A few weeks ago, an attempted hostile takeover of the Israeli communications equipment company Ceragon Networks ended when its shareholders rebuffed competitor Aviat Networks, which had tried to replace board members and appoint its own directors.
Although Ceragon’s shareholders have not benefited from the stock in recent years, they were swayed by arguments presented by the board, led by chairman Zohar Zisapel, about forthcoming value. Assisting Ceragon in fending off the takeover was US investment bank Evercore, which began operations in Israel about three years ago. The CEO Israel and Senior Managing Director of the Israeli branch is Len Rosen, a veteran investment banker, formerly at Lehman Brothers and Barclays.
“In cases like Ceragon and others, activist investors or buyers want to take advantage of the fact that market caps are very depressed after the tech stock crash. In these situations, they can use hostile measures to put pressure on a company that never intended to be sold. That’s usually the stage where we get hired. We’re the number one bank in defending against hostile takeovers and activist investors,” he says. Rosen says that Evercore does not work either with companies attempting to carry out a hostile takeover or with activist investors: “We don’t play both sides.”
How did the process work with Ceragon?
“We met with the company’s management every day. Of course, there were additional consultants, lawyers and so on. The position that Ceragon’s management took was that they were willing to hear about any deal with anyone, including Aviat, but at a reasonable price. Aviat’s ($259 million, S. H-W.) offer was unreasonable. I’ll give you an example: Let’s say I want to buy a car from someone. The car is worth $10,000, but I tell him, ‘I’ll pay you $2,000.’ The guy says, ‘That’s ridiculous, I won’t sell.’ Then I get someone to negotiate the sale on my behalf and if I succeed, I’ll get the car for $2,000. That’s what Aviat tried to do – made a low bid, requested to appoint people to the board of directors. But the shareholders aren’t stupid, and they told them no.” However, it should be noted that Ceragon’s stock is currently traded about 30% below the price offered by Aviat, after falling by tens of percent in the past year.
Aviat claimed that Ceragon did not give a good return to investors. It’s hard to say they were wrong.
“Obviously, the shareholders want to make money and want the stock to rise, but Ceragon has a strategy, and they’re at the beginning of it, and they’re also very open about it. CEO Doron Arazi is doing a great job. This, by the way, is part of the reason Aviat wanted to buy them. Most of the hard work, in products and markets, has already been done.” Rosen expects to see more cases like this in the future and believes that the trend will generate more work for Evercore.
Which Israeli companies could be the target of a hostile takeover, or an attack by an activist investor?
Rosen does not name names, but answers “Any company traded at a low price, that can be ‘swallowed’ easily – even companies with a controlling shareholder. We also talk to companies that have a 40% controlling interest, but if an activist speaks up, even the controlling shareholders have to listen. If a company is worth, say, $150 million, you can buy 5% of it for $7.5 million and start making trouble. Another example is companies traded at very low levels, that have been essentially abandoned by their shareholders, companies merged into SPACs that don’t have analyst coverage on Wall Street, and companies that have more cash than their market cap.”
There are quite a few Israeli companies that meet these criteria.
“That’s right, and we talk to all of them.”
From the point of view of a company and from your point of view, is there a difference between a hostile takeover attempt and an activist investor making demands?
“Sometimes activist investors have good ideas, and the management should listen. Sometimes, the ideas are short-term and not in the long-term interest of the shareholders. Activism is a short-term business.”
“We turned down many offers from SPACs “
Evercore Bank was founded in 1995 and is traded on the New York Stock Exchange at a $3.7 billion market cap. The bank started operations in Israel in 2019, recruiting Rosen, who had been running Barclays in Israel, as well as two more bankers from Barclays, Daniel Shpungin and Lior Shimoni.
Shortly after it started doing business, Covid-19 broke out, and although Rosen says the pandemic “delayed our breakout”, it seems the bank has been quite busy in Israel in the interim. Recent transactions include the sale of security company RADA to Leonardo DRS, the sale of Cellwize to Qualcomm, Cognyte’s spin-off from Verint, the Outbrain IPO, the Innovid SPAC merger, and more.
“Unlike for others, so far, 2022 has been our best year yet,” Rosen says. “In Israel, they didn’t even know our name, but now they’re beginning to understand what differentiates us from the others. Another reason is that a lot of the stupid stuff from last year has disappeared. For example, a SPAC merger valued at billions of dollars for a company with no income at all, or flotations at hyper-inflated valuations.”
You’ve mentioned inflated tech IPOs – would you say there was a bubble?
“Yes, there was and it popped. But is the current decline in valuations justified? Nobody knows.”
Evercore was part of the SPAC party.
“I turned down a lot of SPACs, because we tried not to take on companies that were too small to go public. Many companies, and certainly Israeli companies, want to enter the market much earlier than they should. It’s very hard for a company to reject a billion dollar SPAC offer, when it plans to keep losing money over the next five years until it starts bringing in revenue. We did quality deals, such as Grab from Singapore (a SPAC deal worth $40 billion – S.H-V.).”
“The hard part is to stay listed and grow”
How does the macroeconomic environment affect your activity, and that of the investment banks in general?
“The macro environment has a huge impact on the investment banks. Everyone’s revenue has declined, especially after a crazy year like 2021 when revenues were very high. In Israel, we are very active and continue to be active. The reasons are that the IPO market is closed, and companies in need of financing for growth are heading in the direction of MA, and they turn to us. Also, the SPAC market has declined, due, among other things, to regulation – some investment banks are no longer doing SPACs at all.”
According to Rosen, MAs have declined on a global scale because payment in these transactions is usually done in cash or shares. When a stock has dropped significantly, one doesn’t want to use it for a transaction, because it is too cheap. On the other hand, it will be more expensive to borrow money against a background of rising interest rates. Those transactions that do take place those in which there is no need to borrow, or transactions that are accretive.
“I think there will be a very strong market for companies of up to $1.5 billion,” Rosen estimates. “The big buyers – like Intel, Amazon, Microsoft, NVIDIA, Qualcomm – have money and the ability to buy, and Israeli technology companies are on everyone’s radar.”
In your opinion, will the acquisitions be of private or public companies?
“Both, but mostly privately-held ones, which have to date been financed by venture capital funds and private equity. Some might perhaps have gone public, but the market is shut down. In any case, in the end, most Israeli companies are sold, even if they go public first.”
There are hundreds of SPAC companies that were floated on Wall Street in 2020-2021 and are looking for acquisition targets, before time runs out and they have to pay their investors back. Doesn’t this represent an opportunity for Israeli companies that want to reach Wall Street, despite the market situation?
“We’re seeing more unusual, weird proposals from SPAC companies. For example, trying not to merge with a private company but a public one – why? I didn’t understand that. The SPACs getting close to their end dates are really trying to find opportunities, but many of them will have to return the money. It’s important to remember redemptions (the option SPAC shareholders have to not participate in a merger and redeem their money – S.H-V.); when there are 90% redemptions, then the merging company does not receive any money in any case. Secondly, becoming a public company isn’t that difficult. Staying traded and growing is the hard part. Even on good days, you’re just another public company, sometimes without analyst research, and if there’s no revenue, then also without any catalysts or ways of being measured. Basically, a company that doesn’t need to go public – simply shouldn’t go public.”
When do you think the IPO market will open up again?
“If you’d asked me in July, I would have guessed September, and if you’d asked me last week, I would have said ‘at the end of the year’, but after the inflation numbers published this week and the market downturn, it seems to me that it will take longer. Inflation has an effect on market volatility, and volatility makes IPOs difficult. No one wants to become a public company as part of a down-round.” (Funding at a lower value than in previous funding rounds – S.H-V.).
“This isn’t the same crisis we saw in 2000 and 2008”
Rosen has been with the Israeli technology sector for many years. “The first deal I did, as an attorney at a large Wall Street firm, was when an Israeli company called Orbot came to us in 1989 – a few young guys, Kobi Richter, Yochai Richter, Zvi Lapidot. They wanted to do an IPO and as a young partner I volunteered to work on it – both because I knew some Hebrew as a Jewish boy, and also because I figured, rightly, that it would give me a free trip to Israel, which was really fun.
“In the end, they didn’t go public but merged with Optrotech and created Orbotech (which develops machines for production processes in electronics fabrication facilities – S.H-V.). By the way, my last deal at Barclays was the sale of Orbotech to KLA for about $3.3 billion.”
Another company that came full circle for Rosen was Given Imaging, which developed a camera-in-a-pill for digestive system diagnostics, and which in 2001 became the first IPO on Wall Street after the terrorist attacks of September 11th. “All of Given’s management were in New York at their road show. I remember we were worried when we looked for them and couldn’t find them when we heard about the planes,” he says. Thirteen years after working on the Given Imaging IPO as a banker at Lehman Brothers, Rosen worked on the company’s sale to Covidien for about $1 billion.
With your perspective on the high-tech market in Israel, how does it look to you today?
“Israeli tech is stronger than ever. It’s amazing how much innovation and maturity – in the best sense of the word – there is at these companies. There’s a real recognition of this by the major global technology players. It’s clear that there’s a slowdown in the market and the economy, and a probability that a recession is on the way, but we haven’t yet seen it affecting start-ups the way we did in the crises of 2000 and 2008. It could be that there won’t be such effects, because venture capital funds have money for investment.”
Rosen says that, in the past, there was a phenomenon of investment banks, venture capital funds and private equity funds from abroad opening a representative office in Israel during good times, and closing it in hard times. “I hope we’ve moved passed this stage. I believe that Israel’s success has reached a point where Israel is big and important, and it’s clear to everyone, so that branch offices won’t close down, even when times are hard. There are many more opportunities in the Israeli market, which is built on knowledge and innovation.”
Published by Globes, Israel business news – en.globes.co.il – on September 28, 2022.
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