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48 The US-Israel Legal Review 2019
ISRAEL: MERGERS & ACQUISITIONS
exports shows no sign of abating.
Similarly, recent regulatory reforms have
opened the door for Israeli cannabis producers
to export their product for medicinal purposes.
Strong bonds between the academic-medical
world and businesses in this area herald great
promise for an industry that has finally been let
off the leash. Within months of these regulatory
developments, eight M&A deals involving Israeli
cannabis firms were registered in 2018, the
majority of which involved existing companies
entering into mergers in an attempt to raise funds
and drive up valuations. However, the industry as
a whole remains somewhat controversial and as
such, companies hoping to take advantage of these
developments need to ensure that they are able to
navigate the additional regulatory requirements.
For example, companies hoping to cultivate and
export their product must receive approvals from
the Israeli Police and the Ministry of Health.
Moving beyond specific industries, it is also
important to consider what strategic decisions
Israeli companies are taking. Understanding trends
in the market and adapting accordingly will provide
investorswithanedgeinanaggressivelycompetitive
market, where even the smallest advantage can
make all the difference. The next section of the
article looks at some emerging trends that we have
identified, and considers their significance.
MARKET TRENDS IN 2019
To start with, it is quite clear that the Israeli market
will continue to draw the interest of private equity
funds and VC’s, and that the resources available to
these institutions will continue to drive transaction
volume. Despite the rise in interest rates which
will affect returns, we believe debt is accessible
to financial and strategic acquirers at relatively
low rates (historically speaking) and with ‘light’
covenant packages. These factors will weigh into
strategic development considerations. For example,
the availability of funding has a negative effect on
IPO’s, and promotes M&A as the preferred route
for fund raising and exit strategy, a trend that has
been emerging for several years now. Even where
companies elect to go down the IPO route, they
consistently avoid the Tel Aviv Stock Exchange,
with all eight of the public offerings undertaken by
Israeli companies in 2018 occurring abroad.
Beyond the universal factors that push
companies towards the M&A route worldwide,
there are several factors which are particularly
relevant to companies considering undertaking
a public offering on the Tel Aviv Stock Exchange,
such as burdensome corporate governance and
disclosure requirements, lower valuations (though
this depends on the nature of the company in
question), lower liquidity post IPO, as well as
intense and often highly-critical media coverage.
Second, the continued interest being shown by
Chinese funds in all sectors of the Israeli market is
likely to increase, despite growing unease by some
media commentators and government officials
of a ‘Chinese invasion’. In 2018, Chinese investors
participated in six of the seventeen largest funding
deals in Israel. However, investors must be wary of
the warnings from the influential Israeli security
complex which could lead to regulation restricting
such investments in particular industries, or could
even culminate in an ‘oversight mechanism’ which
would increase administrative and regulatory
burdens on investors and companies alike. These
concerns are most threatening to those sectors
that are already heavily regulated, such as financial
sectors, certain advanced technologies, and
infrastructure. Respectively, we may encounter
local regulatory limitations and restrictions
similar to those imposed by the Committee on
Foreign Investment in the United States. There
remains uncertainty as to whether such limitations
will indeed be implemented and become a reality,
but they should be considered as a potential hurdle
that may eventually need to be crossed, especially
in circumstances of involvement by Chinese funds
in heavily regulated sectors.
Third, when it comes to structuring deals we
believe we will see increased ‘bid transactions’
due to the significant competition between buyers,
combined with the increasing aspiration for sky-
high valuations. In light of the highly desirable
nature of many of the target companies in the
Israeli market, sellers find themselves in a position
of strength and leverage this to their advantage.
Sellers will negotiate with several buyers
simultaneously andwithout the desired exclusivity.
As such, in a market where buyers’ alertness and an
ability to move quickly has always been a valuable
asset, increased competition compounds this, and