Exclusive Q&A With Simon Jaffa on Mergers & Acquisitions
Posted: 15th January 2015 08:37
1. Can you talk us through the current M&A landscape in your jurisdiction?
2014 was an extremely busy year on the M&A front, with there being significantly more activity than the previous year. There was a concern that the Gaza conflict in the summer of 2014, might result in deals being aborted. However, our experience was that business continued as usual. There was no discernible slowdown in foreign interest and investment in the market. Presumably many investors doing business in Israel have already factored into the equation that this is simply one of the risk factors to consider if you have reached the conclusion that Israel offers some great investment opportunities. Technology remains the main focus for foreign investors, though other industries such as food, oil and gas and water were also of interest. We also witnessed an increased presence from European and Chinese companies looking for new opportunities in Israel.
2. What sectors currently provide the best opportunities for investment?
The Israeli technology sector continues to attract worldwide interest. This sector itself can be broken down into various subsectors such as software, semi-conductors etc. Over the last 15-20 years Israel has become synonymous for producing ground-breaking and innovative technology to the extent that many large multinationals regard Israel as a kind of technology incubator. New companies are continually looking to open offices here to identify opportunities. In 2014, we represented UK Plc Spirent who made their first Israeli acquisition. That being said, the opportunities in Israel extend far beyond technology. Biomed also offers opportunities for foreign buyers. We have also witnessed some interesting non tech deals in the past year such as Bright Foods (a Chinese company) acquiring Tnuva, a major dairy company.
3. What are the key components for deal success?
Patience, commitment, and assembling the right team. Any deal has many intricacies, and given the uniqueness of some of the rules and regulations in Israel, closing a deal here might take longer than an investor initially expects. Israel is rightfully called a “start-up nation” and is constantly trying, usually successfully, to invent a more efficient and cheaper wheel. This leads to continuous adaptations to standards which may cause delays. These potential pitfalls can be navigated by a competent legal advisor, one who can help his client understand the important and non-important issues and communicate accurately and properly to the investor.
4. What are the main risks and challenges when conducting cross-border M&A?
Cultural misunderstandings and assumptions play a large part in these challenges. For example, local banks may offer very different financial packages than what a foreign investor may be expecting. We know when there’s still room to improve a deal as well as being able to identify when knowing when the proposal is as good as it gets! Another challenge is the inability of foreign investors to adapt to local practices. For example, the regulatory landscape in Israel is sometimes very different than what they are used to and investors need to be flexible enough to deal with it or this can lead to many problems. An example would be that many start-ups in Israel accept funding from the Chief Scientist; this creates regulatory restrictions on exporting the company’s IP. These type of issues needn’t be deal breakers. Our role as legal advisors to many acquirers is to navigate these issues so that there are no unwelcome surprises. In many cases our knowledge of the local landscape means we can approach the relevant authority and successfully obtain pre rulings when required.
5. With global M&A reaching a seven year high, can you talk us through what has led to its resurgence and how this newfound growth can be sustained?
The 2008 global recession had less effect on Israel than say Europe or North America. Israeli banks suffered fewer losses due to their generally conservative practices (Israeli Banks had already faced financial meltdown in the early 80’s!). Therefore, the economic downturn in Israel, and the consequential slowdown in investments, was not due to the fundamentals of the economy, but rather due to the financial constraints of foreign investors. Throughout the so called “downturn years”, the Israeli M&A market has remained relatively buoyant. As the global economic situation has improved, we have seen an increase in interest of mainly foreign technology companies wanting
to invest in. Google’s acquisition of Waze in 2013 was a case in point and certainly our expectations are that this trend will continue.
6. Despite the growth in M&A activity, 2014 also witnessed a record number of failed deals with $573 billion worth of deals withdrawn. Why has it been so difficult for big corporations to close a deal?
In our experience, many potential deals in Israel are aborted due to differences in the expectations regarding earn outs. Israelis tend to have an expectation of receiving the vast majority of the consideration upfront. Any non-Israeli buyers want to condition deals on future performance. This is a major contributing factor to failed deals. There’s often a serious concern on the Seller side that any contingent consideration will ultimately not be paid out and its surprising how many transactions fail due to the perception that the earn out will never be paid. Our role is typically to advise buyers and we need to know how to make local sellers comfortable with an earn out type arrangement while at the same time clearly defining targets and milestones that will trigger additional payments. The key to reducing the possibility of a failed deal is being sufficiently sensitive to these sorts of issues and ultimately creating a mechanism that will work for both parties.
7. Why is it important to consider the tax issues and implications of a possible deal at the very outset?
Structuring a deal in the right way is a key part of M&A. Get this wrong and what may have looked like a profitable acquisition may suddenly become borderline at best or even loss making. From the start, we work with buyers to minimize the tax burden, avoid against tax inefficient schemes and where relevant to receive certain government grants and benefits. The Israeli government has an interest in encouraging foreign investment. This means that, in order to encourage the investment of foreign capital, there are various incentives granted to reduce the potential tax liabilities. There are also incentives and subsidies for capital investment in different parts of the country. We recently represented a foreign purchaser who agreed to keep the target’s IP in the country and this allowed us to negotiate a major tax advantage for our client. Likewise, we often advise buyers to address the tax authorities with proposals concerning inbound investment. In certain situations, these type of commitments may result in a more favourable tax treatment for a buyer. Our tax department regularly assists in obtaining these types of rulings
8. In your opinion what jurisdictions and industries should we be keeping an eye on for M&A activity in 2015?
Technology investments will remain a big draw for non-Israeli companies. VCs have made major investments over the last few years, and many of those portfolio companies are now reaching maturity. Many of these VC funds will be looking for these mature portfolio companies to complete exits in 2015 (and thereby assist with new fund raising that certain of the funds wish to initiate). The fact that the IPO market in the US and Europe are in a better state than previous years will hopefully assist this process. Our expectation is that M&A activity in 2015 will exceed 2014 levels.
Additionally, we think other sectors will interest non Israeli investors. Israeli off shore oil and gas presents many interesting opportunities and recent antitrust rulings will only hasten the entry of more non Israeli players into the oil and gas sector. We should also mention Israeli agriculture. Israeli Agrotech is becoming increasingly sought after. A Chinese company’s recent acquisition of the Tnuva dairy company is testament to this. We expect to see more deals in this space including particularly the water industry where we see many interesting companies with unique and exciting technology.
Simon Jaffa, a founding partner of Barnea & Co., heads the Infrastructure and Project Finance Department. Simon has over 15 years in project finance, during which he has advised a wide range of leading infrastructure companies. Over the course of his career, he has led cross-border transactions and accrued extensive experience in representation of clients in their dealings with Israeli authorities.
Simon's experience extends across all major areas of infrastructure, including transportation, electricity, water, solar energy and gas.