2017 went down in the record books as Israeli high-tech’s most successful year in terms of exits. No fewer than 16 major merger and acquisition deals were reached over the year, and one outstanding one with Intel’s $15 billion purchase of Mobileye.
But as it turns out, last year was not significant for Startup Nation only in terms of sheer numbers, but also in terms of the quality of the deals, something that had gone unnoticed until Viola Growth fund examined them in terms of diversity.
The acquiring companies came from a wider range of home countries and industries. But most important, their reasons for choosing to buy an Israeli startup were also more varied than in the past, the Viola study found.
Viola analyzed not just 2017, but 100 of Israeli high-tech’s biggest exits over the past decade with the aim of finding what motivated buyers to acquire an Israeli company.
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What it found was that in 2017, one-quarter of the deals were financial: The buyer aimed to resell the startup at a later date at a profit. Another top reason was to enter new markets.
That’s a big change from the traditional reasons that Israeli startups were bought — for their intellectual property or for their employees, who would typically be retained by the buyer and employed at a local research and development center run by the buyer.
The changing motivations for cross-border mergers and acquisitions is a testament to the growing maturity of Israeli high-tech. It’s no longer just about innovation but about companies with significant businesses that are worth money in their own right and generate revenue.
If these conclusions hold true, that could have important benefits for the Israeli economy. Critics of the startup sector say that the tendency of Israeli entrepreneurs to sell their companies at an early stage has limited their potential to generate jobs and supply chains that reach the wider economy.
The study, which was carried out by Viola founding partner Harel Beit-On and analyst Tomer Meridor, found that the most significant development in the exit scene over the last decade in the emergence of private equity funds as buyers.
Private equity funds are financial investors. They typically hold on to the companies they buy for several years, helping them to build up their business in expectation of selling at a big profit at the end. In the past decade, eight merger and acquisition deals were done with private equity funds, two of them in 2016 and four in17.
“The presence of these investors shows that Israelis have succeeded in creating mature and attractive companies with global operations, not just companies with a good idea but ones with a working product and a proven business model and customers,” said Meridor.
Another of the four motivations the report identifies for buying Israeli startups is diversification, or entering new business areas. Intel bought Mobileye, for instance, to get a foothold in the emerging autonomous vehicle industry.
Viola found that in the past decade, 10 tech M&A deals (five in the past two years) were motivated by product or market diversification, with a median purchase price of $380 million. By comparison, for exits where the buyer sought intellectual property or human resources, the median deal size was $245 million.
Market share-motivated mergers and acquisitions was by far the biggest category, with 48 deals over the decade. The average deal was $320 million, but the category most famously includes Google’s $1 billion acquisition of navigation app Waze in 2013.
For years, the main buyers of Israeli startups were American corporations, but in the past six years the seemingly endless parade of Asian business delegations to Israel has turned into exit deals.
China’s Huawei and Posun; Japan’s Mitsubishi, Rakuten, Sony and Softbank; and Singapore’s Singtel have all made major Israeli acquisitions. Indeed, non-American buyers completed more acquisitions in the last three years than in the seven previous years — 13 versus 11, the Viola report found.
They also tended to be bigger than American deals, averaging $325 million, compared to $250 million.
The turning point was 2013, say Beit-On and Meridor. That’s when Israeli entrepreneurs proved they could build companies worth close to $1 billion in deals like Google-Waze and Given Imaging-Covidien.
Others have since followed, like Viber and EasyChip, in the range of $800 million to $1.1 billion. This year’s deals, which were not included in the report, include four giants, led by the $3.4 billion sale of Orbotech.