Alongside the trend of acquisition of Israeli high-tech companies my technology multinationals, we expect the trend of mergers of small companies to continue, in order to create a larger companies, which can be a target for an offering or major acquisition, say Poalim Capital Markets Ltd. Omer Kreisel head of investment banking Eran Zack. In a joint interview with “Globes”, they talk about trends in the M&A and IPO market of technology companies, and advise owners and executives on how to prepare for them.
“Globes”: How does the US primary market look now, and will it be affected by the latest shocks in capital markets?
Zack: “The volatility we’ve seen in the markets temporarily affects the primary market, and some of IPOs have been halted, but we believe that when the picture clarifies, the primary market will resume functioning. During 2015, until stock markets began dropping, the primary market was open, even though it showed poorer figures than in 2014. The number of IPOs in 2015 is projected to be fewer than in the previous year. In the past 12 months, healthcare was the strongest sector, accounting for over 40% of IPOs, but looking ahead at companies planning IPOs and IPOs already in the pipeline, we see that healthcare is returning to its normal size, about 20% of offerings, while technology accounts for about 25%.
“There are companies that the market accepts more than others. Outbrain Inc. has been preparing for an IPO for a fairly long time. Meanwhile, its rival Taboola Ltd. has carried out a private placement, as did Outbrain, after they realized that the value of adtech companies were falling, because of the poor sentiment for the sector, and opted to raise capital from an institutional investor. There are other sectors, such as information security, which are hotter, such as the CyberArk Software Inc.(Nasdaq:CYBR) IPO, and whose share rose strongly, prompting the company to carry out two secondary offerings.”
“Does this mean that Israeli technology companies have more M&A opportunities?
Kreisel: “The criteria for an IPO by technology companies are constantly rising. We therefore expect to see quite a few mergers and acquisitions, and the transactions do not have to be in cash. We may see deals in which big companies swallow small companies or mergers between small companies, sometimes through share swap deals. The merger to two small companies can increase the chances of a subsequent IPO by the merged companies.
“In addition, we see capital raised by growth funds, which invest in companies in more advanced growth stages. This trend may help Israeli companies, which have struggled to raise money to date. Most growth companies need $25-50 million to accelerate their growth rate. When the market matures, it greatly improves their chances of reaching an IPO. These investments create investment opportunities for funds that specialize in the sector.”
Zack: “There are sectors, such as adtech, in which companies are unable to break through a certain value. In the past, for a company to be exciting, it had to reach $30-40 million in annual sales. Today, the market is less interested in companies with sales below $100 million. These companies therefore are seeking solutions through mergers, which is a trend that we think will strengthen. A recent example is the acquisition of Supersonic by ironSource in a share swap deal.”
Will we continue to mainly see acquisitions of Israeli start-ups by multinationals, such as Google Inc. (Nasdaq: GOOG) and Facebook Inc. (Nasdaq: FB), or other kinds of transactions?
Kreisel: “For big multinationals, these acquisitions are their way of entering the domestic market and they are the basis for the establishment of their Israeli development centers. Most of the big companies, such as the examples cited, already have such centers. We are now seeing great interest on the part of Chinese technology giants, such as Alibaba Group Holdings Ltd. (Nasdaq: BABA) and Baidu Inc. (Nasdaq: BIDU). In addition to investing in Israeli companies, Chinese companies are entering the Israeli market by investing in Israeli venture capital funds. This gives them access to a broad platform of technology activities in Israel and creates new opportunities for local companies.”
Zack: “Acquisitions by the giant companies will probably continue, while at the same time we will also see situations in which Israeli companies struggle to surpass a certain valuation and therefore seek to merge with other companies of a similar size. As for the involvement of the Chinese, it is possible to say that, whereas in the past they only sought companies and technologies which could suit the Chinese market, they are now more open to investing in companies and funds that invest in companies that mainly target the American market. In other words, they want to get their hands on innovations, whether intended for the American market or other markets.”
When sit down with an Israeli technology company that wants to consider a merger, what procedure do you advise them to follow?
Zack: “Technology is different from other industries. When you talk about an ordinary manufacturer, there are known methodologies, such as conducting a valuation jointly with the company, preparing marketing material, contacting a large number of potential buyers, and managing a structured sale process in order to maximize value. The rules of the game are different in technology, because high-tech companies do not want to be perceived as being up for sale.
“We advise technology companies to undertake what we call a ‘soft process’. This is a lengthy process, which can take a year or more, in which they try to generate interest among potential buyers in order to obtain an initial offer from them. We try to leverage this offer with other buyers. In order to interest potential buyers, you have to establish some kind of business partnership with them. If the potential buyer has no one from the relevant operations division who knows the company and has worked with it, it will be harder to interest the buyer in a deal.
“Therefore, our contribution begins with identifying potential buyers and helping the company establish a network of relations and collaborations that will, in future, help realize the sale. We are aided in this area by the extensive international network of our strategic partner, the William Blair & Company investment bank. In the next stage, we try to bring acquisition offers and manage a focused process with the potential buyers. Our experience teaches that such a process can substantially boost the value of a deal compared with the original offer.”
Which companies, in terms of size, do you recommend should start building such networks with possible partners?
Zack: “This is a process recommended for every company, even a small one that is not yet thinking about a merger, because an acquisitions offer that it does not expect can suddenly pop up. When such an offer arrives, the company should be ready to leverage it and create a competitive dynamic between potential buyers. If there are no early partnerships, the chances of creating such a competitive dynamic are very low. The timing for creating the relationship depends on various factors. Most companies will do it after they have already established a business model and have sales, but there are fields, such as cyber and storage, in which acquisitions of companies occur even before they have a single dollar of revenue, so the process starts at an earlier stage in the company’s life.”
Kreisel: “We identify among many entrepreneurs whom we meet an understanding of the need to build a big company. Proper building allows greater flexibility for financing options along the way, and the entrepreneur’s final target does not have to be an IPO. Success in recruiting investors in advanced financing rounds and/or realizing a merger strategy allows entrepreneurs to realize profits en route and to turn their attention and efforts to other ventures. Everyone can only profit from this.
The IPO market
A four-year slump in quarterly capital raised in the US primary market
As Kreisel and Zack noted, the US primary market greatly weakened in the third quarter of 2015. There were 34 IPOs during the quarter, 43% fewer than in the corresponding quarter of 2014, a function of the latest capital market correction. $5.3 billion was raised during the third quarter, a four-year low, compared with $37.6 billion raised during the corresponding quarter of 2014, a two-year high, according to the website IPO Home.
IPO Home’s data also indicate that, for the first time since 2011, the average IPO yield in the third quarter was minus 4% and that more companies ended the quarter with their share price below their IPO price than companies with a share price above their IPO price. In contrast, the average IPO yield in the second quarter was 14.5% and was 16.8% in the first quarter.
Healthcare dominated IPOs in the third quarter, for the first time in 15 years, accounting for more than half of the IPOs during the quarter. Conversely, only one technology company held an IPO in the quarter a six-year low.
The M&A market
The number and values of merger grow worldwide
Possibly because of the plunge in primary market activity in the third quarter of 2015, the global M&A market continued to grow. According to “Bloomberg”, 6,928 mergers were carried out during the quarter, 10% more than in the corresponding quarter of 2014. The value of the mergers totaled $1.22 trillion, up 17% over the corresponding quarter.
The worst quarter in the past two years was the third quarter of 2013, during which 5,201 mergers totaling $661 billion were carried out.
Not every merger planned is carried out. According to “Bloomberg”, 94 merger proposals, totaling $204 billion, have been withdrawn since the beginning of the year, and 155 transactions totaling $105 billion were cancelled. The geographical distribution shows that most transactions were between North American companies, followed by Europe, and the Asia-Pacific.
The industry distribution shows that most transactions were between consumer products companies, followed by financial and energy companies.
Published by Globes [online], Israel business news - www.globes-online.com - on October 8, 2015
© Copyright of Globes Publisher Itonut (1983) Ltd. 2015