologies Historical Share Price. http://www.google.com/finance?cid=696018


21 |F I N A N C E 6 2 6

additional strategic acquisitions: 2 in the U.S. valued at $36M, 3 in Europe valued at $105M, and 1 in

Israel valued at $20M. However, due to the rapid expansion and loss in market value, Ness was taken

private after losing nearly $330M in value from its 2006 peak. A merger of subsidiaries was completed in

which Citi Venture Capital International [“CVCI”] purchased Ness for $7.75 per share, a transaction

valued at $307M.76

Ness is part of the growing history of IT Services and tech development within Israel,

specifically around VC. Privatizing Ness is likely to lead to restructuring, followed by another spin off,

and future financial gains for CVCI.

Only one deal involved a PE firm as a direct acquirer: In 2005, GIMV77

, a European investment firm,

acquired Genesis Partners III78

, an Israeli venture capital firm focused on seed and early-stage technology

start-ups. Given the growing entrepreneurial environment, and the likelihood of good exits, it seems that

the secondary market for the fund was a good acquisition target. Additionally, only two deals involved PE

sponsorship of the direct target. One, Aryt Industries purchased Pionet Ventures Capital in order to roll its

medical segment into that entity.79

However, since acquisition, it seems that Aryt has shifted its strategy,

formerly dedicated to Medtech, now primarily focused on military technology and electronic detonators.

One unique deal involved a finance tech start-up. Fundtech LTD., founded in 1993, was a software

product that facilitated electronic payments, prior to the tech bubble. The company was privately invested

in by large Israeli and U.S. PE and VC funds80

. Due to the favorable market for IPO exits, Fundtech went

public March 17, 199881

and was listed on the NASDAQ from then until November 2011, when it was

taken private by GTCR, a Chicago PE firm82

. During the time the company was public, a large Israeli

company – Clal Industries and Investments [“CII”] led large purchases from the private equity companies

holding Fundtech equity.

Private Equity Involved In Transaction

The trend of PE involvement as a percent of total deals has been increasing since 1998, where PE was

involved in 5.7% of deals, and more pronounced since 2005. However, the majority of deal volume

76

Globes’ Correspondent. “Ness Technologies merger completed.” Globes. 16 Oct. 2011. Online.

http://www.globes.co.il/serveen/globes/docview.asp?did=1000690349&fid=1725 77

GIMV, About Us, https://www.gimv.com/view/nl/387051-+Over+Gimv+.html 78

Genesis Partners, About Us – Investment Approach, http://www.genesispartners.com/content.asp?page=Investment_Approach 79

The Marker.com Staff. “Aryt Industries to incorporate medical activity into Pionet Venture Investments”. The Street.com. 02 Oct. 2002.

Online. http://www.thestreet.com/story/10008678/1/aryt-industries-to-incorporate-medical-activity-into-pionet-venture-investments.html 80

Eshel, Tamir. “Apax Leumi Invests $2 Mln in Fundtech”. Globes. 12 June 1997. Online

http://www.globes.co.il/serveen/globes/docview.asp?did=352463 81 Ginsburg, Ami. ”First Wall Street Trading Day, Fundtech Streaks Ahead 43” Globes. 17 Mar. 1998. Online.

http://www.globes.co.il/serveen/globes/docview.asp?did=358920 82

Fundtech Authors. “About Fundtech” Online. http://www.fundtech.com/about/


22 |F I N A N C E 6 2 6

(share of deal dollar volume) still is in favor of non-PE involvement mainly driven by Teva

Pharmaceuticals’ large transactions. As the PE market continues to mature, the trend will likely increase

in favor of PE firms involvement in both frequency of deals and size of deal.

Table (2): PE Involvement in Deals

Given the limited number of transactions that involve PE, we see that over the period of time reviewed

(1998-2012); most of PE’s involvement was not in either direct acquisition or direct selling. PE appears to

make an indirect impact on deals, sponsoring either the target or acquirer, and creating value for their

portfolio companies before exiting through acquisition or IPO.

Table (3): PE Impact on Target/Acquirer or Sponsor on Deal Size

PE’s indirect involvement, through sponsorship to the target or seller (31% of volume and 50.8% of

volume respectively), does have an impact on deals. It is interesting to note that the highest deal average

went to those firms where PE was involved on the target’s or seller’s, side compared to the acquirer’s

side, indicating that PE firms command a premium in sales price (Table 4).

PE Invovlement Trend (% of Deal $M) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Grand Total

Share of Volume PE Not Involved 99.68% 79.08% 92.67% 100.00% 99.74% 100.00% 100.00% 98.77% 99.85% 87.53% 99.40% 97.91% 34.14% 97.88% 99.72% 94.63%

Share of Volume PE Involved 0.32% 20.92% 7.33% 0.00% 0.26% 0.00% 0.00% 1.23% 0.15% 12.47% 0.60% 2.09% 65.86% 2.12% 0.28% 5.37%

Grand Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

PE Invovlement Trend (% of Deal Count) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Grand Total

Share of Volume PE Not Involved 97.50% 95.45% 96.83% 100.00% 93.33% 100.00% 100.00% 91.89% 98.00% 90.20% 97.22% 89.47% 82.14% 90.91% 90.32% 94.35%

Share of Volume PE Involved 2.50% 4.55% 3.17% 0.00% 6.67% 0.00% 0.00% 8.11% 2.00% 9.80% 2.78% 10.53% 17.86% 9.09% 9.68% 5.65%

Grand Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Private Equity Involvement Sum of Transaction Value ($mil) Private Equity Involvement Sum of Transaction Value ($mil) Private Equity Involvement Sum of Transaction Value ($mil)

Acquirer Not PE Backed 69,884$ Target Not PE Backed 69,890$ PE Not Involved 66,139$

Acquirer PE Backed 10$ Target PE Backed 4$ PE Involved 3,755$

Grand Total 69,894$ Grand Total 69,894$ Grand Total 69,894$

Private Equity Involvement % of Dollar Volume Private Equity Involvement % of Dollar Volume Private Equity Involvement % of Dollar Volume

Acquirer Not PE Backed 99.99% Target Not PE Backed 99.99% PE Not Involved 94.63%

Acquirer PE Backed 0.01% Target PE Backed 0.01% PE Involved 5.37%

Grand Total 100.00% Grand Total 100.00% Grand Total 100.00%

Private Equity Involvement Average of Transaction Value ($mil) Private Equity Involvement Average of Transaction Value ($mil) Private Equity Involvement Average of Transaction Value ($mil)

Acquirer Not PE Backed 136$ Target Not PE Backed 137$ PE Not Involved 137$

Acquirer PE Backed 10$ Target PE Backed 2$ PE Involved 129$

Grand Total 136$ Grand Total 136$ Grand Total 136$


23 |F I N A N C E 6 2 6

Table (4): PE Firm Involvement

Given that the majority of PE’s involvement occurs through indirect activity, it is possible to ascertain

that the acquisition or divestiture of parts of their holding company is done to generate value creation

through restructuring, or adding value as seen in the history and transaction of Ness Communications.

From acquirer side, the majority of transactions where PE sponsored the acquirer, value were created in

prepackaged software through total deals, average size of deal and the mix of deals. Most deals took place

in the technology sector, and we expect to see more deals in this space as the sector continues to grow and

mature (Table5).

PE Invovlement Sum of Transaction Value ($mil)

Acquiror 10$

Financial Sponsor to Acquiror 1,169$

Financial Sponsor to Seller 1$

Financial Sponsor to Seller Immediate 16$

Financial Sponsor to Target 1,907$

Financial Sponsor to Target Immediate 135$

Seller 512$

Target 4$

Grand Total 3,755$

PE Invovlement Mix of PE Involvement

Acquiror 0.3%

Financial Sponsor to Acquiror 31.1%

Financial Sponsor to Seller 0.0%

Financial Sponsor to Seller Immediate 0.4%

Financial Sponsor to Target 50.8%

Financial Sponsor to Target Immediate 3.6%

Seller 13.6%

Target 0.1%

Grand Total 100.00%

PE Invovlement Average of Transaction Value ($mil)

Acquiror 10.00$

Financial Sponsor to Acquiror 89.95$

Financial Sponsor to Seller 1.07$

Financial Sponsor to Seller Immediate 16.00$

Financial Sponsor to Target 272.45$

Financial Sponsor to Target Immediate 135.00$

Seller 170.81$

Target 1.81$

Grand Total 129$


24 |F I N A N C E 6 2 6

Table (5): PE Involvement by Sector

On the target side, value was created in the information retrieval industry (telecom), when Bezeq was

taken private, moved to B Communications, and listed on the NASDAQ.

PE Invovlement - Sponsor to Target Sum of Transaction Value ($mil)

Information Retrieval Services 1,763$

Prepackaged Software 74$

Electromedical Equipment 30$

Space Vehicle Equipment, Nec 26$

Business Services, Nec 13$

Grand Total 1,907$

PE Invovlement - Sponsor to Target Mix of Transactions

Information Retrieval Services 92.46%

Prepackaged Software 3.90%

Electromedical Equipment 1.57%

Space Vehicle Equipment, Nec 1.38%

Business Services, Nec 0.68%

Grand Total 100.00%

PE Invovlement - Sponsor to Target Average of Transaction Value ($mil)






Grand Total 272$

PE Invovlement - Sponsor to Acquirer Sum of Transaction Value ($mil)






Grand Total 1,907$

PE Invovlement - Sponsor to Acquirer Mix of Transactions

Information Retrieval Services 92.46%

Prepackaged Software 3.90%

Electromedical Equipment 1.57%

Space Vehicle Equipment, Nec 1.38%

Business Services, Nec 0.68%

Grand Total 100.00%

PE Invovlement - Sponsor to Acquirer Average of Transaction Value ($mil)






Grand Total 272$


25 |F I N A N C E 6 2 6

Deal Solicitation Trends in solicited deals have declined recently (Table 4). This indicates that firms have a need for exit;

firms may be distressed and in need of liquidity, which we believe is the biggest driver of solicited deals.

In contrast a firm without liquidity problems and is looking for an exit on their own accord during periods

of increased deal solicitation, have their exit prices driven downs as well. Our data reveals that only 3.5%

of deal volume (by dollars) is said to be “solicited.” This means the target was an active divestiture and

the deal is friendly. On average, deals were roughly the same size whether solicited or unsolicited.

Table (6): PE Impact on Deal Solicitation

Tables (7): Share of Solicited Deals

Table (8): Impact of PE on Deal

Solicitation

0%

10%

20%

30%

40%

50%

60%

75%

80%

85%

90%

95%

100%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unsolicited Solicited Solicited by $ Volume %

Deal Type Total Value of All Transactions ($Mil)

Unsolicited 67,435$

Solicited 2,459$

Grand Total 69,894$

Deal Type % of Dollar Volume

Unsolicited 96.48%

Solicited 3.52%

Grand Total 100.00%

Deal Type Average of Transaction Value ($mil)

Unsolicited 136$

Solicited 145$

Grand Total 136$

Deal Type (PE Involved) Total Value of All Transactions ($Mil)

Unsolicited 3,620$

Solicited 135$

Grand Total 3,755$

Deal Type (PE Involved) % of Dollar Volume

Unsolicited 96.40%

Solicited 3.60%

Grand Total 100.00%

Deal Type (PE Involved) Average of Transaction Value ($mil)

Unsolicited 129$

Solicited 135$

Grand Total 129$

24 |F I N A N C E 6 2 6

Additionally, whether a deal is solicited or not, the mix of deal volume that involved PE firms has not

changed much. This indicates that PE firm involvement does not impact whether or not the deal is

solicited or unsolicited. This is shown by percent of deal volume and percent of deals, 3.45% when PE is

involved versus 3.31% when PE is not involved.

When reviewing whether deals began as rumors, only 14% of deal volume (representing only 4 deals at

0.78% of all deals) started as rumors, however, the average transaction size of those rumors was $2.5B

versus non rumors of $118M. This information is skewed by the largest acquisition in Israel during this

time period which was Teva/Barr Pharmaceuticals. None of the deals that started as rumors involved

private equity, which is largely due to the expectation that PE deals are looking to generate returns and

have dedicated timelines for exits. Therefore, a deal rumor is unlikely.

Table (9): Share of Deals Starting as Rumor

Overall, we do not see much deal solicitation in the Israeli market, and part of this is driven by the infancy

of buyouts by PE in Israel. PE’s involvement in deal solicitation is also a function of time, which drives a

firm’s decision for entrance/exit.

Investment Banks and Legal Advisors

Prompted by Humphrey-Jenner, Sautner, and Suchard’s hypothesis that PE will rely on Top Tier banks or

law firms when information is poor, we investigated the frequency in which investment banks and legal

advisors were used in Israel when PE was or was not involved.83

Our analysis of all transactions from

1998-2012 shows that out of all M&A deals, 18.1% of acquirers used a bank for advisory services and

19.8% of targets used bank services. However, when the transaction is cross-border, the likelihood of uses

83 Humphery‐Jenner, Mark, Zacharias Sautner, and Jo‐Ann Suchard. “Cross‐Border Mergers and Acquisitions: The Role of Private Equity

Firms.” January 2013.

Deal Began As Rumor Sum of Transaction Value ($mil)

Not Rumor 60,041$

Rumor 9,853$

Grand Total 69,894$

Deal Began As Rumor Average of Transaction Value ($mil)

Not Rumor 118$

Rumor 2,463$

Grand Total 136$

Deal Began As Rumor Sum of Transaction Value ($mil)

Not Rumor 85.90%

Rumor 14.10%

Grand Total 100.00%


25 |F I N A N C E 6 2 6

a bank increases to 22.5% and 26.2% respectively, indicating a greater need for due diligence because

of unknown risks and policy of cross-border transactions. These percentages do not vary much when PE

is not involved, and due to the small sample of cross-border deals involving PE, it is difficult to discern

the likelihood of hiring a bank when a PE firm is involved. Based on total number of deals, the

investment banks most involved were: Lehman with 13 total deals (5 acquirer and 8 target), Goldman

Sachs (10 deals; 3 target; 7 acquirer), William Blair (7 deals; 7 target, 0 acquirer), Morgan Stanley (7

deals; 5 target, 2 acquirer), Jeffries (7 deals; 5 target, 2 acquirer), UBS Investment Bank (7 deals; 4 target;

3 acquirer), Deutsche Bank and Houlihan Lokey (7 deals; 3 target; 4 acquirer). Interestingly, we found

that not only are top banks involved in the most deals, they also appear to be more focused on the target

or acquirer side, indicating the service each bank provides best.

When the PE firm was the direct acquirer or sponsor to acquirer, investment banks were used 17% of

transactions for acquirer advice (both deals were Goldman Sachs), while 1/3 of the deals had bank

involvement from the target side. When the PE firm was sponsor to the target (both direct or indirect) or

was the seller, banks were used from the acquirer 44% of deals while the target side only used advisory

22% of deals. Out of the 8 domestic deals, only 1 involved investment banks: a $1.8B deal that involved

JP Morgan Chase and Morgan Stanley. While all other domestic deals were less than $20M, none used

banks on either the acquirer or target side. Given the nature and transparency of the Israeli economy and

governance, most deals involving PE appear to further reduce the need for large investment banks unless

the deal is substantial in size; 14 of 15 deals greater than $500M used a bank. When PE and investment

banks were involved in deals, the size grew to amounts greater than $150M (5 out of 21 total deals where

PE was involved). Additionally, when banks were involved, the average deal was $343.4M versus

$38.9M, an 8.9x premium. The premium increases to 9.7x when PE firms and banks were involved

(Table 10).


26 |F I N A N C E 6 2 6

Table (10): Share of Deals and Impact with Bank Involvement

When evaluating Law Firms that were involved in M&A transactions within Israel, we found that top tier

law firms were used more often. Specifically, 35.2% of acquirers used legal firms while 22.8% used legal

advice. Skadden, Arps, Slate, Meagher & Flom were the firm used most, with a total of 21 deals [acquirer

advisor (8 deals) or the target advisor (13 deals)]. The second most used firm was Morrison & Foerster

with a total of 10 deals (7 targets; 3 acquirer). Similar to when banks are involved, when legal firms are

involved the average deal price increases. This could be driven by either higher premiums or by the fact

that more cash is at stake and thus, more due diligence must be done in order to provide higher returns to

the acquiring company. However, multiples are larger when banks are involved and largest when private

equity firms are part of the transaction.

Table (11): Share of Deals and Impact with Legal Involvement

In summary, the more experience a firm has in a country, the more likely they are to be selected as an

advisor. Another distinguishing factor is whether the experience the firm has is on buy or sell side. The

Bank Involvement Average of Transaction Value ($mil) Multiple

Bank Not Involved 38.9$

Bank Involved 343.4$ 8.8 x

Grand Total 136.2$




Grand Total 129.5$




Grand Total 136.7$

Legal Involvement Average of Transaction Value ($mil) Multiple

Legal Not Involved 37.3$

Legal Involved 358.6$ 9.6 x

Grand Total 136.2$




Grand Total 129.5$




Grand Total 136.7$


27 |F I N A N C E 6 2 6

transaction experience indicates that if an advisor, either a bank or law firm, has experience in buy or sell

side, they are likely to get better terms for their client, rather than being a universal advisor that does both

buy and sell. Also, the data shows that involving both banks and legal advisors increases with the deal

size. The average deal size is nearly 8-15x greater than when an advisor (both bank and legal) is not

involved. Again, part of this may be a premium paid, but it is likely due to the transaction’s size and the

amount of cash at stake.

Exhibit (9): Key Bank and Legal Advisors by Number of Deals

Acquiror Legal Advisor Number

of Deals

Target Legal Advisor Number

of DealsAcquiror Advisors Number of Deals Target Advisors Number of Deals

Weil Gotshal & Manges 8 Skadden, Arps, Slate, Meagher & Flom 13 Lehman Brothers 8 William Blair & Co 7

Skadden, Arps, Slate, Meagher & Flom 8 Morrison & Foerster 7 Goldman Sachs & Co 7 Lehman Brothers 5

Wilson Sonsini Goodrich & Rosati 5 Gibson Dunn & Crutcher 3 JP Morgan & Co Inc 5 Morgan Stanley 5

Brobeck Phleger & Harrison LLP 5 Cleary Gottlieb Steen & Hamilton 3 CIBC World Markets Inc 4 Jefferies & Co Inc 5

Bryan Cave LLP 5 Paul, Hastings, Janofsky & Walker 3 Deutsche Bank 4 UBS Investment Bank 4

White & Case LLP 4 Davies Ward Phillips & Vineberg LLP 3 Houlihan Lokey 4 Houlihan Lokey 3

Willkie Farr & Gallagher 4 Wilson Sonsini Goodrich & Rosati 3 UBS Investment Bank 3 Salomon Smith Barney 3

Latham & Watkins 4 Shearman & Sterling LLP 2 Salomon Smith Barney 3 Citigroup 3

O'Melveny & Myers 4 Proskauer Rose LLP 2 John East & Partners Ltd 3 Deutsche Bank 3

Jones Day 4 Paul, Weiss 2 Citigroup Global Markets Inc 3 Goldman Sachs & Co 3

Morrison & Foerster 3 Lovells 2 Credit Suisse First Boston Corp 3 Thomas Weisel Partners 3

Sullivan & Cromwell 2 Shearman & Sterling 2 Credit Suisse Group 3 Societe Generale 2

Nishimura & Asahi 2 Davis Polk & Wardwell 2 Citi 2 RBC Capital Markets 2

Clifford Chance 2 Dewey, Ballantine, Bushby, Palmer & Wood 2 Jefferies & Co Inc 2 Oppenheimer & Co Inc 2

Arnold & Porter 2 Gray Cary Ware & Freidenrich 2 Morgan Stanley 2 Credit Suisse First Boston 2

Covington & Burling 2 Greenberg Traurig 2 Broadview Associates 2 Bank of America Merrill Lynch 2

Simpson Thacher & Bartlett 2 Foley & Lardner 1 Collins Stewart Ltd 1 Merrill Lynch 2

DLA Piper Rudnick Gray Cary LLP 2 Nixon Peabody LLP 1 Perella Weinberg Partners LP 1 Credit Suisse Group 2

Vinson & Elkins LLP 2 Meitar Liquornik Geva & Co 1 Citigroup 1 Daiwa Sec Capital Markets 2

Greenberg Traurig 2 Freehills 1 Credit Suisse First Boston/ CS 1 JP Morgan 2

Winston & Strawn 2 Chadbourne & Parke 1 Rothschild 1 Broadview Associates 2

Herzog Fox & Neeman 2 Fulbright & Jaworski 1 CIBC Oppenheimer 1 Hambrecht & Quist 2

Cleary Gottlieb Steen & Hamilton 2 Weil Gotshal & Manges 1 Merriman Capital Inc 1 America's Growth Capital 1

Shearman & Sterling 1 Amit Pollak Matalon & Ben-Naftali Erez & 1 Bank of America Merrill Lynch 1 Robert W Baird & Co Inc 1

Fenwick & West LLP 1 Morris Nichols Arsht & Tunnell 1 Needham & Co LLC 1 Citi 1

Sullivan & Worcester LLP 1 Goldfarb Levy Eran & Co 1 Evercore Partners 1 Fleet Boston Corp 1

Fried Frank Harris Shriver & Jacobson 1 Debevoise & Plimpton 1 RBC Capital Markets 1 Communications Equity 1

Osborne Clarke 1 Goodwin Procter LLP 1 Financiere Wargny 1 Generale Bank 1

Frost & Jacobs 1 Eversheds 1 Seymour Pierce Butterfield Limited 1 CIBC World Markets Inc 1

Skadden Arps Slate Meagher & Flom (Inter 1 Gorrissen & Federspiel 1 Barclays 1 BMO Capital Markets 1

Fulbright & Jaworski 1 Troutman Sanders LLP 1 Chase Manhattan Bank PLC 1 Avenir Finance 1

Blank, Rome, Comisky & Mccauley 1 Gowling Lafleur Henderson LLP 1 Hambrecht & Quist Inc 1 Grant Thornton LLP 1

Gibson Dunn & Crutcher 1 Mayer Brown Rowe & Maw 1 Mooreland Partners LLC 1 Rothschild 1

Baker & McKenzie 1 Clifford Chance 1 Alliant Partners 1 Wit Soundview Group Inc 1

Gray Cary Ware & Freidenrich 1 Morgan Lewis & Bockius 1 Morgan Stanley & Co 1 Teather & Greenwood Ltd 1

Pekin & Bayar 1 Willkie Farr & Gallagher 1 Bank of America Corp 1 Advest Inc 1

CMS Cameron McKenna 1 Arnold & Porter 1 Oppenheimer & Co Inc 1 BDO Stoy Hayward 1

Dewey Ballantine LLP 1 Cooley Godward LLP 1 BT Alex. Brown/Wolfensohn 1 Broadview 1

Gross Kleinhendler Hodak Halevy Greenber 1 Bonelli Erede e Pappalardo 1 PricewaterhouseCoopers 1 Morgan Stanley & Co 1

Squire Sanders & Dempsey LLP 1 Heenan Blaikie 1 Unterburg, Towbin Co 1 Imperial Capital LLC 1

Heller Ehrman LLP 1 Pillsbury Madison & Sutro 1 Rosario Capital Ltd 1 Pacific Crest Securities Inc 1

DLA Piper 1 Herbert Smith/Gleiss Lutz/Stibbe 1 KPMG 1 Arma Partners LLP 1

Heller Ehrman White & McAuliffe 1 Dorsey & Whitney LLP 1 Canaccord Adams 1 RBC Dominion Securities 1

WilmerHale 1 Kennedy Covington Lobdell & Hickman 1 KPMG Corporate Finance 1 JMP Securities LLC 1

Cravath, Swaine & Moore 1 Simpson Thacher & Bartlett 1 Thomas Weisel Partners 1 Roth Capital Partners Inc 1

Dewey & LeBoeuf LLP 1 Kramer Levin Naftalis & Frankel 1 Leerink Swann & Co 1 Catalyst Advisors BV 1

Hogan Lovells 1 Sullivan & Worcester LLP 1 UBS Warburg LLC 1 Sagent Advisors Inc 1

Orrick Herrington & Sutcliffe LLP 1 Latham & Watkins 1 Bear Stearns & Co Inc 1 Keefe Bruyette & Woods Inc 1

Yigal Arnon & Co 1 Wachtell Lipton Rosen & Katz 1 Merrill Lynch & Co Inc 1 Corum Group Ltd. 1

Osler Hoskin & Harcourt LLP 1 Lefevre Pelletier 1 BDO Stoy Hayward 1 Lazard 1

Addleshaw Goddard 1 Fox Williams 1 Grand Total 92 Banc of America Securities LLC 1

Proskauer Rose LLP 1 Cooley LLP 1 Chase H&Q 1

Kirkland & Ellis 1 Allen & Overy 1 UBS Warburg 1

Sidley Austin Brown & Wood 1 Gunderson Dettmer Stough Villeneuve Fran 1 CIBC Wood Gundy Securities 1

Arsene Taxand 1 Grand Total 91 Bear Stearns & Co Inc 1

SJ Berwin 1 Morgan Keegan Inc 1

Linklaters 1 Healthcare Growth Partners Inc 1

Bar & Karrer 1 Grand Total 101

WongPartnership LLP 1

Dewey, Ballantine, Bushby, Palmer & Wood 1

Mayer Brown LLP 1

Uria Menendez 1

McDermott Will & Emery 1

Bell Gully 1

Morgan Lewis & Bockius 1

Araoz y Rueda 1

Dechert 1

Cooley Godward LLP 1

Munger Tolles & Olson 1

Fladgate Fielder 1

Musat & Asociatii 1

Loyens & Loeff 1

Katten Muchin & Zavis 1

Grand Total 128

Banking AvisoryLegal Advisory


28 |F I N A N C E 6 2 6

Impact of Cross-Border Transactions In Israel

Cross-border transactions account for $56.8B of all deal value and 324 deals or 63% of deals. Again, this

is highly driven by the largest transactions of Teva Pharmaceuticals. Most cross-border transactions in

Israel specifically involving banks firms were through advising the acquiring company. This seems to

indicate that most of the value creation was through expanding outside Israel, and even more specifically,

developed nations both in Europe and the U.S. By evaluating the sectors as well, we notice that the

majority of the deals were in the tech sector or medical sector which are core to the success of Israeli

economies. Given the success of venture back startups, the ability for non-Israeli companies to find

suitable acquisition targets with minimal risks is high. Thus far, the role of PE in cross-border deals has

been minimal because VC backed startups are unlikely to be leading major acquisitions and the PE

market within Israel is still developing. However, what is noticeable is the role of international PE firms

looking to acquire Israeli businesses. Starting with the role of U.S. private equity purchasing Ness

Technology. Additionally, out of the all the cross-border deals involving PE, most included the use of

banks, and primarily with the PE being the sponsor to the acquirer. This seems to indicate that even with

robust due diligence processes supporting the PE sponsored firms, that the connections and experience in

cross-border transactions is beneficial to value creation and risk mitigation when acquiring businesses in

foreign countries (Table 12).

Table (12): Cross Border M&A with Bank Involvement

.

Acquirer Industry Acquiror NameTransaction

YearTarget Name Financial Sponsor Role Description Acquiror Nation Target Nation Acquiror Advisors Target Advisors Total

Business Services, Nec eBay Inc 2011 Appchee Applications LTD Financial Sponsor to Target United States Israel (blank) (blank) 13$

Computer Facilities Management Ness Technologies Inc 2006 Innova Solutions Financial Sponsor to Acquiror Israel United States (blank) (blank) 25$

2007 MS9 Consulting LLC Financial Sponsor to Acquiror Israel United States (blank) (blank) 11$

Selesta Espana SAU Financial Sponsor to Acquiror Israel Spain (blank) (blank) 13$

Selesta SpA Financial Sponsor to Acquiror Israel Italy (blank) (blank) 25$

2008 Logos as Financial Sponsor to Acquiror Israel Czech Republic (blank) Corum Group Ltd. 67$

Depository Institutions Bank Leumi Le Israel BM 2011 Banque Safdie SA Financial Sponsor to Acquiror Israel Switzerland Goldman Sachs & Co (blank) 148$

Electromedical Equipment Syneron Medical Ltd 2009 Primaeva Medical Inc Financial Sponsor to Target Israel United States (blank) (blank) 30$

Investors, Nec GIMV 2005 Genesis Partners III Acquiror Belgium Israel (blank) (blank) 10$

Plastics Foam Products Broadway Industrial Grp Ltd 2010 Pinanotech Ltd Financial Sponsor to Acquiror Singapore Israel (blank) (blank) 1$

Prepackaged Software BMC Software Inc 1999 New Dimension Software Ltd Financial Sponsor to Acquiror United States Israel Goldman Sachs & Co CIBC Wood Gundy Securities 620$

2000 OptiSystems Solutions Ltd Financial Sponsor to Acquiror United States Israel (blank) Wit Soundview Group Inc 70$

IncrediMail Ltd 2011 Smilebox Inc Financial Sponsor to Target Israel United States (blank) (blank) 40$

RealNetworks Inc 1999 Webglide Financial Sponsor to Acquiror United States Israel (blank) (blank) 10$

Retalix Ltd 2005 TCI Solutions Inc Financial Sponsor to Target Israel United States Citigroup Global Markets Inc (blank) 34$

Semiconductors and Related Devices Conexant Systems Inc 2000 Novanet Semiconductor Financial Sponsor to Acquiror United States Israel (blank) Fleet Boston Corp 158$

Microsemi Corp 2007 PowerDsine Ltd Seller United States Israel Thomas Weisel Partners Citigroup 275$

Space Vehicle Equipment, Nec Thales SA 2009 CMT Medical Technologies Ltd Financial Sponsor to Target France Israel Rothschild (blank) 26$

Subdividers and Developers, Nec Alrov Ppty & Lodgings Ltd 2010 Hotel Lutetia Financial Sponsor to Target Immediate Israel France (blank) (blank) 135$

Surgical and Medical Instruments 3M Co 2010 Attenti Holdings SA Seller United States Israel (blank) Robert W Baird & Co Inc 230$

Grand Total 1,942$

Cross-Border Private Equity Deals Involving Investment Banks


29 |F I N A N C E 6 2 6

Additional Detail Regarding Deal Activity As PE buyout is at its early stage in Israel, the M&A activity in the private equity sector only accounts a

marginal portion of total activity in Israel. Exhibit 1 shows from 1998 to 2012, PE backed deals only

accounts 5.37% of total value of M&A transactions. Foreign investors play an active role in Israel market.

Out of 29 transactions, 17 are cross-broad deals. Given the numbers and value of historical deals (Exhibit

2), 3 medium to large size deals (> $ 200 million) occupied more than 70% value of total deals by PE

firms.

Table (13): 1998~2012 Israel PE M&A Transaction Value vs. Total M&A Value

Table (14): 1998~2012 Israel PE M&A Transaction

The largest deal was made in telecommunication industry. In 2010, the controlling interest in Bezeq, held

by the Apax-Saban-Arkin group [“Apax”], was sold to 012.Smile Communications Ltd, which was later

$0

$5,000

$10,000

$15,000

$20,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

PE Involved M&A OTHERS M&A

0

1

2

3

4

5

6

0

400

800

1200

1600

2000

2400

1998 1999 2000 2001 2002 2003 3004 2005 2006 2007 2008 2009 2010 2011 2012

Tran

sanc

tion

Val

ue($

in m

illio

n) Num

berof Transanctions (#)


30 |F I N A N C E 6 2 6

on renamed as B Communication, a subsidiary of Shaul Elovitch's Eurocom Group, for $1.75 billion.

Apax acquired 30%, or Bezeq share, at $972 Million when Bezeq was officially privatized in 200584

.

Apax is a global private equity and venture capital firm which was headquartered in London. It is one of

the oldest and largest private equity firms operating on an international basis, ranked the seventh largest

private equity firm globally. It have raised approximately $35 billion (USD) dating back to 196985

. Apax

invests exclusively in certain business sectors including telecommunications, information technology,

retail and consumer products, media, healthcare and financial and business services. In the early stage of

the company, it dedicated to making investment in venture capital in Europe and US. From 1993, the

company started to invest in buy-outs and raise 'balanced funds' with a growing portion of buy-outs over

venture capital86

. By now, Apax has invested in portfolio companies at all stage. In 1994, Apax open its

office in Tel Aviv. It is one of the earliest PE firms step into Israel market.

The buyer, Eurocom, one of the largest private holding groups in Israel, was acquired by Shaul Elovitch

in 198587

. Shaul Elovitch is an Israeli businessman who was born in 1949 in Poland and made Aliyah to

Israel when he was two years old. He joined his father-in-law's small business of installing intercoms and

television antennas and importing telephones. Partnering with Tadiran, Elovitch became the exclusive

distributor in Israel of Panasonic's line of office appliances. In 1993, Elovitch became Nokia’s exclusive

distributor in Israel. A year later Cellcom entered Israel's cellular network arena and became a client of

Eurocom's Nokia phones, and together the two rivaled Pelephone's Motorola-based dominance of Israel's

mobile phone market. With exclusive status in mobile market, Shaul Elovitch had ambitions to move to

telecommunication market. However, he failed various attempts to establish himself in Israel's

communication sector since the late 1990s, including a failed move to compete with Bezeq through a

company named Ofek. In 2009, Shaul Elovitch was seriously contemplating the acquisition of either

Bezeq or Partner Communications Company. On 14 April 2010 the ownership of Bezeq was transferred

from the Apax-Saban-Arkin group to an indirect subsidiary of Eurocom, B Communications.

Another typical case was that in 1999, BMC Software Inc., a Houston-based maker of corporate software,

bought an Israel-based New Dimension Software Ltd. for more than $650 million in cash as it seeks to

84

No Author.‘Bezeq’ http://en.wikipedia.org/wiki/Bezeq 85

No Author. ‘Apax Partners’ http://en.wikipedia.org/wiki/Apax_Partners 86

Apax. http://www.apax.com/inside-apax/our-company/our-history.aspx 87

No Author. ‘Shaul Elovitch’ http://en.wikipedia.org/wiki/Shaul_Elovitch


31 |F I N A N C E 6 2 6

expand its sales abroad and gain new technology88

. At the beginning, BMC primarily wrote software for

IMB mainframe computer. Starting from mid-1990s, the company’s growth rate increased through

acquisitions of both small and large software firms. From 1994 to 2009, BMC acquired a total of 32

firms. Given its need for capital, BMC received financial sponsorship from Advent International Corp

(Advent), an American global private equity firm focused on buyouts of companies in Western and

Central Europe, North America, Latin America and Asia89

. In North America, it actively acts on upper-

mid-market buyouts focusing on growth opportunities, cross-border transactions and strategic

repositioning90

. Currently, BMC is still part of Advent investment in Technology sector. In 2011, BMC

recorded annual revenue of $2.1 billion, making it one of the 20 largest software companies, based on

revenue, for that year91

. Its stock price soared from $37.16 on Oct 30, 1999 to $51.67 on Jul 8, 2011. Even

after financial crisis, BMC’s value has remained relatively high, currently priced at $42.1792

.

The two presented cases are indicative of the active role that International PE firms play within Israel

(whether they’re the buyer or seller). Most of the International PE firms have a long history in the VC

sector and have expertise and investment experience in technology sector. This would explain the

motivation behind international firms, seeking opportunities in Israel: these companies are attracted to

Israel’s entrepreneurship in high-tech industry. PE firms have a pattern of seeking strategic deals to

increase value of their portfolio companies under management.

Cumulative Abnormal Returns (CAR)

Evaluating the cumulative abnormal returns (CAR) for the deals below, which were selected because of

high visibility due to U.S. exchanges, frequency of transaction by company (NSTC), and large U.S. based

companies with unique acquisitions, we see that CAR exists only for a few deals, specifically the Retalix

acquisition of TCI Solutions Inc. (2005), and Ness Technologies of Innova Solutions (2006), and Ness

Technologies of Logos (2008). While it is likely that positive CAR exists for other deals, the theory that

PE firms help to increase CAR for acquisitions is difficult to detect because of the limited and nascent PE

Buy-out market in Israel. Additionally, the largest CAR is seen with the earliest two deals prior to the

global recession in 2008. Uniquely, Ness Technologies’ Acquisition of Logos as still managed to create

88

No Author.‘BMC’ http://en.wikipedia.org/wiki/BMC_Software_Inc 89

No Author. ‘Advent International” http://en.wikipedia.org/wiki/Advent_International 90

No Author. http://www.adventinternational.com/investmentdata/Pages 91

No Author. ‘BMC’ http://en.wikipedia.org/wiki/BMC_Software_Inc 92 No Author. http://www.bloomberg.com/


32 |F I N A N C E 6 2 6

positive CAR in the during Q4 2008 when the SP 500 returned -49.6% from peak in January 2008 to

2008 lows in November 2008. Also, the few U.S. acquisitions show flat to negative CAR indicating that

the market did not see market favorability in the cross-border transaction. Lastly, the largest deals seem

to show nearly neutral CAR indicating that the size of acquisition may have a negative impact on the size

of the return for the acquirer.

Table (15): Calculated CAR by Transaction

Overall Attractiveness and Challenges

Challenge 1

In Israel, the citizenry has been infected with the entrepreneurial spirit; “everybody and his brother-in-law

seem to be starting a company.”93

Starting a business is easier than ever, thanks to IT advances94

.

However, despite the intellectual capital and motivation necessary to undertake such ventures, there is a

shortage of funding: “there's a plethora of opportunities at a very early stage to raise $20,000 or $100,000

to get a minimum viable product out there,” says Liat Aaronson, the executive director of the Zell

Entrepreneurship Program, a scheme for final-year undergraduates at IDC Herzliya near Tel Aviv95

. The

difficult bit is turning small firms into bigger ones. Lack of early stage ($1-$2M) Israeli VC is commonly

cited as the culprit.96

However, despite less VC funding, the figures demonstrate the strength of Israel's

high-tech industry97

. In 2012, Israel entrepreneurs saw investors shifting back into early stage and seed

investments with a five-year record $146 million raised by 157 seed companies98

. "While investment by

93 The Economist Staff. "What next for the Start-up Nation." 94

The Economist Staff. "What next for the Start-up Nation." 95

The Economist Staff. "What next for the Start-up Nation." 96 The Economist Staff. "What next for the Start-up Nation." 97

The Economist Staff. "What next for the Start-up Nation." 98 Shapiro, Levi. “Israeli tech funding & exits in 2012: Plenty of chutzpah but show me your Instagram”.

CAR by Transaction

Target Name Acquiror Name Ticker Exchange Acquiror Nation Date Complete Deal Size CAR

Banque Safdie SA Bank Leumi Le Israel BM LUMI TELAVIV Israel 12/1/2011 148$ 0.53%

Appchee Applications LTD eBay Inc EBAY Nasdaq United States 9/8/2011 13$ -0.23%

Attenti Holdings SA 3M Co MMM NYSE United States 10/20/2010 230$ 0.01%

Primaeva Medical Inc Syneron Medical Ltd ELOS Nasdaq Israel 11/9/2009 30$ -0.51%

Logos as Ness Technologies Inc NSTC Nasdaq Israel 10/1/2008 67$ 1.36%

Selesta SpA Ness Technologies Inc NSTC Nasdaq Israel 9/5/2007 25$ -6.37%

Selesta Espana SAU Ness Technologies Inc NSTC Nasdaq Israel 1/29/2007 13$ -1.56%

PowerDsine Ltd Microsemi Corp MSCC Nasdaq United States 1/9/2007 275$ -0.05%

Innova Solutions Ness Technologies Inc NSTC Nasdaq Israel 5/8/2006 25$ 2.59%

TCI Solutions Inc Retalix Ltd RTLX Nasdaq Israel 6/30/2005 34$ 8.56%

Grand Total 860$


33 |F I N A N C E 6 2 6

Israeli VC funds is shrinking, foreign VCs as well as corporate and private investors are gradually

increasing their investments99

.

Challenge 2

Building a business requires more than money and technology. Companies need customers. With 7.6m

people, there simply aren’t enough people in Israel100

. It’s not a problem that Israeli firms will be

purchased by International investors at some point; however, the trend is that Israeli firms are becoming

global from the start101

.

Challenge 3

Building businesses also requires people to be an employee. In a nation of start-ups, many people want to

be their own boss. Due to the amount of start-ups, talent risks being thinly spread102

. While many people

possess the intellectual cache needed to create a business, few can find employees, and of those

entrepreneurs that attract talent, some want to go it alone, looking for a big pay day. Several companies

have rejected offers of hundreds of millions of dollars only to fail a few years later.

Conclusion

While Israel’s PE industry is still developing, the access to efficient capital markets will continue to help

it grow and develop. Given the government’s role in shaping and developing VC and R&D spending

within the country, it is likely to take longer for PE to catch up to the successes that the VC industry has

had. Additionally, when comparing the creation of value in Israeli businesses, we anticipate more

acquisitions of both startups and businesses that have gone public, but where initially VC backed start-

ups. Overall, the Israeli PE/VC market is highly efficient and enables businesses to develop, expand, and

flourish in a globally competitive market. Israeli companies will continue to be a part of global PE’s

investing portfolio for the foreseeable future.

99 Shapiro, Levi. “Israeli tech funding & exits in 2012: Plenty of chutzpah but show me your Instagram”. 100

Shapiro, Levi. “Israeli tech funding & exits in 2012: Plenty of chutzpah but show me your Instagram”. 101 The Economist Staff. "What next for the Start-up Nation." 102

The Economist Staff. "What next for the Start-up Nation."


34 |F I N A N C E 6 2 6

Appendix:

Trade Agreements

Free Trade

Area Agreements

Protection of

Investments

Avoidance of

Double Taxation

Agreements

on R&D

MFN Trade

Agreements with non

WTO Members

Canada Albania Austria Funds Kazakhstan

Mexico Argentina Belarus Canada Russian Fed.

U.S.A Armenia Belgium Singapore Ukraine

Azerbaijan (3) Brazil South Korea

E.U. Belarus BulgariaUnited

KingdomUzbekistan

E.F.T.A. Bulgaria CanadaParallel

Funding

Standardization &

Product Certification

MERCOSUR (3) China(3) China Argentina Moldova

Turkey CroatiaBelgium/

FlandersUkraine

Qualified Industrial

Zones (QIZ)

Agreements

Croatia Czech Rep Brazil Turkey

Egypt Cyprus Ethiopia(3) China

Statement of Intent

– MOITAL and US

Consumer Product

Safety Commission

(CPSC)

Jordan Czech Republic Finland Denmark

El Salvador France Finland

Germany France

Estonia Greece Germany

Ethiopia Hungary Greece

Georgia India India

Germany Ireland Ireland

Guatemala (3) Italy Italy

India Jamaica Maryland

Kazakhstan Japan Netherlands

Latvia Latvia(3) Norway

Lithuania Lithuania Ontario/CA

Moldova Luxemburg(3) Portugal

Mongolia Mexico Slovenia

Poland Moldova Spain

Netherlands Sweden

Romania Norway Taiwan

Philippines Turkey

Serbia- Montenegro Poland Uruguay(3)

Slovakia Portugal Victoria/Au

Slovenia Romania Virginia(3)

South Korea Russian Fed E.U

South Africa(3) Singapore

Seventh

Framework

Program

Thailand Slovenia CIP (EIP)

Turkey Slovak Republic U.S.

Turkmenistan S.Africa

U.S. Science

and Technology

Commission

Ukraine S.KoreaBIRD

Foundation

Uruguay Spain

Uzbekistan Sweden Other

Thailand Eureka

Turkey Galileo

U.K. Clusters

U.S.A

Ukraine(3)

Uzbekistan

(1) Under negotiation

(2) Initiated

(3) To be ratified

(4) Awaiting re-establishment

(5) Re-initiated

Source: Ministry of Industry & Trade, Foreign Trade Department, International Division.

Israel’s International Trade and Economic Agreements

July 2008


35 |F I N A N C E 6 2 6

Differences between GAAP/IFRS

Item US GAAP IFRS Result

Inventory

Valuation

Permits LIFO, FIFO, weighted average cost, or

specific identification. Inventory carried at lower

of cost or market.

Permits FIFO or weighted average cost; LIFO

not permitted. Inventory carried at lower of

cost or net realizable value.

Companies that use LIFO must revalue

inventory, which could result in major

tax liabilities due to the IRS’s LIFO

conformity rule.

Asset

Impairment

Two-step impairment. Single-step impairment. Write-downs are more likely under

IFRS.

Asset Valuation Assets can be written down, but not written up.

PP&E is valued at historical cost.

Allows upward revaluation when an active

market exists for intangibles; allows

revaluation of PP&E to fair value.

Book values are likely to increase

under IFRS.

Revenue

Recognition

Provides very specific general and industry

guidance about what constitutes revenue, how

revenue should be measured, and the effect of

timing on recognition.

Not specific about the timing and measurement

of recognition; lacks industry-specific

guidance.

Revenues are likely to increase with

less detailed guidance.

Contingencies Contingent liabilities must be disclosed. Can limit disclosure of contingent liabilities if

severely prejudicial to an entity’s position.

May result in fewer disclosures.

Debt Covenants Permits curing debt covenant violations after

fiscal year end.

Debt covenant violations must be cured by

fiscal year end.

Debt covenants may need to be

amended, resulting in related

transaction costs.

Research &

Development

R&D costs must be expensed. Allows capitalization of R&D costs. Development costs will be deferred and

amortized.

Entity

Consolidation

Consolidation is based on who has the

controlling financial interest.

Consolidation is based on which entity has the

power to control.

Companies are likely to consolidate

more entities.

Securitization Allows certain securitized assets and liabilities to

remain off a corporation’s books.

IFRS requires most securitized assets and

liabilities to be placed on the balance sheet.

May result in very different balance

sheet values.

Financial

Instrument

Valuation

Fair value based on a negotiated price between a

willing buyer and seller; not based on entry

price.

Several fair value measurements. Fair value

generally seen as the price at which an asset

could be exchanged.

Financial assets and liabilities will be

measured differently.

Depreciation Methods allowed: straight-line, units of

production, or accelerated methods (sum of

digits or declining balance). Component

depreciation allowed but not commonly used.

Allows straight-line, units of production, and

both accelerated methods. Component

depreciation required when asset components

have different benefit patterns.

Assets with different components will

have differing depreciation schedules,

which may increase or decrease assets

and revenue.


36 |F I N A N C E 6 2 6

Active PE/VC Firms Israel

Firm Name3i Group

Advent

InternationalAffinity Capital

Bessemer Venture

Partners

Blue Chip Venture

Company

Cerberus Capital

ManagementGeneral Atlantic

GIMV AntwerpFrancisco

Partners

NPM Capital

Private Equity

Shamrock Capital

Advisors

Texas Pacific

Group Inc

Warburg Pincus

LLC

Fund Size$19.2B

$11.41B$165M

$2BN/A

$24B$17B

$1.8B$5B

$1.7B$700M

$48B$30B

Average

Investment

Size

$100M-$650MN/A

N/A$4M-$6M

N/AN/A

$50M-$500M$7M-$55M

$25M-$500M$25M-$250M

$10M-$50M$10M-$1B

N/A

Capital GrowthMinority

N/AConsolidations

N/AN/A

N/AGrowth Capital

Growth CapitalGrowth Capital

MinorityConsolidations

Growth Capital

Leveraged BuyoutMajority

Leveraged BuyoutManagement Buyouts

ConsolidationsMajority

RecapitalizationsLeveraged Buyout

Leveraged BuyoutRecapitalizations

Management BuyoutsGrowth Capital

Recapitalizations

Buy & BuildLeveraged Buyouts

Management Buyouts

Business ServicesBusiness Services

HealthcareClean Technology

Business ServicesAerospace/Defense

Business ServicesClean Technology

TechnologyFood&Beverage

CommunicationsCommunications

Communications

Consumer Goods & ServicesConsumer Goods & Services

Financial ServicesHealthcare

AutomotiveConsumer Goods & Services

TechnologyHealthcare

EntertainmentConsumer Goods & Services

Consumer Goods & Services

Financial ServicesFinancial Services

HealthcareMedia

Building MaterialsFinancial Services

ManufacturingMedia

EntertainmentFinancial Services

HealthcareHealthcare

RetailTechnology

Financial ServicesHealthcare

ServicesFinancial Services

Healthcare

MediaIndustrials

TechnologyHealthcare

Oil & GasHealthcare

Industrials

TechnologyMedia

IndustrialsTechnology

MediaMedia

RetailLogistics

RetailOil&Gas

TechnologyManufacturing

Technology

Retail

Technology

AsiaAsia

North AmericaAsia

North AmericaAsia

AsiaEurope

North AmericaEurope

North AmericaInternational

Asia

EuropeEurope

EuropeEurope

EuropeEurope

InternationalInternational



North AmericaNorth America



HeadquartersLondon, ENG

Boston, MAMinneapolis, MN

New York, NYCincinnati, OH

New York, NYGreenwich, CT

Antwerp, BelgiumSan Francisco, CAAmsterdam, NetherlandsLos Angeles, CA

Fort Worth, TXNew York, NY

Target

Industries

Geographic

Presence

Transaction

Type


37 |F I N A N C E 6 2 6

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Global Private Equity in Israel: Where Innovation Meets Capital

Economy & Finance

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