The few merger and acquisition deals at the end of the year did not change the fact that 2008 saw a paucity of deals in Israel compared with the preceding years. "Globes" reported that sales of Israeli companies totaled $1.2 billion in 2008, compared with $3 billion in 2007 and $2.6 billion in 2006. The common reason cited for the decline is the global credit crunch, which is being felt in Israel as well. There is no argument that the credit crunch is a major obstacle for the economy in general, and M&A deals in particular.
Even Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA), Israel's acquisition leader, was forced to finance its acquisition of Barr Pharmaceuticals Inc. with a combination of share offerings, financing from its own sources, and bridge loans.
Nonetheless, it seems that the economic crisis itself is no obstacle to M&A deals. On the contrary, it can drive such deals, if they are share-swaps, rather than cash transactions. This is precisely the time when opportunities for acquisitions are flourishing like mushrooms after a rainstorm, and when everyone hopes to streamline and cut costs, a share-swap M&A deal can be a means for reducing expenses in the short term and achieving high and sustained long-term future growth.
History teaches that more M&A share-swap deals are made during economic slumps than during boom times, when the seller usually prefers cash. Besides the ability to finance a deal, which is critical in and of itself, the current reality also reflects the assessment of the shareholders on both sides about the relative value of their companies at the relevant date, compared with a different one.
For example, in a bull market, the seller will value his shares as relatively expensive, and consider it cheaper to pay cash. In contrast, in a bear market, the seller won't want to sell his shares in the hope that he will be able to get a higher price for them in the future. In a cash deal, the price is absolute and unaffected by the relative value or price of other companies in the market. In contrast, if the seller gets the buyers' shares for his own, even if the value of the buyer's company or its share are also low, the seller will benefit from a rise in the share price of the merged company and of the stock market.
As always, the decision on the structure of a deal and the type of payment is based on a great many additional considerations. The inherent disadvantage of payment in shares is the dilution of the holdings of the buying company's shareholders, to the point, in some cases, of the loss of the controlling interest.
If the buyer is an investment fund or other financial institution, such as the acquisition of Dmatek Ltd. (LSE: DTK) by London Merchant Securities Capital plc (LSE: LMS) (LMS Capital), the share allocation may be less relevant. However, the stock allocation and dilution is not always the real obstacle to a deal.
Another disadvantage of a share-swap deal is that shareholders of the acquired company are the public, it is necessary to consider the need of a prospectus. In addition, if the company allocating the shares receives financing from the Office of the Chief Scientist or benefits from the Investment Promotion Center, the allocation requires the approval of these two agencies.
On the other hand, payment with stock in an M&A deal also involves considerable benefits. In addition to foregoing the need for financing in the current business climate, in some cases it may be possible to defer the tax payment on sale of the shares in exchange for the shares in the new company.
It goes without saying that the essential condition for an M&A share-swap is the trust by both parties that the whole (the merged company) is greater than the sum of its parts (each party's proportionate share in the company), so that each party benefits. The best examples are synergetic deals between companies with complementary or supplementary business, which enables streamlining.
In conclusion, the economic crisis can facilitate M&As that create a sounder, larger, and stronger company for the future. As the Book of Ecclesiastes says, "Two are better than one… for if they fall, the one will lift his friend."
Shirin Herzog is a partner at Ron Gazit, Rothenberg & Co. She is also a guest lecturer in corporate governance at Georgetown University.
Published by Globes [online], Israel business news - www.globes-online.com - on January 4, 2009
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