The exit outlook for Israeli M&A is especially positive, particularly in light of the ever-growing interest from the Far East. While the vast majority of inbound capital still comes from the US, China has emerged as a prolific investor in Israeli start-up and tech businesses.
Shanghai Giant Network Technology’s $4.4bn acquisition of Playtika, the social and mobile games business sold by Caesars Interactive Entertainment (CIE), is a marquee example of the increasing flow of capital coming from the East – Latham & Watkins advised CIE. Other investments have been equally eye-catching. At the end of 2014, Chinese search engine Baidu invested $3m into Pixellot, the Israeli sports video start-up. Baidu also provided financing to Carmel Ventures, the Israeli venture capital firm.
With a greater variety of foreign investors and acquirers hunting for high-quality Israeli assets, we can expect Israeli targets to achieve higher valuations.
Former President Shimon Peres, who sadly died this week, was a key figure in developing Sino-Israeli ties. China’s interest in Israel is to be celebrated, but local targets should be alive to the complexities and cultural nuances of entering a transaction or commercial agreement with a Chinese entity or entities. Investments or acquisitions originating from China will often have strong government and regulatory overlay. There can be multiple parties to the investment and a host of investors and financiers sitting behind the deal. At the extreme, regulatory uncertainties, divergent interests amongst investors, and government influence can impede deals, but there is always room for innovative solutions, including substantial deposits.
For this reason and several others, it is expected that early stage exits will continue to dominate the M&A market in Israel. In life sciences, for instance, the regulatory environment is becoming tougher making early exits even more compelling.
Furthermore, Israeli start-up founders tend to be serial entrepreneurs, enjoying the thrill of bringing a company to market rather than overseeing a revenue-driven business. Getting to the next level often requires a large workforce, a customer services team and logistics expertise, even a dedicated compliance unit. Selling to an acquirer that can deliver corporate management expertise, a sales force and marketing knowledge is a logical step for many Israeli start-ups. The arrival of the Chinese is to be welcomed, not least because it will heighten competition for Israeli start-up assets, yet the typical preference for early-stage M&A exits is unlikely to change.