Israeli startups develop appetite for acquisitions

More and more of the capital raised by Israel's startups is being invested in M&As. But can Israel's young entrepreneurs succeed where so many tech giants fail?

Tipalti cofounder and CEO Chen Amit was until recently strenuously opposed to mergers and acquisitions. "ECI where I worked for some years made 17 acquisitions totaling billions of dollars overall. All these 17 acquisitions failed, making for an unsuccessful education on mergers and acquisitions."

But Amit found that Tipalti's customers wanted the company's product to include an extra component that it didn't have. Tipalti had developed a platform for automation of payments and management of suppliers for organizations. But the platform only began after the supplier submitted an invoice to the business and Tipalti's customers wanted the product to start earlier in the process, when the employee of an organization submitted a procurement request. Tipalti realized it would take two years to develop such a system and so sought an acquisition.

Amit said, "At the start of 2020 we ruled out two candidates for acquisition - a US company and a Canadian company. In the first company the CEO didn't stop telling me what was wrong with Tipalti and I didn't see any way that the development organizations would connect. With the second company I travelled to San Francisco to meet the CEO and he didn't turn up. Our talks with them were bizarre."

"Towards the end of last year, I consulted with ironSource CEO Tomer Bar-Zeev about things related to Tipalti and he referred me to an Israeli startup called Approve, and said that he was sure that one day we would buy them. When I spoke with the founder, Bar Winkler, I immediately heard that his strategic approach resembled ours."

In April, Tipalti announced that it was acquiring Approve for an estimated $40 million. "There are so many things to do in terms of development, so if we can find an opportunity to speed up the processes and move on to the next thing, I adopt it with open arms," explains Amit. "Tipalti raised financing at a company valuation of $2 billion last September and in my estimation the valuation has since doubled. So it's logical to invest one or two percent of our value in an acquisition that will take us forward two years."

Israeli startups have always made acquisitions and Bar-Zeev's ironSource is an excellent example of a privately-held Israeli company that has expanded through no less than 12 mergers and acquisitions. And last year, the trend of acquisitions by Israeli startups significantly accelerated.

According to an analysis conducted by Vertex Ventures partner Tami Bronner, based on data provided by PitchBook, 2021 is expected to be a record year in terms of acquisitions by Israeli startups. PitchBook reports that in the first half of 2021, Israeli startups acquired 24 companies, after acquiring 26 companies in all of 2020, and just 20 in 2019 and 19 in 2019. These figures are not comprehensive because small deals are not always reported but the trend is clear.

Israeli startups don't only buy other Israeli startups. Some of the acquisitions are of American companies and this month Israel fintech company Rapyd even bought an Icelandic payments company for $100 million

While the motivation behind Tipalti's acquisition of Approve was to expand its product, some acquisitions are undertaken in order to expand the customer base. AI-based transcription and captioning company Verbit, another Israeli unicorn, announced in May that it was acquiring VITAC for an estimated $50 million, in order to get access to its major North American customers, like CNN and Fox.

A similar aim was behind Next Insurance's acquisition of US insurtech company AP Intego. The acquisition for an estimated hundreds of millions of dollars brought Next AP Intego's 75,000 customers. "The benefits of the deal are twofold because AP sells only one product, employer liability insurance, while Next has different insurance products that it can offer customers," explains FinTLV Ventures founding partner Gil Arazi, an investor in Next. In addition, Next's technology allows AP to double the size of its capabilities and close deal with potential customers."

Some of the acquisitions, especially the relatively small ones, are simply designed to recruit more skilled employees for the company. "Back up company OwnbackUp acquired Tel Aviv-based Merlinx this year in order to recruit a team of skilled security experts, highly sought after employees in the Israel job market."

In contrast to the past, less Israeli startups are today being acquired in their early stages by American corporations, and instead they prefer to grpow and develop independently. Those Israeli startups have recently won record breaking capital investments, which they are using more and more for mergers and acquisitions, a tool that was once the preserve only of large publicly traded companies. The draft Economic Arrangements bill, which was published this month, includes a clause that will expand the tax benefits on acquisitions made by Israeli companies in Israel and abroad and this could speed up even further the trend.

Bronner said, "In the past Israel startups raised $6-$10 million in Series A rounds, while today the amount is $30-$50 million. Together with this money growth expectations and very swift growth. Today it is impossible to build a company slowly and cautiously and everything has to be fast and large. Mergers and acquisitions can be an engine of swift growth, if startups learn to use it correctly."

But the statistics surrounding mergers and acquisitions are not encouraging, showing that worldwide 70%-90% of them end in failure. Can relatively small Israeli startups with young entrepreneurs succeed where giant companies with experience have failed?

Bronner comments, "One advantage for small companies making acquisitions is that the founders and CEOs are very involved in the entire process and that is super-critical. Sometimes large companies are not acquainted with the company they buy and what it does but with small companies there is a better understanding of what an acquisition can contribute to it. At the same time, Israeli entrepreneurs today are much more sophisticated than in the past and have learnt how to manage an operation with several centers in different countries."

Arazi warns, "There are cases where the acquisitions can push startups backwards. The companies undertaking the acquisitions merge their revenue with the acquired company in order to create apparent growth. But the danger is that the acquired company does not grow at the same exponential rate as the acquired company, which harms the valuation multiples that the market gives the amalgamated venture."

Amit said that Tipalti's acquisition of Approve whetted its appetite for more deals. "Meanwhile the merger is working excellently and we are examining more deals that will help us expand the product and enlarge the market," he said, "But I still have the scars from ECI and I think that we need to be very cautious and think very carefully before doing a deal."

Published by Globes, Israel business news - - on July 14, 2021

© Copyright of Globes Publisher Itonut (1983) Ltd. 2021

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