5 min read
ByAlex Brummer, Alex Brummer
As a "start-up" nation praised for its tech genius Israel, more often than not, has been the prey rather than the predator in the rarefied world of global takeovers. Going right back to 1998, when US digital pioneer AOL snaffled the Israeli-invented instant messaging service ICQ for £25m, there have been rich pickings for global buyers.
The list of acquirers includes Berkshire Hathaway, controlled by the Sage of Omaha, Warren Buffett, who in 2013 bought ISCAR Metalworking for $2 billion (£1.3bn); and America's Cisco Systems, which in 2012 paid $5 billion (£3.2bn) for Rupert Murdoch-controlled NDS, an Israeli firm that encodes the cards that are the brains inside set-top boxes.
In recent weeks, we have seen signs that the traffic has started to move in the other direction, with Israeli firms engaging big time in the game of Anglo-Saxon capitalism through mergers and acquisitions. Throughout this summer, Israel's top pharmaceutical firm Teva Pharmaceutical has been dominating the headlines in the Wall Street Journal and the Financial Times as it has sought to make a transforming acquisition. Having first been rebuffed in the effort to buy Dutch domiciles Mylan for $40.1 billion (£25.8bn), it has since gone on to spend $40.5 billion (£26.1bn) on bidding for America's Allergen. The deal, when completed, will be the largest in Israel's corporate history and more than 80 times the value of the AOL deal in the opposite direction almost two decades earlier.
The Teva-Allergen transaction (of which more later) is not just a landmark in terms of its sheer scale, which catapults the Israeli firm into the top rank of pharmaceutical companies. It is also a symbol of a nation in the process of changing its global horizons. At present, the European Union (including Britain) is Israel's biggest trading partner with the most recent data showing exports at £11.5 billion. The UK has become an increasingly significant part of that trade with the value rising to £5.1 billion having doubled over the past decade.
As remarkable is the Jewish state's accelerating trade relations with China. Latest data from Israel's Central Bureau of Statistics shows that Israel imported $8.11 (£5.2bn) of goods and services from China in 2014 exceeding imports from the US for the first time. At the same time, Israel has been building its exports to China which reached $2.7 billion (£1.74bn) in 2014.
Thriving: Start-up firms have helped to turn Israel into a global tech capital, but now the real hard work begins
Jerusalem expects the trade gap to narrow rapidly following the completion of an Authorised Economic Operator programme that allows "trusted" companies to fast-track trade relations in Asia.
The opening up of trade to the East and Chinese inward investment in Israel is seen as a far-reaching trend. It provides other commercial choices if the EU becomes a more difficult place to do business because of the Palestinian boycott movement and the eurozone crisis.
Teva's multi-billion acquisition of Allergen is an important marker for Israel's reputation as a global player in the healthcare market. The company traces its origins back to a wholesale chemist Salomon, Levin & Elstein that was founded in Jerusalem in 1901. In the 1930s, it adopted the name Teva ("nature" in Ivrit) and, after a series of mergers with other Israeli pharma companies, it was eventually quoted on the Tel Aviv stock exchange in 1951.
Among its more notorious investors in the 1990s was the late media tycoon Robert Maxwell. It was one of his more successful shareholdings.
Teva has, over the decades, expanded to become the world's top maker of generic drugs. These are compounds created by the world's biggest pharma companies but no longer protected by patents. Paradoxically, the reason that Teva needed a new business partner is because its branded multiple sclerosis drug Copaxone, which accounts for up to half Teva's profits, will soon be losing its own patent protection. The Israeli group's chief executive, Erez Vigodman, entered the crowded M&A field because of pressure from investors to do a transforming deal that would secure future revenues and profits.
The Israeli firm's new partner Allergan is best known for its Botox anti-wrinkle treatment. But it is also the third largest generic drug maker in the US, having merged with Actavis in March 2015. Aside from providing Teva with a new portfolio of drugs, it will also improve Teva's distribution arrangements in the US. Teva already has access to the NHS where, remarkably, Israeli pharma companies account for one in every seven prescriptions that are filled.
Size and distribution have become all important in the healthcare sector at present. Teva may have had little choice but to do a deal itself or be swallowed.
So far this year, healthcare M&A has been a dominant trend globally with some $398.5 billion (£257bn) worth of deals being completed in the period to July 23.
The Teva transaction may be the most eye-catching but Israeli companies also have been a big factor recently in the gaming sector. Serial entrepreneur and billionaire Teddy Sagi, perhaps best known in London for his ownership of Camden Market, recently came riding to the rescue of struggling financial spread-betting firm Plus500, which his London quoted company Playtech bought for £460 million. Sagi and Playtech have also been an important influence in the transformation of two of Britain's best known gambling enterprises William Hill and Ladbroke from high-street betting chains to online gaming.
Cyber security is also a key area of activity for Israeli companies. In 2014, Israel sold $6 billion (£3.8bn) of internet security software to the rest of the world. In this case, the traffic has been in the other direction with seven online security companies sold to foreign buyers for $700 million (£451m). Another CyberArk floated on the Nasdaq exchange in New York with a valuation of $2 billion (£1.3bn).
In the highly competitive world of mergers and acquisitions and initial public offerings, Israel punches well above its weight. It is notable, however, that many of the biggest transactions are being done offshore in London and New York rather than the Tel Aviv stock exchange. The latter still suffers from a lack of liquidity, availability of cash, largely caused by unusual ownership structures. Data shows that some 20 prominent Israeli families either directly or indirectly control more than 50 per cent of the shares traded on the Tel Aviv stock exchange.
The families concerned have holdings in property, financial services, supermarkets, airlines and telecommunications. Holdings are held through a complex cascade of companies. Writing about this in the New York Times, the Nobel prize-winning economist Paul Krugman noted earlier this year: "There is extreme concentration of wealth and power among a tiny group of people at the top…The nature of the control is convoluted and obscure working through 'pyramids' in which a family firm controls a firm that in turn controls other firms and so on."
The Teva-Allegan merger and Playtech's key role in the UK gaming industry provide striking evidence that Israeli capitalism is becoming more global and more normalised.
Nevertheless, the dominance of Israeli oligarchs on the Tel Aviv exchanges suggests that the domestic economy is still in need of competition and governance reforms if it is to become truly global.
Alex Brummer is City Editor of the Daily Mail
