Yesterday, international accounting firm PwC released its annual Hi-Tech Exit Report, revealing that Israeli technology leaders are not rushing to take their companies public. Instead, they are opting to be acquired by a larger company – or to hold out for the prized $1 billion ‘unicorn’ valuation.
Fuel for big tech
For small- to medium-sized companies, acquisition is proving to be the sought-after path. The report recorded 62 deals this year, generating a total of $7.2 billion, compared to last year’s 52 deals that yielded $5 billion. This 44 percent increase, PwC maintains, was thanks to large multinational corporations eager to acquire innovative technologies. “We have grown accustomed to the presence in Israel of global giants like Facebook, Apple, IBM, Qualcomm, Microsoft, Intel and more,” Rubi Suliman, high tech partner at PwC Israel, said in a statement.
This sentiment is shared by many entrepreneurs. Maxine Fassberg, president of Intel Israel, said during this year’s DLD Tel Aviv conference that Intel is in Israel “because we’re after the talent and the creativity of the Startup Nation.” According to Fassberg, “Israel is crucial to Intel. Intel cannot do without the geniuses here in Israel.”
That keen interest has kept the deal flow steady. Microsoft alone acquired five Israeli companies this year, including cyber-security companies Adallom, for $320 million, and Secure Islands Technologies, for $150 million. The US tech giant also bought text-analysis startup Equivio for $200 million, and N-Trig, creator of the Surface Pro stylus, for $200 million.
Amazon was also among the big bidders, making a rare foray into Israel this year when it bought chip-design company Annapurna Labs for a reported $350 million. Meanwhile the Israeli ad-tech company ironSource bought another Israeli ad-tech company, Supersonic, in a deal estimated to be between $200 million and $300 million.
Apple also got in on the action, with its $20 million acquisition of Linx, maker of depth sensing cameras, while Facebook, through its Israeli virtual reality arm Oculus, acquired Pebbles Interfaces for a reported $60 million.
The largest acquisition of 2015 was HeartWare’s $860 million acquisition of Israeli valve repair company Valtech Cardio.
“Companies are unable to raise in IPOs at the same valuations as they did in private placements”
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2014 brought a record number of IPOs, including that of Mobileye, the Jerusalem-based company that is developing computer cameras that prevent automobile accidents, and CyberArk, one of the fastest growing cyber-security companies. This year, however, saw a drop in the number of companies that went public, from 18 last year to 8 this year, suggesting that startups are now looking to the private market to raise funds.
“Only recently we have witnessed companies that were unable to raise in IPOs at the same valuations as they did in private placements,” Suliman says, referring to the recent IPO of payment processing company Square, which received a lower valuation than when it was a private company. “Quite a few Israeli companies find it easier to raise private capital with higher valuations, which make it less attractive to go public, if at all,” he says.
But perhaps more telling is the trend that “decision makers in the high-tech industry no longer seek small-to-medium IPOs and want to grow companies to ‘unicorn’ status before listing, which requires a higher level of company maturity, and takes longer to achieve,” according to PwC.
PwC’s report reflects the sentiment of this year’s DLD conference, where Waze co-founder Uri Levine and USB inventor Dov Moran agreed with Gett CEO Shahar Waiser that “the appetite for creating a unicorn is there.” Waze, Gett, IronScource, and Outbrain are just some of the latest examples, and most believe more are to follow.
The China factor
The report also touched upon the Chinese investment in Israel, which has been very well publicized, but has not yet led to significant acquisitions in the technology field. Chinese companies made a number of Israeli purchases in 2015, including Dead Sea cosmetics company Ahava for $76.5 million and a $2.6 billion controlling stake in the dairy company Tnuva. However, most of the acquisition activity in technology still involves American companies, responsible for 79 percent of the deals this year.
Yet, given the number of research and development partnerships that the Chinese government has signed with Israel, future mergers and acquisitions activity between the two countries’ technology sectors could be just around the corner.