PwC Israel has released its comprehensive annual business transactions report for the year 2023, providing a deep dive into the intricate dynamics of mergers and acquisitions (M&A) involving Israeli companies.
The report highlights a challenging landscape characterized by a substantial 46% decrease in transaction volume and a 23% decline in the total number of transactions compared to the previous year.
As geopolitical uncertainties and the Swords of Iron war dominate headlines, PwC’s annual report paints a nuanced picture of Israel’s economy that was already facing headwinds. The report illuminates a landscape characterized by declining mergers and acquisitions, underlining a narrative of economic challenges that predate the seismic events of recent months.
PwC is a global professional services firm renowned for offering a broad spectrum of services, including assurance, advisory, tax, and consulting. It’s one of the four largest companies in its industry, assisting various clients, from big businesses to governments.
The company is a major player in the world of professional services, and its report grants a valuable glimpse at the wider activity (or lack thereof) that occurred within the Israeli business landscape in 2023.
Things were already going poorly
The total transaction value for 2023 stood at approximately $9.8 billion, a sharp 46% decline from the $18b. recorded in 2022. This figure marks the lowest in the past decade, trailing only the $7.2b. total transactions in 2014.
The average transaction value in 2023 plummeted to $131 million, indicating a 35% decrease from the 2022 average of $202m. The number of mega-deals (deals above $1b.) also witnessed a decline, reflective of a shift towards lower-risk transactions.
Interestingly, the notable reduction in transaction volume and value occurred even before the security crisis in October, with the first three quarters of 2023 showing a 60% decrease in volume and a 21% decrease in the number of transactions.
2023 was significantly influenced by the global tech crisis, an industry that consistently drove transactions in Israel.
While signs of recovery are evident in the United States and Europe in the second half of the year, the Israeli tech sector has yet to show signs of improvement. This growing gap between Israel and the world in market trends and recovery rates raises concerns about the overall dynamics of the Israeli market.
Foreign investments in Israel contracted sharply to $6.7b. in 2023, a 41% decline from 2022 and the lowest level in the last decade. Per PwC, foreign investors displayed caution in making deals in Israel during this period, favoring lower-risk transactions.
Let’s not forget about that pesky judicial reform
PwC identifies the uncertainty in the Israeli political and social landscape as a major contributing factor to the high impact on the Israeli market compared to global trends. This uncertainty is especially pronounced concerning the legal reform and widespread protests in 2023, when the current Netanyahu-led government ran forward with a hasty and massively controversial judicial overhaul plan.
The reform, which is currently on hold but by no means halted, would see the judicial authority of the Israeli High Court severely limited, and would give much more political and legal power to the members of the government’s ministers and Members of Knesset.
This plan has been massively protested for nearly a year straight since January, with weekly protests taking place, led by concerned Israeli residents who fear that the move would severely undermine Israel’s legal system, making way for corruption.
Additionally, hundreds of economists, experts, and executives have raised countless red flags regarding the reform’s inevitable effect on the Israeli economy. By destabilizing the country’s legal system, the government threatens to scare of foreign investors, who would feel nervous about putting their money into an uncertain investment landscape.
While these concerns were pooh-poohed by the government members leading the charge for reform, they did in fact begin to come to fruition. Not only has every leading global credit rating agency warned against the reform, in many cases reducing Israel’s credit rating, but the number of transactions with foreign companies and investors notably declined throughout the year. PwC’s report is further proof of that occurring.
The importance of the hi-tech sector in Israel’s business landscape is further emphasized by PwC’s report that it continued to lead the local M&A market in 2023, constituting about 81% of all transactions. Despite a sharp decline in all sectors, the hi-tech segment accounted for over 80% of all transactions.
“In the short term, against the backdrop of the security escalation, we anticipate that the local market will continue to exhibit weakness compared to global trends. Predicting the market’s response in the longer term is challenging and depends, among other factors, on the development of the security and political situation in Israel,” said Liat Enzel-Aviel, transaction services leader at PwC Israel.
Any room for hope?
Despite the challenging landscape depicted in PwC’s report for 2023, there is room for optimism. The tech sector, a perennial driver of Israeli M&A, remains resilient, and signs of recovery are evident globally.
While caution is advised, the inherent strength of the market, coupled with potential support from technological innovations, suggests a gradual rebound in the coming years.
“We believe that, with a broader and longer-term perspective, the local acquisition and merger market will recover, especially with the support of tech companies and research and development firms that were not adversely affected in terms of technology, development, and innovation,” Enzel-Aviel concluded.
“Despite the negative impacts mentioned, the demand and need for technology and innovation were not affected and are expected to grow over time, given the global challenges, especially in areas such as artificial intelligence, cybersecurity, energy, healthcare, fintech, and more.”