The war has dampened M&A (exit) activity in Israel a bit, but deals are still being done. The recent Wiz acquisition by Google for $32 billion confirms that.
We discuss a few points based on recent experience. Our remarks are potentially relevant to M&A deals of all sizes in high tech and low tech, in many countries.
Every negotiator has their own style. Here are a few tips to consider incorporating in your style.
- First, decide who are your negotiators.
- Second decide your valuation (price) range
- Third, a letter of intent / term sheet and a non-disclosure agreement are needed when things get serious, before the main agreement.
- Fourth, prepare everything else and everyone on the M&A team and in the due diligence data room – financial, contractual and business items. And designate a point person on each side for communication purposes.
War Issues:
Typically, agreeing the price valuation is the main sticking point.
In Israel there is the added complication of the October 7 war. Is it business as usual in Israel? What do potential sellers and buyers need to consider?
For high tech start-ups the motive in an M&A deal is generally to develop something good and sell it to a multinational group with better marketing abilities. For the multinational group, the motive in an M&A deal is often to avoid falling behind its competitors with least risk.
The October 7 war is problematic because the war represents a risk factor. Even if the buyer intends to acquire Israeli technology and lay off the Israeli work force, that is not the end of the story.
Technological development and supplies from Israel may become doubtful for an unknown time period. Some Israelis are still evacuated, many are drafted as reservists to the IDF, not all airlines are flying to and from Ben Gurion airport. The war has already lasted over 600 days, so the 6 Day War of 1967 is a distant memory.
On the other hand, not all start-up personnel are drafted to the IDF. And some are able to work remotely or part time at different hours of the day. Working nights is fine if you work with others in the US which is 7-10 hours behind Israel.
The art of the wartime deal:
So how is an Israeli start-up ripe for exit (M&A) valued and how does the war affect the price valuation?
What we are seeing at present is extensive use of earn-out clauses in Israeli M&A deals. That means part of the agreed purchase price is conditional on business as usual and isn’t paid if something goes wrong. That way all sides may be satisfied. Israeli sellers may assume nothing will go wrong and that the war will soon end. The buyer knows the purchase price may be adjusted downwards if there is a period of instability due to the war. Moreover, if this is a cash deal using borrowed money, the buyer’s source of finance might be reassured by an earn-out clause to limit the war risk.
In practice, the war presents greater inducement to pay for an M&A deal with share consideration rather than cash, i.e. shares/stock of the buyer. This is more likely if the buyer’s shares are publicly traded on a stock exchange. The share consideration may of course be combined with an earn-out clause. This way, the seller shareholders lose less in tax, the buyer doesn’t need to find cash.
Also, inventories, other assets, personnel, development and production may all be partly or entirely shifted abroad – the extent depending on individual circumstances.
The tax side:
The tax side is complex in any M&A deal. There are several common problems. First, if part of the consideration is variable depending on an earnout clause, it is necessary to request a tax ruling from the Israeli Tax Authority allowing part of the capital gains tax to be postponed. Normally Israel collects capital gains tax within 30 days after the deal is done, even if the price is paid installments (unlike the US). However, if part of the consideration may never be paid, the Israeli Tax Authority has said that is different, but a tax ruling is highly advisable.
Second, if the buyer buys the shares of the Israeli seller only to shift the technology and business out of Israel (because of the war or anyway), that can trigger double capital gains tax and dividend withholding tax. The result can be 70%-90% Israeli tax if no action is taken). So advance tax planning is legitimate and absolutely vital.
Third, don’t overlook other taxes in such situations – VAT, real estate taxation, employee taxes on an ESOP (employee share option plan) etc.
Next Steps:
Please contact us to discuss an upcoming M&A deal, or any other matter. We have much experience in this area.
As always, consult experienced legal and professional advisors in each country at an early stage in specific cases.
© Leon Harris 5.6.2025