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As industry's blue chip companies continue to expand their operations around the globe, investment professionals expect the Israeli hi-tech market to stay firmly on the radar when it comes to merger and acquisition activity in 2007.
"The continued globalization will be the main driver of M&A activity next year as it was in 2006," said Clal Finance Batucha analyst Tsahi Avraham. "[Global corporations] see more of an opportunity than risk by expanding outside their own countries and that applies to Israel. Especially since more companies have already made their first investment here, the second time is always a lot easier."
While Avraham would not speculate on any specific companies he thought may make a move in Israel next year, he said that any of the large technology companies that had invested here in the last few years would be good candidates to do so again.
In one of the strongest years ever for Israeli hi-tech deals, 2006 saw two of the biggest deals in its history penned in the space of a month last summer when Hewlett-Packard purchased Mercury Interactive for $4.5 billion and Sandisk Corp. bought M-Systems Flash Disk Pioneers for $1.55b.
The year also listed the likes of Google, Microsoft, Intel, Network Appliance, AOL and McAfee among those buying "blue-and-white" or opening a research and development facility in the country.
In its most recent data, investment bank Leap Capital reported that $10.8b. in Israeli M&A transactions were signed in the first nine months of the year. A flurry of activity in the final quarter is expected to bring the end of year total close to the 2000 peak year for Israeli tech mergers when $13.8b. in deals were struck, and at least surpassing the 2005 level of $12.1b.
The trend in Israel mirrored global developments where mergers and acquisitions hit record levels of around $4 trillion for the year.
"We are not expecting any dramatic change in trends and the high level of M&A activity should continue," said Ed Mlavsky, chairman and founding partner of venture capital firm Gemini Israel. "The high innovation and relative entrepreneurial inexperience makes Israeli companies susceptible to offers."
Some Israeli companies rumored to be on the table throughout 2006 and which continue to be on the watch-list are Retalix, ECI Telecom, Verint Systems, Veraz Networks, Starhome, Wintegra and BigBand Networks.
Israeli companies also played the role of acquirer with Check Point, Amdocs, Nice Systems and NDS among those buying in 2006 and that trend was expected to continue in the coming year. as well.
Building on the successes of 2006, Mlavsky said Israel was showing some unprecedented opportunities for corporations on the acquisition trail.
"As a venture capital firm, we see that the deal flow now is very high compared to any time last year and there are real quality opportunities in the market at the moment," he noted. "There seems to be a limitless potential to start-ups in Israel and we should expect at least as many deals as in 2007."
Mlavsky added that there were some changing trends in the market where Israeli hi-tech companies may start to excel in the coming years.
These include the movement towards producing consumer products rather than the traditional focus on industrial goods. With the growing interest worldwide in Clean-tech, Mlavsky pointed to two Israeli companies - Solel and Ormat Technologies which were becoming significant players in that market. As a third trend, he noted that Israeli companies were making strides in the Internet arena.
"I think in the next wave of Internet development, Israel will play a significant part," Mlavsky said. "Already I don't think the country gets enough credit for the role it played in the Internet revolution and it is now increasing in activity and gaining in credibility."
Looking at trends in the market, RBC Capital Markets analyst Daniel Meron predicted 2007 will be less about technologies and more about applications.
"What is really driving things right now are not so much technology inventions but rather using technologies that are already out there in a better way, and finding applications that actually require it," Meron said. "There are a number of buzz words out there like digital rights management, WiMax, VoIP, Video conferencing, and IPTV, which are all technologies that have been around for a while and have always promised to be the next big thing. The question is which technology will break out next year."
With Israeli start-ups active in all these areas, many will be contemplating their growth strategy going into 2007 and weighing the options against the lures of major corporate buyouts.
"I think the main driver is that the big are getting bigger and it's harder for the companies to cross the bar and become public in a way that will allow them to attract enough investor interest down the road," Meron said. "The trend towards M&A is still strong because on the one hand you have companies that are looking for more innovation, and the other the bar for investors is now higher."
10 key trends to expect in IT
As the nature of business and the IT environment continues to change, research company Gartner recently gave its 10 key predictions of which trends and events will dominate the market in 2007 and beyond.
1) Market share for the top 10 IT outsourcers will decline to 40% by 2009 from their current 43.5% share. This movement will signal a revenue shift of some $5.4 billion.
2) Only one Asia Pacific-based service provider will make the global top 20 through 2010.
3) Blogging and community contributors will peak in the first half of 2007. The number of bloggers will be around 100 million at some point before June next year.
4) By 2009, corporate social responsibility (CSR) will be a higher board- and executive-level priority than regulatory compliance.
5) By the end of 2007, 75% of enterprises will be infected with undetected, financially motivated, targeted malware that evaded their traditional perimeter and host defenses.
6) Vista will be the last major release of Microsoft Windows. The next generation of operating environments will be more modular and will be updated incrementally.
7) By 2010, the average total cost of ownership of new PCs will fall by 50%. The growing importance and focus on manageability, automation and reliability will provide a welcome means of differentiating PCs in a market that is increasingly commoditized.
8) By 2010, 60% of the worldwide cellular population will be "trackable" via an emerging "follow-me Internet."
9) Through 2011, enterprises will waste $100 billion buying the wrong networking technologies and services.
10) By 2008, nearly 50% of data centers worldwide will lack the necessary power and cooling capacity to support high-density equipment. With higher densities of processors proliferating, problems in this area continue to grow. Although the power and cooling challenge of high-density computer equipment will persist in the short-term, a convergence of innovative technologies will begin to mitigate the problem by 2010.
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