IPOs have replaced M&A as alternative route?
A recent article in Calcalist discussed the fall in the number of exits in the first nine months of 2020 and the leap in public issuances of Israeli companies.
We spoke to lawyers at the forefront of this trend to find out more about the factors explaining the rise in offerings in the past year, the impact of COVID-19 and when will the volume of M&A transactions return.
Head of Lipa Meir’s Capital Markets and Securities department, Eitan Shmueli noted: “In the last few months, several technology companies, such as GenCell, Ecoppia, Aquarius Engines, Highcon and Human Xtensions, raised on the Tel Aviv Stock Exchange an aggregate sum of NIS 1 Billion. The valuations of these companies were between NIS 500 Million NIS and NIS 1 Billion. This trend marks the resurgence of the stock market as a source of initial capital raising, which is the primary role of the stock market.
This trend could be explained by the high valuations of the tech companies at the U.S. stock markets, where technology stocks have soared to very high values. Such high valuations have influenced the valuations in the TASE and enabled the IPOs. Most of the capital raised was by way of book building that required underwriting of at least 25% of the issue amount – which led to the payment of underwriting and management fees to the underwriters in substantial sums, which in turn strengthened the trend.
However, the trend of merging new companies with stock market skeletons has not weakened and is a source of capital raising for small companies that are not yet eligible for IPO capital.”
Ron Ben-Menachem, a partner in Herzog Fox & Neeman’s Corporate and Capital Markets Department, added: “The increased activities in capital markets, can be attributed to several factors, including low interests rates, stimulus packages and other actions taken by governments and central banks to support the economy due to COVID-19, and the increased uses in technology consumption – which leads to increases in share prices of technology companies.
While some of these factors directly relate to COVID-19, we expect that public offerings will continue to be a viable and important financing channel after COVID-19, subject always to the regular ebbs and flows of the market.”
Gary Emmanuel, New York Corporate and Securities partner at McDermott Will & Emery LLP adds: “It’s a combination of factors including better valuations, maturity of the tech sector and greater institutional appetite for investing in the Israeli capital markets. Israel is no longer the start-up nation; with more unicorns per capita than any other country in the world, the tech scene is bustling with activity. As long as we see success stories in the tech world post-IPO, we can expect to see a continuation of this trend.”
Guy Ben-Ami, Counsel and leader of the Israeli Cross-Border Practice at Carter Ledyard & Milburn, added: “Many Biomed companies see the IPO process as their best way to raise a considerable amount of funds quickly, funds they need for FDA clearance or for more clinical trials. VCs sometimes are hesitant to inject more money at that point and the risk/reward profile certainly fits an IPO on NASDAQ for instance. COVID-19 ‘helped’ because some of the Biomed companies leveraged their potential solutions in combatting the pandemic, but it is not temporary, it’s the nature of the business.”
With the string of announcements about COVID-19 vaccines, will there be an immediate and growing interest again in M&A transactions?
“We think the buyers are still there. Naturally, in conditions of uncertainty buyers tend to be more careful, but good companies will always attract attention and be a viable target for acquisitions, in the COVID-19 period and thereafter,” said Ben-Menachem. “A vaccine will certainly improve the prospects of companies in sectors such as airlines, hotels, and hospitality.”
Ben-Ami adds: “There is certainly a lot of optimism. I have seen clients say that could finally do on-site due diligence visits for example, something that was badly missing during the pandemic. Zoom virtual visits are not the same.”