Waiting for an Offer They Can’t Refuse

Many a fine Israeli tech company is traded on NASDAQ but not in Tel Aviv. Why is it that local capital market animals are the only ones in Israel who haven’t caught the high-tech fever?

What do Check Point, Amdocs and Comverse have in common? The most obvious answer is that all three are Israeli high-tech companies that made a big splash on the global stage. Check Point was the first to develop the firewall, the protective software now used on all office computers. Amdocs is the dominant player in billing software, with its products serving 90% of telecommunications companies in the United States. Communications-related software developed by Comverse is now used by 2 billion customers in 125 countries. There is, however, another major common denominator: All three companies are traded on NASDAQ in New York but not on the Tel Aviv Stock Exchange.

Despite bringing Israel the glory of being a high-tech superpower, these companies and others are a source of much pride but do not contribute much to the local investment scene. If only they could be persuaded to dual-list, the TASE’s daily trading volume would increase by NIS 680 million − more than half of the daily turnover in 2012, when trade volume averaged NIS 1.1 billion. Given their current status, this seems far-fetched. There is no reason that Check Point, currently trading at a company valuation of $9.7 billion, would want to dual-list. Co-founder and CEO Gil Shwed would probably consider the idea laughable.

Why do Israeli high-tech companies skip over Israel’s capital market? High-tech executives say that this is mainly because the country’s institutional investors, which manage the public’s pension funds, consistently avoid technology-based companies. The numbers bear out these claims. In 2011-2012 Israeli technology shares were the sector with the highest rate of return, with the Tel Aviv-Technology Index increasing 30% in 2011 and 19% in 2012. Yet institutionals continued to direct 83% of their funds into traditional investment tracks such as government bonds and corporate bonds issued by local tycoons. Local high-tech companies make up only 1% of trading on the TASE.

The TASE currently includes venture capital funds and 33 high-tech companies whose business is in electronics, computers, communications equipment and clean-tech ‏(products and services designed to improve efficiency and cut costs‏). Twenty-two of these companies are dual-listed on overseas markets. Their stocks are listed on the TA-Technology Index, which has an aggregate value of NIS 47 billion. Four of these companies, including Mellanox, NICE Systems, Elbit Systems and EZchip, are also part of the benchmark Tel Aviv-25 Index of blue-chip shares, where they comprise 5.8% of the total with a combined value of NIS 25 billion. Despite this respectable listing, institutional investors shy away from these companies.

Traumatized by the bubble

Investment managers at the institutional investors claim that their reluctance to invest in technology companies is due to their trauma from when derives from their trauma when he dot.com bubble burst, as well as the very nature of investing in such companies. Some of them do not generate revenues in their early stages, which weighs on the fund managers’ results.

Tech sector executives cite a different reason, though. They say the institutionals don’t understand the technology world.

Indeed, most investment managers or research divisions at major Israeli investment houses do not issue formal surveys of the country’s high-tech sector. Aside from analysts at Oppenheimer and Harel Finance, who regularly cover most of the largest Israeli technology companies, other research divisions treat the sector as if it didn’t exist.

“I don’t understand what EZchip does, so I can’t buy it for my clients,” one investment manager told TheMarker. Even though EZchip shares yielded phenomenal 180% returns over the last three years and the company is now traded on the TA-25 with a market valuation of NIS 3.7 billion, local institutional investors have not bought in.

Drawing technology companies to the TASE requires a three-way collaboration between the stock exchange itself, which sets investment policies and provides the trading infrastructure; institutional investors, which provide the cash; and the companies, which need to deliver the goods. In 2010, the TASE set itself a goal of becoming a magnet for global high-tech companies. It organized several conferences over the last three years, bringing together tech executives and investment managers. It also launched a course in partnership with Tel Aviv University to give analysts a background in the life sciences, with the aim of expanding coverage of the big drug companies.

So far, though, the results have not been impressive − only four technology companies have listed on the TA-25 since 2010, much fewer than expected.

The stock exchange is not giving up.

“We intend to approach companies with sales in the $300 million range that need funding in an attempt to convince them to use the TASE for the early phase of raising capital,” says TASE CEO Ester Levanon.

Do you believe you can persuade them to choose Tel Aviv over New York?

“We’re aiming for companies that aren’t yet ready to raise capital overseas − companies that are on the right track but are not yet large enough to attract capital in the United States. Our experience shows that companies that start out on the TASE do not delist later. We’re also trying to lure American companies to dual-list in Israel. We met representatives of four such companies over the last year, but to no avail.”

Levanon rejects the claim that institutional investors are not familiar with the technology sector. The real obstacle is that it’s difficult to evaluate these companies due to a lack of information, she says.

“There is little analysis of technology companies, and this undoubtedly poses a barrier. We’re trying to find a company that would charge to conduct this kind of analysis.

Technology companies we’ve spoken to have expressed great interest in this. They feel they’re missing out on investment opportunities.”

Regulatory issues will have to be tackled before this happens, though. Israeli law currently bars companies from publishing their own analyses, due to concerns about bias. In the United States, in comparison, biomed and technology firms pay for and publish detailed analysis of their performance. Last summer, Israel Securities Authority chairman Shmuel Hauser set up a committee to look into advancing investment in publicly held companies that are active in R&D.

“This committee was created after many discussions about easing regulatory requirements for the high-tech sector,” explains Levanon. “The committee is enabled significant cooperation between many agencies, including the Finance Ministry capital markets division, the Tax Authority, the National Economic Council, the Justice Ministry and the TASE management. The committee will submit its recommendations this month, and I’m very optimistic.”

How will things look two years from now?

“Technology companies will have a significant breakthrough on the stock exchange. You only need one or two to list and then the rest will join. That’s what happened with biomed companies, and there’s no reason to believe the same pattern won’t reoccur with high-tech,” she notes.

‘Not ready for Wall Street’

Guy Preminger is head of the high-tech division at PricewaterhouseCoopers, which prepares most of the prospectuses for high-tech companies considering raising money in Israel. Like Levanon, he is optimistic about their future on the TASE.

“There’s a positive feeling in the air, and more bonds are being issued. I believe we’ll soon see the high-tech sector’s first stock issues as well,” he says.

PwC is currently preparing prospectuses for several high-tech companies that are gearing up for a market debut, says Preminger, though he declines to name names. “There are currently 200 companies having trouble raising money that are not yet ready for Wall Street. These companies would be glad to issue stock here since they’d have trouble raising significant capital overseas.”

Preminger believes that the low interest rates will also draw more money into the stock market, helping boost share issues in the short term.

“One good issue from a technology company will pave the way for others,” he says. “The markets are waiting for these companies to fulfill their potential.”

Not everyone shares this optimism. “No analyst would consider an analysis financed by the company itself,” says Rami Rosen, head of the research division at Harel Finance, one of the only investment houses in Israel that specializes in the technology sector. “Unlike the American market, I can’t see the Israeli market making room for companies with a vision but no real activity yet.”

But Rosen admits that institutional investment managers are beginning to understand this sector better. “The inclusion of Mellanox and EZchip in the TA-25 has forced investment managers to study and evaluate these companies. But things won’t change in the foreseeable future, despite the TASE’s good intentions.”

Once the TASE and the Securities Authority go ahead with their plan to ease restrictions on the listing of R&D companies, all that remains is for institutional investors to recognize their enormous potential, and let the snowball effect take over.

Nir Keidar