There is no reason to worry. The markets might be crazy, currencies in a frenzy, and billions if not trillions of dollars lost because the financial and business world lost the edge of nervous optimism needed to infuse mere dreams with a sense of expectation. Israeli high technology can cross the bridge because it has the ideas, money, and speed of delivery needed to thrive.
The person who said there was no reason to worry was AccessNet president Eyal Shavit. AccessNet are Israeli correspondents for Broadview Associates, the investment bank that has a lock on high profile mergers and acquisitions for Israeli Information Technology companies. He was asked to comment on the situation because he has a keen and interested view on the future of the M&A market, which, according to the conventional wisdom of the day, many Israeli technology companies will need if they are to make their mark, now that IPOs are much more difficult.
Essentially, the relationship between high tech start-ups and their financiers is not at all different from the triangle of supply, demand and expectations that drives the technology company's relationship with the marketplace for real goods. Shavit was interviewed at the Journey 98 conference organized by "Globes" and Kost, Forer, Gabai -- Ernst and Young. Those who attended the conference from the money side of the technology game seemed more relieved than anything, because the one clear message of the current upheaval is that valuations for start-ups were too high. Their rapid decline makes for a more comfortable buyers' market. Several entrepreneurs who were doing the rounds of the money people recognized the same factor, though, being sellers, none of them wanted to be quoted by name. The general feeling seemed to be that, yes, things have changed, but the market is still there, as are the people with ideas and the money they need to make these ideas happen.
Shavit literally snorted at the notion that Israeli high tech is entering into a recession. "If I see just one percent unemployment among technical people I'll begin to believe that," he said.
"The story has changed," he said, "but there still are two advantages that won't go away." Israel, he said, is still an "unbelievable spring of ideas," and Israeli companies can "develop stuff much faster," which is a critical element in today's marketplace.
The high valuations of the past year or so will soon be described as a bubble, which is how any overheated market is described in hindsight. When a bubble bursts there are usually some casualties among people who took the hype too seriously. It's probably too early to really assess the size of the bubble or the casualties, and Shavit carefully phrased his words when he said: "I think a few of the less-experienced (Israeli) VCs ran the risk of overpaying" for equity in start-ups they funded.
Broadview, with its record of 81 information technology M&A deals worth about $4 billion during 1997, "walked away from multiple opportunities because the owners wanted three times more than the market would bear," he said. The trend for overly high valuations was not uniquely Israeli and affected the entire market, but might be felt more strongly here because Israel has become "more expensive than most places in the US in term of wages," according to Shavit.
With Broadview's corner on at least most of the Israeli M&A Information Technology market, Shavit will be on the receiving end of these valuations at the end of the day. Today’s consensus view seems to be that the already strong forces making for consolidation in the tech market are only likely to grow even stronger, because of the market itself, and because of the financial difficulties over independent flotations. The trend is true not only for start-ups but also for publicly traded companies. In this scenario, high initial valuations and lower M&A exits wipe out a large part of the profits from the various investors.
In the tech market, waiting for a higher price is a dangerous game, because markets change so quickly that opportunities just disappear. Cienna, one of the most successful start-ups of the decade, was just bought at much reduced price because it lost a key contract with AT&T, and there wasn't much time to hang around and wait for things to improve. One a far smaller scale, the same thing could happen to some of the over-generously valued Israeli start-ups of the last decade when their turn comes for the quick decision to sell or merge.
At the very bottom of the market, Shavit foresees a problem. Broadview, he says, does not handle M&A deals for less than $20 million, and some potential M&A exits will be stuck because of this. He thus quite obviously pointed out an opportunity for other operations to work the lower levels of the market, if the demand for M&A brokerage is as high as everybody seems to think it is right now.
Another factor that stands out is that a lot of Israeli high tech companies are selling much more in Europe, and are finding a far more receptive market over there than they did only a few years ago. There is a close affinity between the market for products and the market for capital. There might be other options besides an American IPO or American M&A.
The last time the process of completing the capitalization of Israeli start-ups halted was sometime around 1993, after a spate of tiny IPOs in New York that left investors disappointed and most of the companies without enough capital to really pursue their market. Within not much more than a year, it was back to business in a better and bigger way. A global recession would have to be pretty deep before it began to hit an industry characterized by chronic under capacity.
Published by Israel's Business Arena on September 6, 1998