Startup Nation Shows It Prefers IPOs to M&A

Value of new stock issues by tech companies grew almost six-fold, while takeover dropped 22%.

Ofer Vaknin

The year 2014 may have signaled a turning point for the Startup Nation, with more companies opting to stay independent by listing their shares on a stock exchange and fewer choosing to be bought out by a foreign multinational, figures from the IVC Research Center released on Tuesday showed.

Seventeen high-tech companies raised $2.1 billion in initial public offerings last year, up from eight IPOs raising $360 million, according to the survey taken by IVC together with the law firm Meitar Liquornik Geva Leshem Tal. Mobileye, the maker of anti-collision technology, accounted for $1 billion of that total. By comparison, the value of exits done through mergers and acquisition deals reached $4.84 billion.

Although more than twice the value of IPOs last year, the figure was down 22% from 2013, IVC said. Moreover, of 82 Israeli startups acquired through M&A deals last year, 24 were bought by other Israeli companies, up from 19 the year before. All told, 42 Israeli high-tech companies made one or more acquisitions last year of a local or foreign company, IVC said.

“Sometimes IPOs reflect a market trend stemming from public readiness to invest in certain sectors, such as life sciences,” said Alon Sahar, a partner in Meitar. “In other cases, IPOs reflect the real ability of the industry to build larger companies for the long term.”

Sahar said success stories such as the IPOs of Mobileye and CyberArk, which raised $86 million in September in New York and has since seen its share price double, more companies can be expected to follow suit. “The appeal of building larger companies may also explain current findings on M&A proceeds, where the number of deals below $5 million dropped to the lowest in a decade, with only 25 deals.”

The growing preference for IPOs would address one of the fundamental problems of Israel’s high-tech industry. Investors and entrepreneurs have traditionally preferred to sell their companies at an early stage rather than let it grow and development, which would create more jobs.

But rather than reflecting a new trend by Israeli startups to growing bigger businesses for the long term, it may simply reflect the effervescence of the global IPO market. Some 1,205 issuers raised nearly $249 billion globally in 2014, making it the busiest year since 2010, according to data from Thomson Reuters – raising concerns of another tech bubble like the one that hit tech stocks in 2000.

Overall, the value of high-tech exits rose just 5% in 2014 from the year before to $6.94 billion, while the size of the average M&A sale fell to $59 million from $62 million in 2013, IVC said. But investors on average did considerably better on the exits: Investors such as venture capital funds earned a 6.22-fold return on equity, up from 4.29 in 2013.

“It’s customary to strive for a minimum return of three times equity,” said Koby Simana, CEO of IVC. “In these terms, 2014 was an excellent year, especially in the life sciences, clean-tech and communications sectors, with the highest annual return on equity.”