Israel: Anti-Fragile

Thriving in the face of adversity as politics and security play an integral part in everyday life is a default position for Israel. The data backs this up: recent OECD reports describe Israel as stable with strong economic growth: annual GDP has consistently risen by three to four percent over recent years to reach nearly $400bn in 2019. This, despite a protracted leadership battle taking place with two general elections in six months bringing the nation no closer to a conclusive result.

Michael Barnea, managing partner of Barnea, Jaffa, Lande & Co, develops the point: 'The environment is surprisingly robust considering the political instability that we've experienced for a considerable time. Investment, both from overseas into Israel and in the local market, is extremely strong and gives every appearance of being confident in the future.'

Despite international law firms being allowed to operate in Israel, they have invariably chosen not to. The legal market is therefore monopolised by domestic players, many of which have grown significantly and the main contributory factor has been a glut of mergers. According to David Tadmor, co-chairman and managing partner of Tadmor Levy, today the largest firm has close to 400 feeearners, whereas in 2000 it was around 65 lawyers. Herzog Fox & Neeman (HFN) is Israel's largest law firm, with 380 fee-earners, and at least 20 Israeli firms now have more than 100 lawyers. 'What sets us apart is that we have grown organically rather than through mergers

like some of our competitors,' says HFN infrastructure partner Mark Phillips.

Yudi Levy, managing partner of Goldfarb Seligman & Co, notes there has been a strong trend of large law firms merging with other large firms, smaller firms and specialised boutiques, or even absorbing entire departments of mid-sized firms – a pattern that is expected to continue in 2020. Levy's own firm was one of the first to begin the trend with the 2011 merger of Goldfarb, Levy, Eran, Meiri, Tzafrir and M. Seligman, and it recently acquired the real estate practice of Berkman Wechsler Bloom – meaning it lays claim to having the largest practice in Israel – alongside the opening of a new branch in Zurich focused on tax.

'There is fierce competition in Israel over clients; we have a lot of lawyers,' says Oded Oz, founding partner of Oz / Engel & Co. The Israel Bar Association now has over 80,000 members – twice the number of lawyers in Japan. Chargeout rates vary between $250 and $500 an hour at the top end, with an abundance of choice helping to keep fees down. 'One of the challenges for professional services firms in Israel is fees. For us, audit fees are not at the level they need to be and it's becoming the same for lawyers with legal fees,' says Jonathan Lavender, head of markets at KPMG in Israel.

Tech nation

Last year, UK-based insurance specialist Kennedys entered an official alliance with insurance boutique Zelichov, Ben-Dan & Co – the first formal affiliation of its kind between an Israeli and an international firm. Meanwhile, Bird & Bird is among several international firms with a growing Israel practice. 'The three main areas where we advise Israeli companies are IP/life sciences, tech and data privacy,' says partner Howard Rubin, who heads the UK firm's Israel steering group

'We've given them a lot of advice on GDPR and we help many Israeli IP-heavy companies,' he adds. 'Israel's domestic market is small, so they very quickly go for international development When any start- they very quickly go for international development. When any start up company is growing in Israel, often the first thing is to look at the US market and then, in parallel or soon afterwards, to go to Europe.'

Lawyers play an integral part in Israel's service-based economy, which is dominated by its highly-developed tech sector. Apart from China and the US, it also has more Nasdaq-listed companies (around 100) than any other country. 'Israel is the Middle East equivalent of Silicon Valley, with similar ecosystems,' says Ronald Lehmann, corporate partner at Fischer Behar Chen Well Orion & Co (FBC).

The story of Israel's high-tech achievements is told in the best-selling book, Start-Up Nation, by Dan Senor and Saul Singer. One thesis in the book is that success stems from the Israeli mentality of challenging the status quo. Many successful tech entrepreneurs have come out of the Israeli army, which continues to select the best candidates for its most prestigious forces, such as Unit 8200 – the intelligence unit known for its cyber security and high-tech spying activities. Many key figures in the high-tech industry have served in those units. Says Lavender: 'If you go into technology units, you need to do five years, so you have a few thousand people coming out of the army with very deep technology capabilities every year.'

Dan Geva, corporate and securities partner at Meitar Liquornik Geva Leshem Tal, suggests: 'Israel is somewhere between a start-up nation and a country in which start-ups are becoming more industrialised.' Phillips adds: 'It's a self-sustaining cycle: once you have some companies established, people break off, start their own business and do different things. Then the whole industry develops around it.'

At Gross, Kleinhendler, Hodak, Halevy, Greenberg, Shenhav & Co (GKH), Richard Mann heads the firm's M&A group. 'We have more than 50 lawyers in our technology practice, many of whom work primarily with start-ups,' he says. 'The growth of start-ups and the valuation increase has become much more rapid. Today, there are tech start-ups raising money with valuations in excess of $1bn – something that was unheard of even two years ago.

Additional support from Israeli government incentive programmes and venture capital helps to perpetuate success. Levy concludes: 'With hundreds of innovative start-ups and numerous R&D centres of the world's largest corporations, Israel is at the forefront of global technological research and innovation, and an attractive destination for global capital investment.'

Deal watch

The corollary is deals aplenty. Israelis are very open to foreign investment; there are few regulatory restrictions beyond those limited to specific areas in the financial and telecoms sectors. As one of the country's largest foreign investors, Intel announced plans this year for an $11bn Israeli production and research facility. In 2017, it bought Mobileye, an Israeli developer of sensors and artificial intelligence for autonomous driving, for $15.3bn – the largest-ever purchase of an Israeli tech company. Skadden, Arps, Slate, Meagher & Flom advised Intel while Morrison & Foerster advised Mobileye on the deal.

At $25.7bn, last year saw the highest aggregate value for Israeli M&A since 2012; in volume 132 deals involved Israeli companies. Around 40% of them were in the tech, pharma, medical and biotech sectors, including the $3.1bn acquisition of Orbotech by Nasdaq-listed KLA Corporation; Thoma Bravo's purchase of Nasdaq-listed Imperva for $2.1bn; and Medtronic's $1.64bn acquisition of Israel-based Mazor Robotics. Outside tech, Israeli industrial companies were predominant: International Flavors & Fragrances bought Frutarom for $6.9bn, while Pepsico acquired SodaStream for $3.2bn.

Meitar was involved in four of the top five deals in 2018, advising KLA Tencor, Thoma Bravo and Medtronic on the buy side and

SodaStream on the sell side. Geva says: 'These deals clearly demonstrate that international – mostly US – investors trust that in acquiring sophisticated Israeli companies – and in the way they develop their processes – they are relatively very advanced. Almost every large international group, especially in technology, admires Israeli innovation and the country's work ethic. In the first half of 2019, we advised on around 100 investments in new technology companies.'

Of the top dozen deals by value in 2018, HFN (which advised Pepsico) and Tadmor were involved in two apiece. This included Tadmor advising Leumi Card – together with FBC – on its $685m acquisition by Warburg Pincus, which was advised by Goldfarb. According to Mergermarket, the five most active firms in M&A last year were: Meitar, HFN, Naschitz Brandes Amir, Yigal Arnon and Erdinast, Ben Nathan, Toledano & Co (EBN)

'When your practice focuses on the seller side in tech, it never slows down because Israelis will always have motivation to found new technology companies,' says Nimrod Vromen, partner at Yigal Arnon. 'I divide the tech industry work very distinctly into buyers and sellers – sellers being start-ups and tech companies, and buyers being investors and acquirers. At some point, start-ups also become buyers when they are big enough. The focus of what we do is to act as consigliere to an entrepreneur or tech founder from day one until well after the company floats.'

Doni Toledano, head of M&A and banking and finance at EBN, adds: 'You see a lot of activity among life sciences, medical devices, digital health, communications and fintech. Even in industries that are less tech-oriented, for example, Netafim, which was sold last year for $1.9bn, it's not a high-tech company per se; it's a drip irrigation company, but it deploys technologies that allow it to elevate itself. So, even companies that are not traditionally high tech see the importance of technology.' Skadden and EBN advised the previous owner of Netafim – private equity house Permira – while the acquirer, Mexichem, was advised by Covington & Burling.

In addition to advising Bank Leumi on its divestment of Leumi Card, FBC is currently representing two private equity funds – one US-UK and the other US-based – in their acquisition of Phoenix, one of Israel's largest insurance companies. 'A few years ago, we saw significant interest from China in a whole range of industries – everything from high tech to industrial – there was a tremendous spike of interest,' says Lehmann. 'But the Chinese profile has receded. We're now seeing the increasing involvement of private equity funds from the US and Europe in large transactions

Tech has continued to dominate Israeli M&A in 2019, albeit in a quieter market: ten tech deals were announced in Q1 and a further 12 in Q2. By far the biggest so far is NVIDIA's $6.9bn acquisition of

Israeli big-data connectivity company Mellanox Technologies, which is being advised by HFN and Latham & Watkins. NVIDIA is being advised by Jones Day

Another firm to make the top ten advisers list by value is GKH, where Mann notes: 'There's no question that the M&A market is very strong. What characterises it more than any other factor is that the variety of different acquirers currently exploring opportunities in Israel has never been greater – particularly in terms of geography, but also in many different industries.' Barnea agrees: 'We've never been busier, we have about 30 M&A deals going on: some of them already signed, others in the process of being concluded. This has not been the case before. We see more companies coming from various jurisdictions expressing a desire to be involved in the Israeli economy.'

Mann notes that US companies have always been active investors in Israel. 'But it's a much more widely dispersed market than ever before, including significant representation from European entities, with the Asian practice quite fast growing,' he says. 'Asia means primarily China, but also includes Korea and Japan, and to a lesser extent India. The strongest sectors are cyber and IT, while there is also a lot of interest in automotive technology as a result of the Mobileye transaction.' McKinsey analysts also expect Israeli companies to account for an increasing share of the global auto-tech market.

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