The Israeli M&A market has enjoyed a spectacular H1 2021. In just the first six months, deal value in the country has reached US$28.7 billion, already higher than any annual total on Mergermarket record (since 2006).
Though due in part to strong activity at the top end of the market, activity has also been robust in terms of the number of deals—there were a total of 109 transactions in H1 2021, just under the 118 in total over the whole of 2020.
A huge driver has been special purpose acquisition companies (SPACs). Given Israel's prowess in all things related to technology, it was only a matter of time before the SPAC phenomenon reached Tel Aviv.
Technology is a hugely disruptive sector, and those companies addressing, or even creating, new markets have the potential to win big by taking on big risks. SPACs attract investors with an appetite for strategies that are potentially high risk as well as potentially high reward.
Israel has more startups per capita than any other country, making the explosion of interest in—and investor demand for—tech-targeting SPACs a natural fit for the opportunities that are on offer.
In the first half of 2021, the top three spots in Israel were claimed by SPAC transactions. Fintech ironSource, a platform that helps game developers monetize and their apps and grow and engage their users through multiple channels, was sold by CVC Capital Partners for US$10 billion to Thoma Bravo Advantage, a blank check company that filed its IPO at the end of December.
In second place sits the US$3 billion acquisition of REE Automotive, an electric vehicle platform maker, by the Nasdaq-listed 10X Capital Venture Acquisition Corp. Third comes TWC Tech Holdings II Corp.'s US$1.9 billion merger with Cellebrite Mobile Synchronization, a data intelligence company. Another notable 2021 example was the merger of SPAC ION Acquisition Corp. 1’s with Taboola.com, a global leader in powering recommendations for the open web, culminating in Taboola’s listing on the New York Stock Exchange.
The activity in Israel is a spillover of a US trend that defined capital markets activity in the first quarter of 2021. While 2020 was heralded as “the year of the SPAC,” the US$88 billion raised by blank check companies in Q1 of this year dwarfed the US$76 billion collected last year in its entirety. This volume was raised by 320 SPACs going public.
Yield-starved investors are hungry for growth and anything that can make their portfolio performance pop. Because they are not operating companies until they settle upon a deal target to merge with, SPAC IPOs are fast-tracked, often shaving months off a traditional process. Their financial statements are short and there are no operational risks to disclose. They also forgo the lengthy and costly investor roadshow process required in a regular IPO.
The Q1 feeding frenzy was reined in by US regulators who spotted what they consider a common accounting anomaly. In April, the US Securities and Exchange Commission challenged the classification of SPAC warrants as equity rather than liabilities. Following up in July, the regulator set forth what it expects of these vehicles for their warrants to be considered equity, which includes indexing these instruments to the SPAC's own stock.
The intervention paused issuances, as sponsors set about revising their accounting practices. In Q2 only US$16 billion was raised in SPAC IPOs globally. While issuance has slowed to a relative trickle, already raised vehicles are actively seeking deals. There are currently 439 US-listed cash shells with a combined US$131.2 billion in the pre-deal phase, according to SPAC Research.
And these continue to find targets in Israel. The third-largest M&A transaction so far Q3 (as of publication) saw Medtech Acquisition, a SPAC, pay US$625 million for Memic Innovative Surgery, a company dedicated to transforming robot-assisted surgery with its proprietary technology. The next largest deal was SPAC Healthcare Capital Corp.'s acquisition of Alpha Tau Medical, a developer of alpha radiation cancer therapy, for US$600 million.
All of these SPACs scooping up Israeli assets are US-registered cash shells. But that could be set to change.
In May, just as US issuance slowed, the Israel Securities Authority (ISA) laid ground rules to open up the Tel Aviv Stock Exchange to local SPACs, balancing demand from private companies to access this fast-track fundraising route with investor protections.
Among its rules, the ISA requires that sponsors have at least 40 million shekels (US$12.4 million) of their own capital at risk, skin in the game to align their interests with those of third-party investors. A minimum 70% of a SPAC IPO must be accounted for by institutional investors, a relatively high threshold.
The minimum Israeli SPAC offering must also be above 400 million shekels (US$123.7 million) and investors are guaranteed to have their money returned should they later vote against the acquisition of the target company, once the target has been named.
The US will continue to be the primary venue for SPAC raisings that eventually merge with promising tech-centric Israeli businesses; the brand association, kudos and free publicity that comes with a Nasdaq listing will likely ensure that outcome.
But with a steady stream of deal opportunities, and with regulators laying the foundations for local listings, more modestly sized cash shells that aim to accelerate the growth of homegrown technology businesses will surely become a feature of the SPAC landscape, in Israel and elsewhere.