Last year was a record one when it came to investments and acquisitions of Israeli companies by Chinese firms. The tally of completed deals, transactions in progress, commitments for future sales, joint enterprises and economic cooperation agreements in 2014 came close to $4 billion.
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Major attention has been given to the major transactions: the acquisition of Makhteshim Agan (now known as Adama); the protracted negotiations over the sale of the Tnuva food company to China’s Bright Foods; and the interest of Chinese officials in Phoenix Holdings. However, it transpires that Chinese contacts are surfacing everywhere – whether at an Israeli social network for investors, a cutting-blade firm, a search engine for cheap airlines flights, or a company that’s developing a diagnostic pill for intestinal diseases. Chinese investments have been placed in all of them in the past year, and the trend is only expected to intensify.
The figure was reported by law firm Weinstock Zecler & Co., which is active in the field of mergers and acquisitions involving Chinese entities. “If at the beginning they were sporadic investments, mostly in high-tech companies, now Chinese investors are investing more broadly in the Israeli economy,” said Micki Shapira, a Weinstock Zecler partner.
“We are currently seeing the Chinese also investing in local venture capital funds, which had not happened before,” he added. “At its peak, it involves huge investment on their part in the Israeli market via holdings in companies like Tnuva and [Adama]. The trend will grow: 2014 is just the beginning, and we are already dealing with two more transactions and getting additional inquiries. If 2015 continues this way, it will surpass 2014.”
The flow of Chinese investment to Israel was not a given. The Chinese economy has had its problems in recent years: since 2010, it has been confronting slower growth, but that hasn’t necessarily affected Chinese investment here.
“Chinese entities that come to buy Israeli companies are not experiencing a slowdown, but in fact the opposite – accelerated activity,” says Gidon Weinstock, another partner at Weinstock Zecler, which has been involved in a number of business transactions with China in recent years. “It’s been the result of the fact that the Chinese policy here is clear: buy Israeli know-how to deal with problems in China. On the other hand, in the business sector in China itself – for example, Israeli companies setting up joint enterprises in China – there is a slowdown. Israel is a comfortable place for Chinese companies that want to invest outside of China in sectors that interest them.”
The law firm is currently representing Mivtach Shamir Holdings in negotiations to sell its minority share in Tnuva to Bright Foods.
Variety of investments
Not only is the range of companies in which the Chinese are investing diverse. The manner in which the investments are made is varied: direct investment; cooperative arrangements with Israeli venture capital firms; joint efforts to raise capital with other investors; and joint enterprises. The Chinese are operating in every possible manner in the Israeli market.
Weinstock says the interest of the Chinese in Israel cannot be just happenstance. “It may not be something official, but clearly the Chinese government is encouraging it. In 2014, they passed a legislative amendment that eased investments made outside of China. The procedure was made easier, providing that transactions of up to $1 billion need to be registered but don’t require real official approval.”
Zvi Shalgo, managing partner in the Chinese-Israeli Synergy China Fund and a dominant figure in the field of Chinese acquisitions in Israel, says the focus of the Chinese will be to take strong firms in China and help them build international markets.
“The classic model is Huawei, where they took a Chinese company and within 20 years turned it into an international conglomerate,” he said of the Chinese telecommunications giant.
Weinstock explains that China operates based on five-year plans that aim to meet government-set goals. “The most recent plan [China’s 12th] came out in 2011, with the fields of interest to the Chinese government being environment, food safety, agriculture, alternative energy and health,” he said. “As seen on the ground, they are taking this orientation in a broad direction. If you look at Tnuva, it’s a lot more than a food company that production techniques can be learned from.”
Israelis who have worked in China love to talk about the spiritual similarities between the most populous country in the world and the little country in the Middle East. They explain that the Chinese view themselves as part of an ancient culture and therefore appreciate ancient Jewish culture as well. They speak of the high regard the Chinese people have for the People of the Book, and the vast Jewish overrepresentation among Nobel Prize laureates.
Even if we are to believe in some mystical Chinese attraction for Israelis, the truth is that China is interested in Israel for much more pragmatic reasons. “There are huge Chinese investments all over the world,” Weinstock notes. “In Africa, you’ll see the Chinese investing nonstop in infrastructure projects. In Europe, too, you’ll a lot of Chinese investment. But Israel is actually well positioned from a standpoint of the Chinese being interested in it.”
“Israel’s role for the Chinese has become more critical in recent years, because major Chinese companies who come to sell products in the world need products and technology of their own,” says Shalgo. “In the past, many of them simply copy-pasted Western technology thanks to Chinese liberality with everything related to imitation. That’s why they are currently so enthusiastic to find new technology – technology that is essential to their entry into mature markets, where most of the major suppliers are committed to Chinese companies’ competitors.
“In this respect,” continues Shalgo, “Israel is a neutral island of available technology that the Americans and Europeans can’t sell by themselves. In addition, when you look at the valuation of Israeli firms, you see that the technology here is cheap relative to the Western world.”
The Chinese demand for Israeli technology also prompts an essential question: Can Israelis get a better price selling their companies by looking to the East instead of the West, as has been their wont. Weinstock cannot guarantee that Israelis will find their dream exit in China: “I don’t know if you can find a better price in China. Currently, China has a budget surplus and a lot of money earmarked for investment. China is aware that a lot of things that are developed in Western countries are also developed in Israel, and it’s easier for them to buy here. By their nature, Israeli sellers want an exit and they are easier for Chinese investors; at the same time, the Americans and Europeans have limitations that make business sales to Chinese companies more difficult.”
The fact that sometimes the Chinese have ulterior motives for their investments – for example, to gain access to technological know-how – may raise concerns among minority shareholders in companies where the Chinese assume control. In a standard investment fund such as Apax Partners, for instance, whose interest is being bought by Bright Foods, minority investors know that the goal of the fund is to generate the highest returns possible within a few years. On the other hand, Chinese investors won’t necessarily be focused on profits and direct yield on investment, but instead occasionally in the indirect added value that it provides their other companies.
The China syndrome
Shalgo believes the way to capture the attention of Chinese investors is by establishing operations in China. “We would have wanted organic growth of companies toward China to expand their market, and not necessarily because the companies want to sell themselves. If Israeli companies want to grow in the Chinese market, they need to establish a substantial presence there. It’s similar to the situation in which Israeli high-tech companies go to Silicon Valley at an early stage, establish a subsidiary and enter into cooperative relationships with local companies. You just see that it’s easier for Americans to talk to an American CEO of the subsidiary than to the Israeli CEO here,” he says. “Unfortunately, most Israeli companies don’t enter China in a substantial manner at an early stage.”
He acknowledges, however, that even if an Israeli firm has no Chinese presence but sells products elsewhere around the world, it could still be attractive to the Chinese.
The basic fear of Israelis over doing business in China may be justified, with Israeli commerce marked by major failures in the Far East. Eight years ago, Gadot Biochemical Industries, for example, set up a plant in China for the production of citric acid at low cost. But when the company attempted to sell it in Europe, they encountered European resistance that the Chinese were exporting their products at prices that amounted to dumping.
Chinese investment in Israel may present another painful prospect over the fact that, in most cases, the workforce of acquisition targets in Israel is not what interests Chinese buyers, and they are liable to relocate the company’s operations outside of Israel. “If a company is bought when it is still a fledgling in Israel,” notes Shalgo, “the Chinese will take the technology or the product themselves and will not have any pretense to anything beyond that. But if the companies are acquired when they are already strong in the world and with an international presence, the Chinese will have no reason to eliminate that presence.”