Israeli SPACs in July: separating the men from the boys

  (photo credit: INGIMAGE)
(photo credit: INGIMAGE)

SPACs, or special purpose acquisition companies, exploded during the pandemic and became popular alternatives to IPOs for Israeli startups. Numerous factors led Israeli companies to seek the help of SPACs to go public. Going public via SPACs gives founders more control over the overall process of taking the company public. A SPAC costs less than a traditional IPO and can be completed in less time than traditional IPOs/direct listings. 

Although not every SPAC formed was a success, July was an interesting month for some Israeli startups that have gone public or plan to merge with SPACs. Here are some of the major headlines from Israeli SPACs and what they mean:

Unity and IronSource Merger

IronSource, an Israeli mobile ad tech vendor, has recently experienced several setbacks. IronSource went public on the New York Stock Exchange in June 2021 after closing its merger with Thoma Bravo Advantage, a special purpose acquisition company. The stock is now trading nearly 60% down from its initial price, and its market performance was primarily affected by macroeconomic uncertainty. Recently, Unity Software announced to merge with IronSource in an all-stock transaction valued at $4.4 billion, which investors believe is a mistake and put the entire deal at a massive risk

Before the announcement, the market value of IronSource was around $2.3 billion, implying that Unity is paying a significant premium for the company. This decision has also been heavily criticized by game developers, owing to IronSource's development of a malware installer. 

Pagaya Overtakes Checkpoint to Become Israel's Most Valuable Company

Pagaya Technologies Ltd., founded in 2016, provides underwriting solutions to online credit granting platforms and banks in the United States. The company manages institutional money using Machine Learning and big data analytics, focusing on fixed income assets and alternative credit. The automated underwriting system enables credit providers to boost the number of loans they offer while streamlining their customer verification procedures. Since the pandemic breakout, the company has grown rapidly as a powerful Fintech engine. The company has collaborated with several banks and Fintech firms, including LendingClub, SoFi Technologies, Prosper, and Upgrade.

The company went public in June 2022 after a merger with SPAC EJF Acquisition Corp. Pagaya stock is currently up 200% since its debut, valuing the company at $18 billion, more than double its initial value. Although Pagaya is a major player in the emerging Fintech ecosystem, the stock seems to be trading like a meme stock with heightened volatility. 

Innoviz Announced a $4 billion Deal with Volkswagen

Innoviz Technologies, founded in 2016, develops navigational sensors for self-driving cars. Innoviz was one of the first Israeli startups to successfully merge with SPAC by deciding to merge with Collective Growth Corporation and began trading on NASDAQ in 2021. 

The stock gathered momentum after the company announced a deal with Volkswagen. According to Innoviz, the deal value is more than seven times the company's market value of just over $500 million. Innoviz will provide LiDAR technology and software to VW's autonomous vehicle unit, CARIAD, beginning in 2025. Over eight years, Innoviz expects to supply 5-8 million LiDAR units across multiple Volkswagen Group brands. 

HUB Gets Picked by Stock Guru Cathie Wood

Hub Security is a computing solutions provider offering cybersecurity solutions and a full range of cybersecurity professional services in over 30 countries. The company was founded in 2017 by veterans of the Israeli Defense Forces' elite intelligence units (8200, 81, MOD, C4I-IDF) to protect sensitive commercial and government information. It offers end-to-end data protection throughout the data lifecycle and next-generation encryption technologies such as quantum computing defense and has been awarded the FIPS 140-2 Level 3 certification for its cutting-edge technologies.

In July, Cathie Wood, the renowned investment manager behind Ark funds, added Hub Security stock to the Ark Israel Innovative Technology Fund, as evidenced by the recently filed holdings data for this fund. Hub seems to be the only new Israeli company to be added to Wood's Israeli Tech ETF "IZRL," alongside many others which were removed – something that is quite a strong signal for the young company. 

The company is also planning to go public in the United States in a $1.3 billion merger deal with SPAC Mount Rainier Acquisition Corp. (RNER). The deal is expected to be completed in the third quarter of this year. 

While other SPAC deals were heavily criticized on overinflating revenue projections to setup higher valuations, HUB is unique in this landscape by providing a $115m revenue forecast for 2022 of which 48% was already booked in January 1st of this year. 

This puts the $1.3 billion HUB SPAC merger uniquely in the lower range of its potential market cap assuming growth rates will continue to surpass 20% per annum which may make it one of the few deals that will increase its value post listing. 

Conclusion

The popularity of SPAC deals has started to wane since investors' enthusiasm has dried in recent months because of the uncertain macroeconomic environment. However, there is always room for more solid companies, and SPACs should be looked at on a case-by-case basis. There's a saying in Hebrew: "when the waves get stronger, the stronger are revealed" (the pun has a double meaning in Hebrew). July seems to have been a strong wave for Israeli SPACs. The current economic environment appears to be separating the men from the boys, with strong companies such as those with significant long-term growth potential standing out and others crashing under the pressure of inflated valuations.

This article was written in cooperation with Future Markets Research