$2 trillion. That's the value of mergers and acquisitions globally so far this year, 75% more than in the corresponding period last year. Reuters recently reported that in large M&A deals, those worth over $5 million, the jump is even greater. These deals total $915 billion, three times the value recorded in the corresponding period last year.
In Israel, of course, the amounts are much smaller, but we recently heard about the acquisition of control in Magal Security Systems Ltd. (Nasdaq: MAGS; TASE: MAGS) by Ishay Davidi's FIMI fund for $23 million, and before that there was the acquisition of paints company Tambour by the Singapore-based Kusto group for NIS 500 million. Waiting in the wings is the deal whereby the Apax fund is selling 56% of food company Tnuva to Bright Food at a valuation of NIS 8.6 billion.
What has brought about this wave of mergers and acquisitions? Where are the big opportunities only overseas, or in Israel too? Is a share-based deal better than cash, given the sharp rises in stock market prices? And has Operation Protective Edge frightened off foreign investors? To answer these and other questions, "Globes" brought together some experts in the field.
"Many of the acquiring companies have a great deal of cash that they have held since the credit crisis of 2008, waiting for investment opportunities," explains Adv. Nimrod Rosenblum, founding partner of Epstein Rosenblum Maoz (ERM), who, among other things, represented Generali in the sale of Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL) to Shlomo Eliahu, and the Emblaze group in the bid to buy control of IDB. "In the case of American companies, their money is held outside the US, because they avoid repatriating it out of tax considerations."
Here it should be mentioned that several US companies are currently seeking to move cash out of the US fast, before the tax reform the US Treasury Department is discussing comes into force. UBS estimates that over $800 billion is held outside the US, half of it by technology companies, and some $150 billion by pharmaceuticals companies. Indeed, these have been two prominent sectors for mergers and acquisitions in the past year.
Outstanding among the US companies holding cash outside the US are Apple, with $111 billion (76% of its cash); Microsoft, with $70 billion (90%); General Electric, with $57 billion (64%); Cisco, with $40 billion (80%); and Google, with $33 billion (55%).
According to Rosenblum, this situation means that companies like Google, for example, that need to invest their money, do so by buying technologies outside the US. "A kind of arms race has come about between the competitors in the market," he says, "Add to that the fact that company values are at a peak, and that companies in Europe are struggling to create value because their economies are stuck, and that an acquisition can bring profit and growth, and you get three main reasons why companies today are looking at mergers and acquisitions."
"The current environment encourages M&A," adds Sky Fund partner Amir Erben, "Anxiety in global markets has receded, market prices allow share-swap deals, interest rates are low, and mainly, there are tax benefits that motivate mergers, such as we saw with Pfizer, for example."
According to Erben, there are factors encouraging mergers and acquisitions in the local market as well. "The first is the debt settlements that led to interesting deals, added to which is the new Economic Concentration Law, which creates interesting opportunities. At the same time, some of the entities that there were here in recent years are no longer active, such as the leveraged funds, or the holding companies that are now inwardly focused."
KCPS and Company founder and CEO Tal Keinan agrees with Erben. "We have been in a very low interest rate regime for a long time, and that is something that allows greater economic leverage. In addition, there is a great deal of cash in the big companies, chiefly in high tech and pharmaceuticals, and there is pressure on them to do something with the money. At the same time, there are many companies going through a process of consolidation."
"Quite a few beginner companies seek to go the quicker route of mergers and acquisitions rather than organic development," Keinan adds, and he, like Erben, mentions the fact that there are additional motivators of M&A deals in the local market, such as the break-up of holding companies.
War? In the end, money talks
In fact, the local market has not missed out on the M&A momentum. "A lot of money is coming into the local market these days, whether from the countries of the former Soviet Union, the Arab world, or from East Asia, such as from China or Singapore, money that is looking to buy. A $100 million deal may be small by global standards, but this is a decent order of size for the Israeli market," says Rosenblum.
We saw a deal of this type a few months ago when the Kusto group of Singapore bought Tambour from the Azrieli group for NIS 500 million, without even doing due diligence. "Although every deal has to be looked at in its own terms, the acquisition of Tambour is a very special case; it's not common for a company to be bought that way," Rosenblum says.
The local market, he says, beckons mid-size investment funds. "They are looking for Israeli companies for $50 million or less, because in the US there are no longer opportunities like this. Unless there is a political crisis in the Israeli market, in the next three years we'll see more funds from the US and the UK."
Erben: "We are an investment fund that is focused on the Israeli market, and that believes in this market. It's very surprising how many opportunities you find here. There are good privately-held Israeli companies that are not well known, but that perform nicely. You see the opportunities in a range of fields, such as in industrial companies and service companies. We examine a company per deal from the point of view of its potential and its growth going forward, and of course, whether the asking price represents a relevant opportunity. We are more focused on the situation and less on any particular sector. It could be the kind of company that needs recovery, or a more complex deal, requiring our involvement as investors or managers."
Has Operation Protective Edge deterred investors, or actually shown off the capabilities of the defense companies here?
Rosenblum: "No-one likes to see what we have been seeing on television, but we saw Warren Buffett buy Iscar while there was a war on. It doesn't stop activity, but suppresses it for a few weeks. We were supposed to have had a meeting about a deal that we are acting on with lawyers from overseas, but it was postponed because of the security situation. I'm not concerned about that, because, in the end, the money talks."
Keinan: "I hope that the capabilities of the defense companies, as displayed in the operation, will do the market good. Such things have happened in the past, and it contributed to sales of Israeli defense systems around the world."
Erben: "The security situation doesn't put people off; not us, and not international entities that we are in contact with. It's clear to everyone that this is a temporary situation and relatively short and that its effect on most sectors of the economy is minor, and so there is no change of attitude towards the Israeli market, there is no lasting damage, and this can be seen in the strengthening shekel.
"Beyond that, Iron Dome looks extraordinary to someone from outside that's the Israeli image that was widespread in any case but it's another sign of our technological capabilities, and I think that it will contribute to the economy. These things take time to mature, and I believe that when we get back to routine, international defense and technology companies will come here to take a look and do deals. This operation has a positive value from a business point of view."
What kind of deals are you currently looking for
"Keinan: We don't like public debt, no matter where in the world, or what its rating is. The opportunities are in the US stock market, but over time we are growing our exposure to Europe and Japan there are cash-rich companies there.
"The central banks there are behind in their monetary policy, and the low interest rates will last longer than in the US, where they are already taking their foot off the pedal. At the moment, we are significantly exposed to hedge funds specializing in following mergers, acquisitions, and flotations, and that are not exposed to the market trend."
Cash or shares?
Another prominent phenomenon in mergers and acquisitions is the high proportion of cash in these deals. UBS points out that the rise in share prices ought on the face of it to have led to a high proportion of acquisitions being carried out through share-swap deals, but in practice, in recent deals, the cash component has been between 30% and 100%.
So what's preferable in making an acquisition: shares, or cash?
Erben: "Every deal is examined on its merits. The Sky Fund's deals will mostly be in cash. Further deals could be in shares or cash-share combinations.
"There is a situation on the market today in which the price of debt is very low, and shares are priced on the stock exchange at reasonable levels, and so, on the face of it, deals involving a share component are worthwhile. I reject the claim that we are in a bubble situation or at high prices. Share deals such as there were in the 2000s in high tech are far from today's situation.
"Today, the considerations are very logical and businesslike. If there's a seller who wants to make an exit, he'll want cash. On the other hand, someone who wants to enhance the business and grow, will want shares, so, bottom line, today, there is no definite preference one way or the other."
Published by Globes [online], Israel business news - www.globes-online.com - on August 18, 2014
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