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By Howard Stock
Israel’s Evolving Relationship with the U.S.
ISRAEL
SPECIAL SPONSORED SECTION
The American Lawyer | October 2016 113SS
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“As building roads brings more cars, the entrance of multinational law !rms seems to bring more work for Israeli law !rms.”
—JANET LEVY PAHIMA, HERZOG FOX & NEEMAN
SPECIAL SPONSORED SECTIONSPECIAL SPONSORED SECTION
114SS October 2016 | The American Lawyer
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JEREMY LUSTMAN
DLA PIPER
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Israel is a leading destination for foreign investment,
far beyond anything that its small size and short history
might imply. With an exceptional concentration of
innovators and cutting-edge technologies, along with
one of the most highly educated, entrepreneurial and
multi-cultural workforces in the world, Israel has turned
into a very interesting place for investors.
Israel has a liberal investment environment, and most
areas are open to foreign investors. Over the years
the Israeli economy has proved itself to be extremely
stable, providing a solid investing environment for
international investors.
Looking forward, the Government recently proposed
to reduce corporate tax rates for technology companies
to 6%-12%, making the Israeli economy more attractive
for investment by foreign IP based companies. The
reduction is in line with the OECD policy for taxation
of IP income by the country in which the income-
generating activities take place. With its strong
technologically-skilled workforce and concentration
of multinational R&D centers, Israel is trying to take
advantage of these changes to encourage global
companies to increase their investments in Israel.
M&A ACTIVITY
In the last few years, foreign investment in Israel
has significantly increased. There are reasons to
expect that this trend will continue. One significant
“driver” is the enactment of the Law for Promotion
of Competition and Reduction of Concentration
(the “Competition Law”). The purpose of the
Competition Law is to reduce concentration in the
marketplace and to encourage competition.
The Concentration Law was enacted to address
what was seen as the ‘over-concentration’ of holdings
in the Israeli economy — traditionally dominated
by large conglomerates, where perhaps 20 families
controlled 25% of the listed Israeli companies
and 50% of the total market share on the Tel Aviv
Stock Exchange, one of the highest concentrations
among developed economies. The Competition
Law prohibits the holding by one entity of both
significant financial enterprises and real (non-financial)
enterprises. As a result, a number of major financial
institutions and real enterprises are required to be sold
by December 2019.
Here are a few examples to demonstrate foreign
involvement in the Israel M&A scene. In July 2016,
BC Partners, a leading global private equity firm,
and Public Sector Pension Investment Board, one
of Canada’s largest pension investment managers,
announced the acquisition of Keter Group, a resin
consumer products provider, based on a company
valuation of US$1.6 billion. Also in 2016, Cisco
spent US$320 million on Leaba, a chip-design start-up,
and US$293 million on CloudLock, a developer
of security technologies for the enterprise cloud;
Sony acquired chip developer Altair for US$212 million;
Oracle bought cloud computing specialist Ravello
for US$500 million, followed by the acquisition of
advertising start-up Crosswise; Intel acquired Replay
Technologies, a 3D video start-up, for US$175 million;
and Dentsply Sirona acquired MIS, a dental implant
systems manufacturer, for US$375 million.
Another factor contributing to increased M&A
activity in Israel is the growing interest from Asian
investors, particularly from China and Japan, and
particularly in Israeli technology. In 2015, the
Chinese State-owned company Brightfood acquired
control of Tnuva, Israel’s largest dairy concern, in a
deal valuing Tnuva at approximately US$2.2 billion.
Additional examples include XIO Group’s US$510 million
purchase of Lumenis, and the acquisition of Altair
by Sony.
FOREIGN INVESTMENTS
IN ISRAEL
YUVAL MEIDAR
PARTNER
HERZOG FOX & NEEMAN
DANA ZURNEUMANN
PARTNER
HERZOG FOX & NEEMAN
HANAN HAVIV
PARTNER
HERZOG FOX & NEEMAN
“Israel is by many measures the country relative to its population that has done the most
to contribute to the technology revolution.” (Bill Gates)
118SS October 2016 | The American Lawyer
Private equity firms have also created a
noticeable investment trend in the Israeli
market, encouraged by valuations of Israeli
companies which tend to be lower compared
to other developed economies. Two
significant transactions of foreign private
equity funds are the buyout of ClickSoftware
by Francisco Partners for US$438 million and
the acquisition of Xura (formerly Comverse)
for US$643 million by Siris Capital.
HITECH SECTOR
It has long been a cliché to call Israel the
“Start-Up Nation”. Israel is known globally
for its hi-tech industry and its strong
R&D activity - Israel is a world leader in
investment in R&D (4.8% of the country’s
GDP), and has the highest number of
technology start-ups per capita in the world.
With a population of only 8 million, Israel
created 1,400 new technology start-ups
in 2015 alone and there are now more
technology companies from Israel listed on
the NASDAQ Stock Market than any other
country except the U.S. and China. Israel
attracts more venture capital relative to the
size of its economy than any other country
in the world. According to the IVC-KPMG
High-Tech 2015 Survey, capital raised by
Israeli tech companies in 2015 set a record
—708 deals accounted for US$4.43 billion
—the highest annual amount and number
of transactions ever recorded. The amount
reflected a 30% increase from the previous
record in 2014, when 688 deals attracted
US$3.47 billion. In 2015, foreign investors,
who are responsible for more than 50%
of yearly investment in Israeli start-ups, spent
an additional US$6.5 billion on technology
acquisitions.
The significant growth of M&A and
investment activity in Israel has continued
in the first half of 2016. According to the IVC
H1/2016 Exits report, there were 45 M&A
transactions for a total value of US$3.32
billion. Beyond M&A and venture finance,
foreign companies have expanded their
innovation toolkit to include R&D centers,
incubators and accelerators, and investment
arms, all of which are proliferating in Israel
across a variety of technology sectors.
The country has become a vibrant hi-tech
laboratory where global companies are
testing new models for innovation. Over 280
multinational companies operate R&D centers
in Israel, including the likes of Microsoft,
Google, Facebook, Apple, IBM, Qualcomm,
Intel, Samsung, HP, Siemens, GE, Philips, Cisco,
Barclays and LG.
OIL AND GAS SECTOR
The discovery in 2009 of the ‘Tamar’ gas field,
followed by the discovery of ‘Leviathan’, one
of the largest deep-water discoveries of gas
worldwide, has turned Israel into a significant
player in the Oil and Gas Sector. After a major
public outcry against the undue power of
the monopoly that effectively controlled
the offshore gas discoveries, (resulting from
the fact that the two major offshore gas
discoveries, the Tamar and Leviathan fields,
are both owned by the same consortium
(Noble Energy and the Delek Group)), the
Israeli Government has now adopted a
“gas outline agreement”. The agreement is
aimed at dissolving the monopoly in the
gas industry, determining the entitlement to
export gas from Israel, and setting the rules
under which the gas companies will sell
their gas. The agreement removes several
uncertainties surrounding the commercial
exploitation of the offshore gas discoveries,
which is likely to attract new foreign investors
to Israel in the coming years.
2015 marked a turning point in the M&A
and investment activity in the Israeli market,
with exceptionally diverse investments by
international investors. The high volume of
investment activity in the first six months of
2016 suggests that this trend will continue. In
order to ensure future growth in the market
however, as well as to maintain Israel’s unique
status as an investment phenomenon,
Israel must leverage its strength in the
technology sector while maintaining a stable
regulatory environment for foreign investors
with attractive incentives for multinational
companies in a competitive global landscape.
AUTHORS:
Hanan Haviv
Head of Hi-Tech | Herzog Fox & Neeman (HFN)
Hanan Haviv heads the Hi-Tech Department
at Herzog Fox & Neeman. Hanan joined
HFN after spending six years in a leading
U.S. law firm. As part of his M&A practice,
Hanan has represented some of the world’s
leading technology companies in their
Israeli acquisitions. Hanan’s practice focuses
on corporate and securities law, with an
emphasis on M&A transactions, and the
representation of technology and life science
companies, ranging from start-ups to
established companies and venture capital
funds.
Yuval Meidar
Hi-Tech Partner | Herzog Fox & Neeman (HFN)
Yuval Meidar is a partner in the Hi-Tech
Department of Herzog Fox & Neeman. Yuval
has expertise in the areas of business and
commercial law, mergers and acquisitions,
venture capital and corporate finance. He
focuses his practice on the representation
of entrepreneurs, venture capital firms, start-
ups and mature companies in the hi-tech
industry.
Dana Zur-Neumann
Hi-Tech Partner | Herzog Fox & Neeman (HFN)
Dana Zur-Neumann is a partner in the Hi-Tech
Department of Herzog Fox & Neeman and
heads the firm’s Silicon Valley Representative
Office. Dana’s expertise is in the areas of
business and commercial law and she is
responsible for strengthening HFN’s presence
in the U.S.
The American Lawyer | October 2016 119SS
hfn.co.il
SPECIAL SPONSORED SECTION
“Israel attracts more venture
capital relative to the size of
its economy than any other
country in the world.”