‘Trying to analyse retroactively the last 12 months is probably the most challenging assignment.’ So reflects Mike Rimon, corporate and securities partner at Meitar Law Offices. ‘Those 12 months consist of the second half of 2021 and the first half of 2022. The contradiction is as big and significant and meaningful as it can be.’
It’s no secret that events of the last few months have caused the global economic outlook to change dramatically from the buoyancy of last year. Despite the shadow of the Covid-19 pandemic lifting from many parts of the world, a fall in consumer confidence caused by Russia’s invasion of Ukraine, ongoing global supply chain issues and spiralling inflation rates mean that almost every jurisdiction is experiencing a slower 2022. Israel is no exception.
According to the Organisation for Economic Co-operation and Development (OECD), the Israeli economy shrank by 0.4% in the first quarter of 2022, a stark contrast to 2021, during which the country’s GDP grew by 7.9%. Inflation is also a concern, with the CPI rate standing at 4% in April, though well below the double-digit figures seen elsewhere, it is beyond the government’s target range of 1-3%.
On a more positive note, the country is building from a strong position in 2021. An effective pandemic strategy and a world-leading vaccination programme meant Israel was able to navigate the Covid crisis better than most other jurisdictions.
‘One thing the government did is make out-bound investment for Israeli investors who invest through partnerships a little bit more difficult from a tax perspective.’
Clifford Davis, S.Horowitz & Co
Moreover, the country was able to enjoy a short-lived period of governmental stability. March 2021 saw the fourth general election in two years, which resulted in a coalition government led by incoming prime minister Naftali Bennett, leader of the New Right party.
Though the stability was not destined to last (another election is scheduled for November 2022 after the coalition collapsed and Yair Lapid took over as prime minster on 1 July), even a year of political continuity is to be treasured in a country that has seen so much upheaval in recent years. Clifford Davis, co-chair of the international corporate group at S.Horowitz & Co, acknowledges: ‘The recent government did manage to pass one budget. That might not sound much, but it’s a big thing because the Israeli government hasn’t been able to pass a budget for a few years. One thing they did is make out-bound investment for Israeli investors who invest through partnerships a little bit more difficult from a tax perspective.’
Capital markets in freefall
For many years, the hi-tech and startup sectors have been at the core of the Israeli economy. Not possessing a wealth of natural resources, the country’s well-educated workforce, combined with a general appetite for innovation and entrepreneurship, has seen it outpace some of the world’s largest economies in developing successful companies.
Indeed, 2021 brought an unprecedented level of success in that respect. Throughout the year, 33 new companies achieved unicorn status. From January to December, companies raised an eye-catching $25bn in funding, according to stats from data provider Start-Up Nation Central.
Unicorns aside, last year also saw several high-profile listings on the international markets. Many of 2021’s most valuable IPOs, such as those of cloud-based software developer Monday.com, which listed on Nasdaq, advertising tech company ironSource and security company SentinelOne, which both listed on NYSE, took place in June.
The second half of the year also saw some notable listings, such as smart car company Arbe Robotics, which listed on Nasdaq at a valuation of $525m in October.
The M&A market was similarly bullish. Each year sees several promising startups absorbed by international acquirers, be it global tech companies or private equity houses. Highlights from 2021 include the purchase of cloud security provider Avanan for $300m by Check Point, and security company Vdoo, which was acquired by JFrog, also for roughly $300m.
The savviness of investors played a large part in the success, as Davis explains: ‘The hi-tech sector has been very adept at investing in parts that can be easily monetised. Foodtech is a very big thing and is going to get bigger. There is also fintech and biotech, which is always going to be a big thing.’
Early 2022 has been a different story. Rimon recounts how quickly the outlook changed: ‘When 2022 came in, it didn’t take a lot of time to see something was going on. There was a meltdown in the capital markets. It became clear that IPOs would be very challenging.
‘When 2022 came in, it didn’t take a lot of time to see something was going on. There was a meltdown in the capital markets.’
Mike Rimon, Meitar Law Offices
‘In the first half of 2022, despite the meltdown in the capital markets and the decreasing valuations of public companies, we’ve still been very busy, although somewhat less than in 2021. It’s still to be seen. I personally believe that there’s going to be very few IPOs this year. But I’m pretty optimistic that we’ll see a lot of M&A, one of the reasons being that the strategic buyers are expected to be more active.’
The market has also been hit by a global reduction in SPAC activity. Starting in the US, early 2021 saw an explosion of SPAC mergers globally, with Israel at the vanguard of the trend. They were seen as a quicker route to the public markets for developing companies. In the first half of 2021, the top three M&A transactions in the country were all SPAC mergers, as ironSource, REE Automotive and TWC Tech Holdings all took the SPAC route to US listings.
The flood of activity has not been maintained. Due to a combination of international and domestic regulatory clampdown, a general reduction in IPO activity, and a number of cautionary tales where companies that listed via a SPAC merger saw their valuations plummet, SPAC activity has dwindled into insignificance in Israel.
On the other hand, a recent uptick in M&A has been noted across the sector and could be seen as a response to funding drying up. Ella Tevet and Ayal Shenhav, head of IP and hi-tech respectively at Gross & Co, explain: ‘In the last three or four months there was a slowdown in the market. There is a decrease in the VC’s investments in Israeli companies.
‘We see more potential M&A transactions within the range of $15m-100m since the companies understand that the exit will take longer and need more funding.’
‘As the current recruiting marketplace is highly competitive, it is difficult to recruit and retain good and experienced lawyers.’
Ella Tevet and Ayal Shenhav (pictured L-R), Gross & Co
Though best known for its tech sector, there are other areas of the market that provide substantive work for lawyers. ‘Israel at the moment is like one big construction site,’ quips Davis. ‘There are huge amounts of construction and infrastructure projects taking place each year. And many of these projects are billion-dollar projects. They can put some of the M&A work, in terms of complexity, risk and investment, in the shade. It is difficult to find a major government construction tender for a project that is worth less than $300m.’
In October 2021, finance minister Avigdor Lieberman said that almost $35bn worth of infrastructure projects are set to be launched over the next decade. Headline developments include the Tel Aviv metro, set to start construction in 2025, and a cable car project to connect Hutzot HaMifratz to Haifa University, though there are plans for numerous projects ranging from airports and railways to power plants and water desalination facilities. Such infrastructure is fertile ground for mandates, with advice ranging in the lifecycle from the initial tendering process to the inevitable litigation and arbitration proceedings.
New player in town
International firms have never gained much of a foothold in Israel, and the market is instead home to a number of sophisticated, full-service, local firms that compete aggressively for market share and talent. Some sectors, such as litigation, white-collar crime and intellectual property are also populated by boutiques, which often house individuals with reputations as strong as anyone in the larger firms.
The top end of the legal market was shaken up this year by the recently-announced merger of Yigal Arnon and Tadmor Levy. Both solid firms in their own right, the new entity is set to become the third-largest firm in the country behind Meitar and Herzog Fox & Neeman, and will add a new dimension to a premium market that already sees a number of players jockeying for position.
Such competitiveness translates to the recruitment market. An unemployment rate of just 3.6% validates the common observation that talent is difficult to find. To make matters worse, law firms are finding it increasingly difficult to compete with a cash-rich, hi-tech sector that can offer bumper pay cheques and rapid development.
As Tevet and Shenhav note: ‘As the current recruiting marketplace is highly competitive, it is difficult to recruit and retain good and experienced lawyers.’
There are however suggestions that, as the tech market becomes tougher and less funding is available, it may be that a career at a traditional law firm becomes appealing once again.
Should that be the case, firms may have a decision to make on how they approach a recruitment market suddenly tipped in their favour. The routes particular firms will take remain to be seen, but some, particularly the most dominant players in the market, will inevitably be able to resist the temptation to welcome everyone in with open arms, and will instead focus on taking the cream of the crop. For the mid-tier firms that have suffered significantly in the recruitment market in recent times, a cautious approach will be needed to ensure that they do not take an ‘all you can eat’ approach that may cause issues in the long term.
Survival of the fittest
Even in times of hardship, some practice areas, and by extension well-hedged firms, continue to prosper. Yael Aridor Bar-Ilan, founder of litigation boutique Dr. Yael Aridor Bar-Ilan Law Offices explains: ‘Traditionally, in periods of slowdown or economic recession, the commercial dispute resolution field is active. Usually when businesses are facing adversity, disputes rise to the surface leading to more litigatory work.’
It is not all doom and gloom. Despite a tough first quarter, the OECD still predicts that the economy will grow by 4.8% across 2022, and a further 3.4% in 2023. Hardly banner years, but a far cry from the recession that a number of global economies will inevitably find themselves in.
Though it appears that economic shrinkage will be avoided, it is still set to be a difficult time for a hi-tech and startup market that has had it all its own way in recent years, and many companies will have to change tack or risk going under. As Rimon puts it: ‘We expect to see in 2022 and in 2023 more startup companies struggling to survive. The well-funded companies will be in a better situation.
‘Usually when businesses are facing adversity, disputes rise to the surface leading to more litigatory work.’
Yael Aridor Bar-Ilan, Dr. Yael Aridor Bar-Ilan Law OfficesPhoto credit: Orel Cohen (Calcalist)
‘A number of hi-tech companies that are publicly trading have seen their stock price go down ridiculously,’ adds Davis. ‘I foresee that, if the markets continue to go down, you’re going to get a lot of public-to-private transactions, backed by private equity, with the idea of going public again in five years’ time.’
However difficult the last couple of months have been, there is a general agreement that it is but a temporary blip in the long-term prospects of the market. ‘There is still a lot of “dry powder” available for VCs which closed in 2021 or early 2022,’ affirm Tevet and Shenhav, ‘VC fund raising is very active. Many Limited Partners understand that 2022 will be a good VC vintage.’
Whatever trials the coming months bring, they are unlikely to dampen the indomitable spirit that has seen the Israeli market successfully weather the coronavirus storm and many years of political turmoil. Aridor Bar-Ilan concludes: ‘It is impossible for me to predict what other law firms will do, but our boutique law firm is focusing on getting the best possible result for our clients while taking into account relevant market changes that may affect their interests.’ LB