Barry Levenfeld is a regular visitor to Silicon Valley. The technology and life sciences specialist at Israeli firm Yigal Arnon & Co has to fly from Tel Aviv to San Francisco, via New Jersey or Los Angeles. Currently the journey takes around 20 hours.
However, he hopes that an online petition to establish a direct flight between Tel Aviv and San Francisco will lead to a more civilised journey. The proposed 14.5-hour flight will usher Israeli high-flyers straight into the growth company and venture capital centre of the world.
Levenfeld believes that a successful petition will provide further momentum to Israel’s status as a high-tech, life sciences and start-up hub. ‘I have been advising technology companies for as long as anybody in Israel. When the tech boom really started to happen here, it was like being in a time machine whenever I went to Silicon Valley. You would learn about trends that wouldn’t hit Israel for two or three years. Now the time lag has shortened to about two or three months, if that.’
Israeli innovation is very much in demand. Last year Google acquired Tel Aviv-based travel mapping service Waze for $1bn. Cleary Gottlieb Steen & Hamilton and Israeli firm Goldfarb Seligman & Co advised Google, while Waze was represented by Israel’s GKH Law Offices and Silicon Valley-based Gunderson Dettmer. This was just one of a series of high-value acquisitions by American companies of Israeli targets.
It may not be a wholly new phenomenon, but industry observers say that these transactions are a testament to Israeli high-tech and start-up companies’ willingness to take a longer-term approach to building a business, rather than selling out at an early stage.
The big break-up: conglomerates face split
After several years of public discontent, including the infamous cottage cheese protests of 2011 – where resentment over the cost of living manifested itself in demonstrations over the price of Israeli diet staple, cottage cheese – Israel’s parliament (the Knesset) passed a law in December that is expected to profoundly alter the structure of the economy. The law will require the break-up of monopolies and oligopolies, which are widespread in Israel. A 2010 Bank of Israel study indicated that ten Israel business groups controlled 41% of the market value of all public companies in the jurisdiction.
Barnea & Co’s Simon Jaffa says: ‘Potentially this is the most far-reaching reform of the Israeli economy in the last 50 years. The groundswell of public opinion is so strong and there is so much disillusionment with how the economy functions, politicians have no choice but to listen to the people.’
A handful of Israeli tycoons control a substantial proportion of the economy through ‘pyramid’ holding structures. These tycoons and their business empires have been consistently blamed for rising consumer prices.
Asset sales are inevitable, though time limits on disposals are understood to be generous. Parliament has been careful not to create a fire sale situation.
Tycoons will no longer be permitted to hold financial assets alongside non-financial assets, but the ramifications for the wider economy are equally profound.
As Israel’s large conglomerates are forced to dispose of certain businesses and assets, lawyers expect many bidders to be foreign investors, including private equity houses. Clifford Davis, a partner at S. Horowitz & Co, sees this as a ‘huge fillip to private equity’. He says that as Israel has a small banking market and there are restrictions on leveraged lending, offshore private equity funds such as Permira and CVC Capital Partners will be the most likely acquirers.
No exit
Lawyers close to the Israeli market now point to the increasing number of high-value public offerings on overseas exchanges, such as Nasdaq, and later-stage acquisitions by foreign acquirers as an illustration of greater belief and risk-taking within the Israeli economy.
Daniel Chinn, a corporate partner at domestic practice Tulchinsky Stern Marciano Cohen Levitski & Co and formerly a partner at Israeli venture capital fund Israel Seed Partners, says there is a fundamental shift in the psyche of Israeli tech and start-up companies and that this is having a profound effect on demand for legal services. ‘Now people are saying “let’s build companies”,’ he explains. ‘These companies are all deciding not to sell out at the first opportunity and build real large-scale companies in Israel. There is additional risk along the way, but if they are able to reach that goal then all of a sudden they are playing with the big boys rather than being eaten by them.’
One of Tel Aviv’s pre-eminent technology incubators, The Time, published a report in 2012 entitled No Exit. The report suggested sentiment was changing within the Israeli tech community – its sole intent was no longer to sell out to the advances of wealthy overseas acquirers. There was a belief that Israel’s time had come and its horde of entrepreneurs was focused on building major global brands.
Data from 2013 indicates that this is happening. Five Israeli companies listed on Nasdaq in 2013, while many others have targeted the New York Stock Exchange (NYSE), and the London Stock Exchange’s main board and AIM market.
Joshua Kiernan, a US-qualified partner in White & Case’s capital markets group in London, says that the stream of IPOs coming out of Israel is virtually unprecedented. The head of the firm’s Israel practice says: ‘2013 and going into 2014 has been the busiest period we have had in Israel for quite a few years. This is as a result of the large number of deals last year and the pipeline is even bigger this year.’ Chaim Friedland, a partner at Gornitzky & Co, says the firm is currently working on six public offerings in the US for Israeli issuers.
One of the biggest transactions White & Case’s Israel group worked on in 2013 was the $1.16bn IPO on Nasdaq of Wix, an Israeli company that markets a cloud-based web development platform.
Wix vice president and general counsel Eitan Israeli suggests that the company is one of many that sees itself as a future global titan rather than just a potential target of a Facebook, Cisco or Google. He says Israeli entrepreneurs always have an eye on the global markets and many now feel that they can access these under their own brand and their own funding. ‘Like many other Israeli tech companies, the local market isn’t our primary one. This is common and has a lot to do with the size of the Israeli market, which is why tech products are often developed with the international market in mind,’ he explains.
Fired up: targeting Israel’s energy reserves
In January this year, the Palestine Power Generating Company entered a $1.2bn gas supply deal with the owners of Israel’s offshore Leviathan gas field. It is the first contract to supply gas from this field, Israel’s largest natural gas reservoir.
In February Noble Energy, the biggest foreign investor in Israel’s offshore gas industry, announced a $500m deal to supply natural gas from the Tamar field to Arab Potash and Jordan Bromine Company.
The deals represent the anticipated beginnings of an enormously lucrative commercialisation of Israel’s natural gas reserves. Major gas discoveries only occurred recently – the Tamar field in January 2009 and the even bigger Leviathan field in December 2010.
For years, Israelis wryly complained about the state’s lack of energy resources in a region that is so closely associated with oil and gas. Now they are faced with a need to develop the necessary infrastructure to enable efficient domestic consumption as well as the exportation to neighbouring jurisdictions as well as those further afield. ‘The Israeli gas industry is in its infancy,’ comments Dan Hacohen, head of the projects and energy practice at Agmon & Co., Rosenberg, Hacohen & Co.
Yet he acknowledges that over the last few years, members of the Israeli oil and gas industry have experienced one surprise after another. ‘It is beyond what everyone hoped for. The surprise grows and grows with the data that comes in. It is even larger than we ever thought and it is clear to everyone that this is a game changer,’ he explains. ‘It shows that the whole basin has huge potential.’
Scale-up
Israel, portrayed as a Start-Up Nation in the 2009 book by Dan Senor and Saul Singer, is now being billed as a ‘scale-up nation’ by many industry observers, including Jonathan Medved, the founder of crowd-funding platform OurCrowd.
It explains the global legal profession’s increasing fascination with the small jurisdiction. DLA Piper now represents more than 100 Israeli clients on their international matters. In 2013 it advised on 20 Israeli-related transactions with an aggregate value of over $2bn.
Jeremy Lustman, a Washington-based partner at DLA Piper, who is also its main representative on the ground in Israel, says the nation is so small and politically isolated that its companies are forced to look overseas. He also indicates that corporate venture funds are now pumping hundreds of millions of dollars into the jurisdiction and multinational acquirers are circling potential targets like never before.
Berwin Leighton Paisner, which has a representative office in Tel Aviv, is also enthused by the amount of outbound work emanating from the jurisdiction. Jonathan Morris, chair of its Israel desk, remarks: ‘The market has really picked up. We are seeing IPOs coming to London, which we weren’t seeing before. We are aware of at least 15 companies that are at various stages of the process, whether it be the main list or AIM.’
Friedland says that Israel’s strength in life sciences is a key factor in this capital markets activity: ‘The US capital markets are awash with life sciences. I am a surfer who has found a wave and I am enjoying the ride.’
Meanwhile, Tuvia Geffen, a partner at Naschitz, Brandes, suggests Israeli companies are intent on exploiting the public markets while the window is still open. ‘Nobody is sure how long it is going to last, so people are trying to do things as quickly as possible,’ he says. ‘Even an AIM offering takes four to five months and an SEC offering will take eight to nine months.’ In July 2013 he advised online trading platform Plus500 on its $75m IPO on AIM and since then its stock price has increased by a striking 500%.
Oded Har-Even, managing director of ZAG-S&W – a joint venture between Israel’s Zysman, Aharoni, Gayer & Co and US law firm Sullivan & Worcester – says that Israel is in the grip of IPO fever. He represents a number of biotech and pharmaceutical companies that have their sights on the public markets. ‘Why raise $4m or $5m from venture capital when you can go to Wall Street and raise $20m or $25m?’ he asks. In 2013, he and his team advised Alcobra Pharma on its $25m IPO on Nasdaq.
Before being overtaken by China recently, Israel had more companies listed on Nasdaq than any other country outside of North America. And while Nasdaq has been the primary destination for the technology community, Israelis are not wedded to one foreign exchange. Kiernan says NYSE, LSE and AIM are also key capital markets for Israeli issuers and the firm’s Israel practice: ‘We’re a business that likes to generate revenues from high-quality deals and Israel has been an important part of our capital markets practice. It is a small country, but generates a disproportionate number of IPOs compared to other countries.’
He is also sanguine about the current climate: ‘As long as the bubble doesn’t burst again and the equity markets remain open, I expect a robust practice over the next couple of years. I am doing a lot of travelling and a lot of hours, but when the going is good you just have to do it.’
Fired up: targeting Israel’s energy reserves (continued)
With huge demand for gas in the Middle East, Europe and the Far East, the necessary infrastructure will have to be created to transport the gas from the fields to the consumer. Simon Jaffa, head of the infrastructure and project finance department at Barnea & Co, believes that a thaw in relations between Israel and Turkey could pave the way for a pipeline through to Europe. A liquefied natural gas (LNG) plant is another option.
Big foreign investors are already readying themselves for a substantial play in Israel. In February, Woodside, a world leader in LNG, signed a memorandum of understanding to acquire a $2.7bn stake in the Leviathan gas field.
In June 2013, Italy’s Edison entered a joint operating agreement with Israel’s Ratio Oil Exploration to take a 20% stake in two offshore natural gas fields, Neta and Roy.
‘It’s a particularly exciting time to be a practitioner in the oil and gas sphere,’ Jaffa says.
‘It is certainly an area that didn’t exist eight years ago,’ says Jack Smith, a partner at Gornitzky & Co who represented Woodside. ‘Transactions in the upstream natural gas sector are indicative of a significant change that has occurred in the Israeli economy.’
Jaffa adds that there is still a lot of work to do before the Israeli gas sector becomes part of the international markets. ‘We are dealing with a regulatory environment that is constantly evolving. For a foreign company assessing the value of a particular gas field, it is not just “X” times the amount of gas, because it is still not clear what the obligations will be on the owners and operators of the gas fields, including investment in gas infrastructure.’
Financing will be another key component and Jaffa argues that this has led to a significant amount of interest from foreign law firms.
Herzog Fox & Neeman’s Alan Sacks believes there is still too much uncertainty around how much gas will be available for export: ‘Foreign players are interested in the export potential of Israel’s gas reserves and although the government has made a decision in principle, there is still a lot of work to be done in enacting regulations that make it clear what can be exported and what tax regime will apply.’
Multiple investment flows
Flights arriving from the east may become increasingly regular too, with growing interest from Asian investors. Japanese e-commerce leader Rakuten bought Viber Media, co-owned by Israeli entrepreneur Talmon Marco, for $900m in February. White & Case represented Viber Media, with Linklaters advising Rakuten.
In addition, China’s Bright Food Group is reported to be in discussions with private equity sponsor Apax Partners to acquire its Israeli portfolio company Tnuva Food Industries.
Freshfields Bruckhaus Deringer is understood to be advising on the deal and Adir Waldman, managing director of its Israel focus group, says that the team is working on transactions involving a variety of other jurisdictions. ‘The US is still the economy most closely linked with Israel, and Europe its largest trading partner if viewed as a single entity, but there is continued interest in Asia and the emerging markets. The market is always active and incredibly dynamic,’ he says.
In 2013, DLA Piper represented Shanghai Fosun Pharmaceutical Group on its $240m acquisition of Israel’s Alma Lasers. Gornitzky & Co provided local Israeli counsel to Fosun. DLA’s Lustman remarks: ‘There is real Asia-Pacific interest in Israeli innovation.’
Levenfeld believes that the increasing dynamism of Israel’s economy and the growing interest in it shown by foreign investors owes much to several government initiatives, including a cohort of successful technology incubators. ‘The government has done great things to encourage R&D and early-stage technology companies,’ he argues. ‘It has put a lot of investment lately into the biotech world – both by helping set up biotech investment funds and by supporting technology incubators.’
The presence of the incubators has been even more valuable, given the retrenchment of Israel’s venture capital industry. A lack of available finance has seen Israel’s major venture capital funds replaced by their American counterparts. Benchmark, Sequoia Capital, Bessemer Venture Partners and Kleiner Perkins Caufield & Byers are among those that have an impressive record in Israel.
It seems Israel is well positioned to ride the global technology boom that has led to such recent headline-grabbing transactions, such as Facebook’s $19bn acquisition of WhatsApp in February, and its law firms are adapting fast to these business drivers. In 2013, Meitar Liquornik Geva Leshem Tal Law Offices merged with banking and finance specialist Kantor, Elhanani, Tal & Co and hired a team of ten lawyers, including four partners, from Herzog Fox & Neeman. In a year, Meitar has grown from 150 lawyers to 231 and, according to corporate partner Cliff Felig, it is now Israel’s largest firm. Felig believes this growth owes much to the success of the high-tech and start-up industry: ‘We are a very small country overall, but we get outsized attention and that is a real tribute to Israeli innovation.’
Yet with Israel’s history and ongoing tensions in the region, it is not surprising that lawyers are a little circumspect in some regards. Herzog Fox’s Alan Sacks asks: ‘Will next year show a huge downturn? Maybe. In the back of our minds we always live with the thought that a big bank might collapse under the burden of bad debts, or there may be a geopolitical development. There are so many variables, but all I can say is that things are buzzing right now.’ LB
The Legal 500 ISRAEL: Recommended firms |
|
| Firm | Total recommendations 2013 |
| S. Horowitz & Co | 13 |
| Yigal Arnon & Co | 12 |
| Fischer Behar Chen Well Orion & Co | 11 |
| Herzog Fox & Neeman | 11 |
| Meitar Liquornik Geva Leshem Tal Law Offices | 11 |
| Goldfarb Seligman & Co | 10 |
| Gornitzky & Co | 10 |
| M. Firon & Co Advocates and Notaries | 10 |
| Naschitz, Brandes | 9 |
| Shibolet & Co | 9 |
| Firm | Top-tier recommendations 2013 |
| Herzog Fox & Neeman | 8 |
| S. Horowitz & Co | 8 |
| Gornitzky & Co | 4 |
| Meitar Liquornik Geva Leshem Tal Law Offices | 4 |
| Agmon & Co., Rosenberg, Hacohen & Co | 3 |
| Fischer Behar Chen Well Orion & Co | 3 |
| Goldfarb Seligman & Co | 3 |
| Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co | 3 |
| Yigal Arnon & Co | 3 |
| Naschitz, Brandes | 2 |
| Tadmor & Co | 2 |
| Yehuda Raveh & Co | 2 |