Exits in Israel's high-tech industry in the first half of 2018 were worth a total of $6.22 billion in 58 deals, according to the exit report from IVC-Meitar. This total includes two deals worth over $1 billion each: the acquisition of automated inspection equipment company Orbotech by KLA-Tencor for 3.4 billion; and the $1 billion acquisition of NDS by Permira. These two exceptional deals raised the average exit amount to $107 million in the first half of this year, from $31 million in the first half of 2017.
Excluding these two deals, the remaining 56 exits in the first half of 2018 totaled $1.82 billion, giving an average of $32.5 million, down nearly 50% from the averages in 2015 and 2016 The number of exits in the first half of 2018 was down 20%, continuing a downward trend that started in the first half of 2015, when there were 72 exits. The aggregate of deal amounts in the $100 million to $1 billion range was $1.1 billion, just 30-35% of the aggregate of the amounts in the same range in each half year from the first half of 2014 to the first half of 2016.
Mergers and acquisitions (M&As) dominate exit activity in Israel, both in numbers and amounts. In the first half of 2018, there were 53 M&As (excluding the two mega-exits) totaling $1.71 billion. There were few such exits in the $100-500 million range, which contributed to the slowdown. According to the IVC-Meitar report, this range usually captures the largest amounts share and is responsible for most of the returns. The number of deals in this range has halved in the last few years, from 13 deals in the first half of 2015 to 6 in the first half of 2018. The first half of 2018 saw only three IPOs, compared with 8 in the corresponding period of 2017. The amounts raised by IPOs totaled $115 million the first half of 2018, compared with $247 million in the corresponding period.
“Usually, the second half is weaker compared to the first half of the year, and by now the decline both in number and amounts of exits indicates that 2018 is going to finish with poor exit performance. However, despite the sluggish performance in H1/2018, the annual exit activity might rise in a stronger second half," said Marianna Shapira, Research Director at IVC Research Center.
The average exits multiple (return on capital invested on average in companies that made an exit during this period), excluding the mega exits, declined in the first half of 2018, reaching only 3.06 compared with 5.4 in 2014.
The comparison between the exits amount and the amount raised by the acquired companies suggests that the continuing increase in capital raised between 2013 and 2016 is not supported by exit activity. The average multiples have been declining since 2014; however, the decrease in non-VC-backed exits since 2014 is much steeper.
IT & Software and Life Science accounted for thelargest number of exits in the first half of 2018. Life Science companies' share of the total number of exits soared to 21%, compared with 6% in the first half of 2014. Three of the biggest exits in the first half of 2018 were in this sector. There were three IPOs by Life Science companies: Sol-Gel, Entera Bio, and Motus GI Medical.
The main technology clusters that stood out in the first half of 2018 are the same as in the last five years: Cyber, Adtech, AI, and Pharmatech. AI companies led with nine exits totaling nearly $500 million.
Meitar Liquornik Geva Leshem Tal partner Alon Sahar said, “It’s important to draw attention to the connection between capital raising and mergers and acquisitions or public offerings. In recent years, there has been an increase in the number of companies raising a significant amount of high-value capital. In 2016, 27 companies raised capital of $30 million or more. In 2017, the number of companies doing so increased, and in the first half of 2018 another record was broken, with 26 companies raising more than $30 million.
"In contrast to these figures, we are seeing a decline in the number of merger and acquisition transactions in general (and, in particular, in values exceeding $100 million), and a decline in the number of companies operating in the direction of an IPO on NASDAQ.
"To justify the investment, and provide reasonable returns for investors, the industry will have to produce a much larger number of sales or deals at a price range of hundreds of millions of dollars. The gap between the price of companies for purposes of raising capital and the number and value of exit events can serve as an explanation to the decline in the number of merger and acquisition transactions in recent years. More and more companies want to or can be construed as significant companies, a phenomenon that ‘distances’ the exit date and reduces the number of transactions. However, with respect to some of the companies, the gap between the cost of raising capital and exit prices can become a serious problem to bridge and will require transactions at lower prices than the cost of the capital raising. We have no choice but to follow the above-noted link, which will have a major impact on the entire industry.”
Fellow partner at Meitar Liquornik Geva Leshem Tal Dan Shamgar said, “There are many instances where local companies play in the same field and vie for talent they want to recruit, technology they are developing, and customers. If we want to build larger companies and bridge the gaps as presented by Adv. Alon Sahar, we will need to see more domestic deals and cooperation in the face of the challenges outside Israel."
Published by Globes [online], Israel business news - www.globes-online.com - on July 11, 2018
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