It was Independence Day this week, and the Israeli economy is celebrating thanks to a multitude of M&A (merger and acquisition) “exit” deals. Over the past year, Google acquired Wiz for $32 billion, Palo Alto Networks acquired CyberArk for around $25b, and there were many smaller deals.

How different is an Israeli M&A deal from any other?

Not all M&A deals succeed, but preparation helps. The main stages to prepare for include:

• Locating candidates and narrowing the short list to one;

• Appointing an M&A project team and team leader, i.e., senior management and experienced advisers in each country;

• Agreeing to the main terms in a letter of intent (LOI) but subject to the main agreement;

• Due diligence;

• Main agreement;

• Post-deal integration.

• First, you will need three documents: (1) A strategy document. This describes the rationale and goals; (2) A financial viability review; (3) An integration plan. This includes people, systems, processes, know-how acquired, supply chain, cultural differences, talent retention, management integration, timeline, and costs. These documents are interrelated and should be updated regularly.

• Second, do due diligence on legal, technical, financial, commercial, and tax documentation and the all-important cap table. Who are the sellers, and will they all agree to the deal?

• Third, expect surprises as things proceed. A big deal often affects the behavior of people on both sides. Homework helps anticipate things, and so does using professional advisers to talk to each other, acting as a buffer. If one side raises a crazy proposal, the advisers can reply objectively: “I can’t recommend that to my client.”

• First, motives. The prospective seller generally has something the prospective purchaser needs, e.g., technology or market share. Without it, the buyer might fall behind. That means the seller may have the upper hand in negotiations.

• Second, cultural differences. Many Israelis display a pragmatic, informal style but can be very hard-working and quick-thinking. Language differences, time differences, and different weekends and festivals need to be factored in, especially as deadlines approach.

• Third, deal structure differences. Can the buyer acquire assets, or does the seller hold the upper hand and insist on selling shares for tax reasons?

• Fourth, can the price and terms of the deal be agreed upon, or do company or geopolitical doubts point to a contingent consideration and/or earn-out formula? What are the tax consequences?

• Fifth, in Israel, tax must be withheld from the consideration and paid to the Israel Tax Authority within 30 days after the deal is done and/or the consideration is known (not necessarily paid). This necessitates getting an upfront tax ruling and/or appointing a paying agent to receive all consideration and withhold the tax.

• Sixth, special rules apply to Employee Stock Option Plans in Israel; they usually have trustees who may need ITA clearance to migrate an ESOP to the buyer.

• Seventh, Israeli company law has bring-along rules for imposing an M&A deal on a minority (typically 20%) that is holding out or cannot be found due to crowdfunding, etc. And cap tables (listing shareholders’ and their capital) are not always up to date. This matters when composing “waterfall” provisions for paying different classes of shareholders.

• Eighth, approvals may be needed, e.g., for antitrust, tax, and other reasons. Then there is the Israel Innovation Authority; if it gave R&D grants in the past, special payment rules apply.

• Ninth, integration of the business to be acquired needs advance planning. In Israel (and other countries, such as the UK), there is a caveat regarding intellectual property (IP) such as technology or a good brand name. Don’t buy shares and assume you can strip out the IP. You can do so if you pay capital-gains tax and dividend-withholding tax approaching 50% on top of the sellers’ tax. Fortunately, there is now a procedure for retaining and not firing tech personnel and putting them to work in an R&D center for eight years if a tax ruling is obtained.

The above comments are brief and only the tip of the iceberg. Unfortunately, some companies and their advisers are inexperienced in the M&A field, and expensive misunderstandings sometimes occur, e.g., in the tax area. Some multinational groups have got it wrong and then lost in the Israeli courts. Fortunately, many other M&A acquirers do succeed, as the figures show.

As always, consult experienced professional advisers in each country concerned at an early stage in specific cases.
leon@hcat.co

The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.