The schedule of the first visit to Israel by Merrill Lynch global co-head of M&A Philip Yates, 44, was very crowded. After all, it’s not every day that someone of his caliber, who regularly meets with senior executives from General Electric (NYSE: GE), Vodafone Group (NYSE, LSE, FSE: VOD), and General Motors (NYSE: GM), comes to Israel, and everyone wanted a piece of him. In a four-day visit, which was extended by a day because of the general strike, Yates met with dozens of Israeli companies from all sectors, government officials, and economic leaders. He also visited the Western Wall in Jerusalem.
”I left a request in the Wall. I’m Catholic, but I prayed, and I even talked with a rabbi. When I looked back, I saw that Yoram wasn’t next to me, and was talking on his phone. Even at such a moment, I’m sure he was going to close another deal.” When Yates says “Yoram”, he means his escort on his visit, Yoram Inbar, who has managed Merrill Lynch Israel for the past eighteen months. Inbar replaced Jerry Mandel in the job.
Merrill Lynch, one of the world’s largest brokers, has a presence in 35 countries, where it manages assets worth $1.5 trillion for its clients. Merrill Lynch engages in research, underwriting, capital issues, and consultancy for enterprises, governments, and institutions around the world.
Yates does not disclose the names of the companies he met, but says that they included the large companies in all industries: health, chemicals, security, insurance, telecommunications, real estate, and holding companies. It is usually difficult to extract statements from managers of Yates’s rank, but even he had difficulty concealing his enthusiasm about Israeli companies. To tell the truth, he didn’t even try.
”I’ve been in a lot of countries, and I haven’t seen quality like in Israel for a long time,” Yates says. He was sitting on the 37th floor of the Azrieli Towers, where Merrill Lynch Israel has its offices. “When I travel around the world, I see that CEOs are more confident. It’s hard to quantify. Market analyses frequently tend to overlook the emotional aspect, but it’s no less important than other aspects.
”I was glad to see further proof of this in Israel. Company managers are definitely demonstrating more confidence. They know how to analyze the market in which they operate, and they have another positive attribute they think ahead, which I can’t necessarily say about Western European countries. I didn’t see many managers in Israel talking about the past. They talk about the future, and about their international ambitions. I like the approach of the managers here.”
”Globes”: Is there anything else that the Israeli companies you saw have in common?
Yates: ”What all the Israeli companies I saw in the past few days have in common is that they work in expanding industries. Most also face competition from Third World countries, and are using their intellectual property to expand. These companies don’t have to mine resources from the land at the cost of huge investments; they just have to use their IP. Furthermore, these companies are one step ahead of the game, and they manage to withstand temptations.
”I refer to M&A, in which we’re seeing a lot of activity behind the scenes. That brings me back to my philosophy about the confidence of managers. Today, even if deals are good from both a financial and logical point of view, managers need the confidence to justify them to their board of directors. For example, in a deal in which I was recently involved, the WPP Group of the US acquired advertising firm Gray Global for $1.3 billion. Martin Sorrell, WPP’s CEO, is a confident manager. Incidentally, that’s not the case in Europe. You could say that there’s a lack of confidence there.” Another big deal in which Yates was involved was the acquisition of P&O Princess for $5.4 billion by Carnival Corp. (NYSE: CCL), controlled by the Arison family.
What temptations do Israel companies face?
”In general, I’ve been involved recently in so many deals in which negotiations took many months, and were ultimately unsuccessful. Now, I can say that the number of these deals can be expected to increase, both those involving Merrill Lynch, and in the market as a whole. I don’t believe that any company should go out and make acquisitions just because it’s a public company with shares. A lot of companies erred by giving in to market pressure.
”Where the Israeli market is concerned, I saw during my tour companies whose organic growth was more than adequate. They proved able to withstand the temptation of acquisition. I’ll sum it up by saying that I was impressed by the ability of management at Israeli companies to see beyond short-term temptations. They’ll try to form joint ventures, cooperation agreements, and licensing agreements, in preference to acquisition. It goes against my business, which promotes M&A, but I’m nevertheless impressed.”
Activity will increase
At the beginning of September, Merrill Lynch promoted Yates from European head of M&A to global co-head of M&A, and will now move from London to New York.
What can we expected this year?
”Since the beginning of the year, we’ve been working on deals that weren’t in the pipeline a year earlier. We therefore believe that activity will grow this year, and there will be more large mergers after the US elections. Regardless of the US election results, that will remove a cloud of uncertainty hanging over the heads of investors, and give the economy a push forward.”
Inbar, 36, managed Merrill Lynch’s investment banking desk in London before becoming manager of Merrill Lynch Israel in 2003. The responsibility for ensuring Merrill Lynch’s success in Israel falls on his shoulders. Inbar joined Merrill Lynch in 2001, after six years as manager of Lehman Brothers’ capital market desk in Israel.
Merrill Lynch’s ten employees in Israel have their hands full with work, and Inbar is optimistic about the future. “2004 was very active in IPOs and other forms of financing,” he says. “So far this year, there have been eight major Wall Street issues by Israeli companies of various types, four of which were IPOs. We can therefore say that the period in which it was impossible to finance activity through the capital market has come to an end.”
Next in line are Ness Technologies, Shopping.com, Saifun Semiconductors, and Ormat Industries (TASE: ORMT). Ness is expected to complete its IPO this week, led by Merrill Lynch, together with Lehman Brothers. “When we look ahead, 2005 will at least as good, with at least five IPOs by Israeli companies. In addition, some of the companies that recently raised money will conduct secondary issues in 2005,” Inbar says.
”Companies with a good story, which have promised things in their road shows, met certain milestones, and whose shares have risen there’s no reason why these companies shouldn’t turn to the capital market a second time next year. They’ll certainly combine this with a merger or other significant announcement,” predicts Inbar.
August is a poor month
”Globes”: It’s recently been said that the window of opportunity for issues is closing. You don’t agree?
Inbar: ”No. The market exists, and the window is open. August is always a poor month, and we’ll soon see issues returning, such as Ness’s scheduled offering. Our optimism is a very strong signal to the Israeli market. Take a look at the performances in recent issues, and you’ll see it yourself. Lipman Electronics Engineering’s (Nasdaq: LPMA; TASE: LPMA) issue was oversubscribed 5.5-fold. The coupon for MA Industries’ (Makhteshim Agan) (TASE: MAIN) bond issue, the largest on the Tel Aviv Stock Exchange (TASE), was 1.75%. Given Imaging’s (Nasdaq: GIVN; TASE: GIVN) secondary issue was at a discount of only 0.5% on the share price, and was oversubscribed 3.5-fold.”
What about M&A? We haven’t seen any significant deals in the past two years. The only ones were Zoran Microelectronics’ (Nasdaq: ZRAN) acquisition of Oak Technology, Teva Pharmaceutical Industries’ Ltd. (Nasdaq: TEVA; TASE: TEVA) acquisition of Sicor, and Check Point’s (Nasdaq: CHKP) acquisition of Zone Labs. What is expected in this category?
”Many foreign companies are contacting us, and I believe we’ll see more and more deals by foreign companies making acquisitions here in the coming year. Deals like these, involving companies like Motorola, Intel, and Texas Instruments, can involve either public companies, but also prices of $50-100 million, i.e. start-ups. It’s rare for us to be involved in such deals, but it will also help develop the industry here. Incidentally, we’ve been asked many times to locate start-ups here for potential acquisitions. At Merrill Lynch, we sometimes provide such service free of charge to major companies on the Standard and Poor’s 500.
”Furthermore, we believe that deals like those you mentioned, in excess of $250 million, will become more frequent in 2005, although only a few such deals are anticipated. In this case, it can be seen that the stock exchange also foresees emergence from a crisis 6-8 months before recovery actually occurs, and that’s what’s happening here, too.”
What about your competition here?
”Almost all investment banks currently operate in Israel. The competition is at a high level, to the ultimate benefit of the clients. I don’t want to comment specifically about our competitors’ business, but it’s no secret that we’re seeing a lot of Citigroup in Israel. In the end, Merrill Lynch has a very large commitment to Israel, and it’s clear that people do business here because it’s profitable, both for us, and for other banks.”
Are banks pursuing clients now?
”I don’t know whether pursuing is the right word, but every bank tries to provide more solutions, and be committed to the client. Consider this - every CFO of a large company now gets telephone calls regularly from five bankers. He or she has a lot of good ideas for his company in front of him. In order to get his or her business, we have to be competitive. I’m not talking about cutting our commissions, which we don’t do, but about giving him or her the best offers and most comprehensive services.”
What about the local market? You didn’t mention it at all, except for the MA bond issue.
”The TASE is very active, and it has been becoming more so for the past 12-18 months. For the time being, volumes aren’t high enough for us, but we definitely believe that this situation will change. I’d say that 2004 will be remembered as the year of blocks. For example, Koor Industries (NYSE: KOR; TASE: KOR) sold a block of MA Industries shares, and Migdal Insurance (TASE: MGDL) sold a block of Bank Leumi (TASE: LUMI) shares. Here, too, if the trend gathers steam and expands, I believe that we’ll enter this field, too. In general, I think that financial derivatives on shares and trading in the loan market will develop on the TASE. That jives with my observation that that the level of sophistication in the Israeli market is rising, and foreign banks, in combination with local entities, are pushing it forward.”
To its Israeli business, which currently includes capital raising, issues, trading, privatization, and research, Merrill Lynch hopes to add a share of an Israeli pension fund. “We had a clear strategic goal to be involved. We spent effort and energy on analysis,” Inbar says. “We eventually decided to bid on our own through the RP Capital Group, in which we have invested (Merrill Lynch has a 30% stake G.P.). We had a specific price target for the asset, but over the final 24 hours of the tender, we saw that prices had gone off our radar screens, and we realized that someone else was going to win.”
Merrill Lynch eventually gave up, and did not even submit a bid. The winner in the tender for Mivtachim, Israel’s largest pension fund, was Menorah, with a bid of NIS 710 million. “We’re still considering ways of entering the Israeli pension fund field,” Inbar says.
Merrill Lynch is also very interested in the Bachar committee recommendations. The committee is expected to recommend separating the mutual and provident funds from the commercial banks, which will create a more competitive market, and decentralize the Israeli financial system. ”The Bachar committee has yet to publish its recommendations. Like many other concerns, we’re waiting for their decision. What’s definite is that if the recommendations are good for us, we’ll be a leading player in the field, just as we wanted to be in the pension funds,” Inbar declares.
It was reported this week that Migdal had sold 50% of Migdal Capital Markets to US investment house Bear Stearns at a company value of NIS 110 million. The sale was aimed at creating a link between Migdal and Bear Stearns, in preparation for the anticipated separation of the provident funds from the banks.
Will you make similar deals?
”The Bachar committee recommendations aren’t final yet. We’ll enter the market only when it’s fully transparent and comprehensible. Like any investor, we don’t like operating in uncertainty. Sometimes we’ll want full control, and sometimes we’ll want a minority share with an option. Meanwhile, we’re looking at deals unrelated to the Bachar committee, such as those involving insurance companies. Merrill Lynch hasn’t made a strategic decision on how to proceed, because we’re waiting for the committee report, but I can guarantee you that we won’t let any business opportunity in Israel pass us by.”
Published by Globes [online] - www.globes.co.il - on September 28, 2004