Are Recent M&As Yet Another Signal of Israel’s Evolution to a ‘Scale-up Nation’?
In Q3 2023 alone, acquisitions of Israeli startups passed $1.6B. But given our current financial landscape, how does this stack up against the aftermath of the dot-com bubble or the 2008 crisis? What can we learn from the last two financial crises about Israel’s M&A ecosystem?
Firstly, shout-out to notable Q3 acquisitions:
These acquisitions piqued my interest about the history of Israel’s M&A after the financial crises and got me thinking, are these acquisitions an outlier during a financial downturn?
Some of the questions I will try to answer:
- Does the current climate lean towards smaller acquisitions or larger ones?
- After a financial upheaval, how long does it typically take for Israel’s M&A ecosystem to recover?
- What is the common $M raised by startups before being acquired?
To grasp the trends of recent years, especially regarding companies likely being acquired post-significant fundraising, let’s delve into the surge of early growth and growth rounds from 2014–2022 for Israeli startups:
Number of A rounds 2.5% CAGR, median round size doubled.
Number of B rounds 2.5% CAGR,, median round size grew by 2.1x.
Number of C rounds 10.7% CAGR, median round size surge by 2.5x.
This rapid growth, both in number of rounds as well as rounds size, shows the increased number of companies that raised a significant amount of money. Some of them will likely try to get acquired at some point.
Yet, how much $M typically do Israeli startups raise prior to acquisition? Analyzing the data since 1995 (thanks IVC), 15% of companies that got acquired secured funding of over $50M.
Common wisdom suggests that during downturns a surge in small-medium M&As happens. Pairing that with the considerable funding by many Israeli startups, how might this interplay with the upcoming M&A activity?
Contrary to this expectation, the current downturn seems to feature a growing median M&A size. This aligns with the increase in growth round noted earlier, due to expected higher M&A value of those companies. But it appears to be at odds with the typical distribution of Israeli acquisitions when observing total funds raised, especially when considering past financial crises.
Also, examining the history of Israeli companies that secured more than $50M and were subsequently acquired, which might suggest larger acquisition sizes, we observe that the majority of these transactions took place over the last five years, during a bullish market. As 2023 draws to a close, it appears the number of acquisitions of these companies will be on par with 2020–2021 levels.
Additionally, Israel’s history shows that most of its M&A activity is of small-medium companies, with an increasing demand post a financial crisis. Post the dot-com bust, there was an uptick in demand for such companies. Following the 2008 crisis, M&A activity for those companies remained fairly steady and recovered quickly.
In recent years Israel prides itself as a “Scale-up Nation”, growing from the well known “Startup Nation”, it is clear that Israel’s ability to scale companies, take them public, and create long lasting value has been improved remarkably in recent years. But given a big portion of companies that raised significant growth rounds, with a clearly big pipeline of companies that will try to get acquired, I believe Israel’s next challenge is to prove its ability to create a strong and enduring M&A environment for growth companies during a challenging financial market.
Recent M&As in the Israeli ecosystem show initial signs that Israel is capable of enduring and having a healthy M&A ecosystem. Over the last nine months, the median M&A for Israeli companies that raised $50M+ has been $350M. Apart from 2020, this is at its highest point in the last five years.
Examining the dynamics of M&A activity from a macro level perspective reveals various drivers and challenges on both the supply and demand sides.
On the supply side, companies struggle to hit their KPIs, fierce competition in many markets due to the influx of startups that were funded in recent years, alongside with the emergence of new Gen AI native companies, makes competition even harder, and their future unclear. The demand side is fueled by strategic growth opportunities, technological advancements, and competitive market positioning. However, these drivers are often countered by challenges such as prior M&As that need to be integrated and macro-economic uncertainties.
Given these drivers and challenges, coupled with the fact that some startups raised their last round at too high a valuation, it appears that buyers and sellers are not yet aligned.
We already see consolidation in some markets. Look at the cyber sector as an example, with Palo Alto Networks acquiring five Israeli companies since 2019, and two more (Talon, Dig Security) in talks.
So, while I’m not going to try and give a specific prediction here, the next few years will definitely be interesting in the Israeli M&A market. Especially for growth stage companies.
