Business exits come in waves, and we’re in the middle of one. It’s putting hundreds of millions of dollars into the pockets of Israeli entrepreneurs and venture capital funds.
On Thursday, Facebook said it was snapping up the Israeli startup Pebbles Interfaces for $85 million. This week came the news that Microsoft was buying the cyber firm Adallom for $320 million, while ad-tech company IronSource was acquiring mobile advertising company Supersonic for between $100 million and $200 million.
The three acquisitions represent the best of what has been happening in Israeli high-tech in recent years. Tech giants are increasing their presence in Israel, particularly through acquisitions. At the same time, home-grown companies increasingly have the resources to acquire other Israeli companies.
Although the past week has seen its share of major transactions, the whole year so far has been a bonanza. According to a report by the business research firm IVC and the law firm Meitar, the first half saw $6 billon in exits, including public offerings and acquisitions in 60 separate transactions, almost double last year’s pace.
And if we limit our sights to just mergers and acquisitions, we find that there were 48 in the first half, involving $4.98 billion, more than the $4.93 billion for all of last year. Law firms specializing in high-tech expect plenty more such deals in the second half. Assuming no unusual turn of events, 2015 promises to be a record year for Israeli high-tech.
On Thursday, with the signing of the Pebbles Interfaces deal, Facebook sealed its fourth such transaction in Israel in four years. Although these may not be huge like Google’s $1 billion acquisition of Waze, Facebook is still seen as a growing player in Israel’s innovation scene.
Facebook the M&A leader
Facebook has invested about $380 million in buying Israeli startups, and more such acquisitions are seen in the pipeline. “Although Google has larger development activity in Israel, Facebook is more active in acquisitions,” says a senior Israeli venture capitalist.
In its first two acquisitions, of Snaptu and Face.com, the Israeli staffs were relocated to Facebook’s headquarters in Silicon Valley, but the 2013 purchase of Onavo marked a turning point between Facebook and Israel.
The importance Facebook attaches to the country has been growing, reflected by the expansion of its Israeli development center, its continued M&A and the landings at Ben-Gurion Airport of top Facebook executives who get to know the country’s startup scene. The U.S. giant currently employs about 60 engineers here and plans to expand that number to 80 by the end of the year, along with about 20 new sales and business-development staff who will serve the local market.
Facebook’s first acquisition in 2011 was considered a traumatic event for Israeli high-tech: A few months later Snaptu’s staff was transferred to Facebook’s offices in Menlo Park, California. The company did the same thing a year later when it bought Face.com, but in 2013, its policy changed with Onavo, a developer of data consumption monitoring and optimization technology. This time, Facebook set up a local development center around its new partner.
Two years later, it’s clear where Facebook sees Israel’s comparative advantage. The acquisition of Pebbles Interfaces will help the American company, which has long been more than a social network, move into the world of virtual reality.
One of Facebook’s main projects in Israel is Internet.org, an initiative of particular interest to Facebook founder Mark Zuckerberg. Israelis on both sides of the Atlantic are taking part in the project, through which Facebook seeks to connect millions of users in poor countries to the Internet — people who would otherwise have trouble paying for the service or coming up with the cash for a smartphone. The service, part of which is based on Snaptu’s app, gives users access to the Web for free.
Israel is also a battleground of sorts between Facebook and Google, and Facebook’s R&D center here is involved in technology that also interests Google. Both companies, for example, help connect developing countries to the Internet.
Facebook is also looking to Israel’s big data analysis expertise, which was partly developed in technology units of the Israel Defense Forces. It’s also sniffing around the global advertising business of Israeli companies such as GetTaxi and Israeli gaming firms.
What particularly interests Microsoft?
Following a five-year period in which Microsoft failed to make a single Israeli acquisition, the situation has changed completely over the past several months. Since November, Microsoft has bought four firms for a combined $600 million, as part of a strategy led by Chief Executive Satya Nadella.
The person responsible for the acquisitions is an Israeli, Yair Snir, Microsoft’s business development director. He’s in charge of buying firms outside the United States and China, and more Microsoft acquisitions in Israel appear likely.
Microsoft’s latest Israeli acquisitions are in priority areas for the company. The U.S. company has acquired N-Trig’s Surface Pen touchscreen technology and Equivio, which specializes in automated analysis of texts.
That complements another pickup by Microsoft — of the German task management company Wunderlist. And Microsoft’s two most recent Israeli acquisitions, Aorato and Adallom, are in cybersecurity. These deals followed Microsoft’s realization that Israel is a global center for cybersecurity.
We can assume that there will be more acquisitions in the company’s new fields. Chief Executive Nadella’s strategy stresses mobile technology and cloud computing, and there’s plenty of Israeli expertise in those two broad fields. Areas particularly luring the company to Israel are cloud technology, big data analysis and machine learning. These fields naturally complement one another.
With Kfar Sava-based Pebbles Interfaces, Microsoft is picking up a company familiar with 3-D gesture interaction with computers and electronic devices. Microsoft may also be interested in Israeli digital medical technology that combines hardware, as in Microsoft’s Smartwatch, and layers of analysis and applications from health care.
Three recent transactions involved mergers of Israeli firms, signaling a maturing of the country’s high-tech industry. Venture capital funds that have stakes in Israeli tech outfits are no longer pressing for companies to be sold quickly so the funds can use the proceeds for their next investments. The entrepreneurs who founded the companies have often made enough money, so they have staying power. And their managers have sufficient knowledge to carry out complex transactions such as mergers.
Beyond that, many Israeli entrepreneurs understand that mergers are part of the business cycle for companies seeking to expand. If in the past, businesspeople preferred forgoing growth to remain independent, now they realize they need to put personal considerations aside and even merge with companies they had considered bitter rivals.
These mergers reflect Israeli firms’ need to grow more quickly than they could on their own. They use the capital they’ve raised and the profits they’re reaping to finance the transactions.
In the case of IronSource and Supersonic, an additional factor helped push a merger. IronSource had already attained a company value of about $1 billion when it raised $100 million about a year ago. The next natural step would be an initial public offering, which would give the founders and venture capital investors the chance to make a mint by selling stock.
But over the past year, tech firms in advertising like IronSource and Supersonic have had a hard time with IPOs. It’s possible the companies’ tie-up will create a large enough firm with a more diverse revenue stream, which would make a public offering easier.
IVC and Meitar report that 11 of the acquisitions in the first half of this year were made by other Israeli firms — 23% of the transactions. Only firms from the United States were involved in more acquisitions of Israeli high-tech companies in the first half — 26.
A major public company, Amdocs, bought Comverse’s billing operations, and Check Point Technology Software purchased Hyperwise, the maker of a threat-prevention engine. Finally, R2Net, an e-commerce company, bought the display technology firm Segoma.
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