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May 2012 Legal Business 69

Freshfi elds Bruckhaus Deringer’s ‘man on the ground’ in Tel Aviv, Adir Waldman, had a relatively typical New England upbringing. Having grown up in Fairfi eld, Connecticut,

the academically gifted Waldman studied at nearby Yale University, before returning two years later to attend Yale Law School, where he became senior editor of The Yale Law Journal.

In between, Waldman took the unusual step of serving in the Israeli army for 18 months. ‘I had been accepted for law school and I knew that I didn’t want to go directly. Thankfully, Yale has a policy of actively encouraging students to take a year or two off to do interesting things,’ he says. The army was a positive experience and serves him well in his current position. ‘I certainly know most of my Hebrew from the army and I probably feel more at home here as a result,’ he comments.

Waldman is in good company in Tel Aviv. Israel’s principle fi nancial and legal centre receives a constant infl ux of Wall Street attorneys, London solicitors and lawyers from other parts of the globe. Many are seeking a new life for religious, cultural, or other reasons. With a steady fl ow of highly qualifi ed immigrants, Tel Aviv has a high concentration of fi rst-rate lawyers.

‘Israel has a sophisticated legal market with world-class lawyers,’ comments Freshfi elds’

Frank Miller, the London-based corporate partner who is responsible for the fi rm’s Israel practice. The domestic law fi rms are now awash with international talent. And many have taken a direct route from Wall Street. Waldman did a seven-year stint at Wachtell, Lipton, Rosen & Katz.

Cliff Felig, a corporate partner at leading domestic fi rm Meitar Liquornik Geva & Leshem Brandwein, was born in New Haven, Connecticut, also practised at a Wall Street fi rm – Cravath, Swaine & Moore – for six years before deciding to move to Israel in 1992.

He explains: ‘I was surprised by how little change there was from Wall Street. When I moved here in 1992, Israel was going through a major change to a high-tech and export-led economy. It was becoming much less heavily regulated and the demand for lawyers who could get documents turned around quickly was growing. There were real opportunities for people with these skills rather than connections. There was a sense that an immigrant lawyer could really fl ourish here.’

Israel’s law fi rms have done well to take advantage of the growing infl ux of internationally qualifi ed lawyers relocating from their native jurisdictions. But what does this new infl ux of foreign fi rms mean for Israel’s legal market?

In an era of ever-increasing cross-border transactions, it is fi tting that Israel’s domestic legal market contains a rapidly growing cohort of international lawyers, just as foreign fi rms continue to lavish more attention on the jurisdictionCHRIS CROWE

PEAK PERFORMANCE

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Photograph SHUTTERSTOCK


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70 Legal Business May 2012

CROSS-BORDER GROWTHThe growth of capital fl ows and entrepreneurial activity over the last decade is an attractive phenomenon for both domestic and international law fi rms. ‘The Israeli economy has grown. It didn’t suffer the debilitating crises that Western economies have suffered,’ confi rms Herzog Fox & Neeman’s Alan Sacks. ‘There has been a great deal of interest internationally and a steady and signifi cant fl ow of investment into Israel.’

Cross-border M&A is no longer entirely between Israel and the US, but it is now worldwide. Last year, for example, China National Chemical Corporation (ChinaChem) acquired Israeli agrochemicals manufacturer Makhteshim Agan Industries for some $2.4bn. This was one of the largest ever deals to involve an Israeli company, with domestic fi rms Herzog Fox & Neeman advising Makhteshim Agan, while Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co represented ChinaChem.

‘Israel is no longer purely engaged in a bilateral relationship with the US, but more of a multilateral relationship with other major trading partners in Europe, Asia and elsewhere,’ comments Miller, who admits that Wall Street law fi rms still have a stranglehold on US-Israeli deals, but explains that his fi rm’s increasing focus on Israel is down to the fl ow of capital between it and other regions.

Miller believes that Israeli clients have the potential to be an incredibly lucrative source of instructions in the same way that acquisitive private equity houses and strategic buyers are in other parts of the world. ‘Israelis are not afraid of risk. They embrace risk. They see opportunities and say “let’s go there” and then they need to fi nd a law fi rm that can help them do that,’ he explains.

Freshfi elds isn’t doing too badly in the region. In 2011, the fi rm represented Israeli transit

bus company Egged on its successful €500m bid to operate the public transport system in Amsterdam for eight years. At the end of 2010, the fi rm advised Israel-based Zim Integrated Shipping Services on the sale of a 47.5% interest in the Tin-Can Island Container Terminal in Lagos, Nigeria. The deal was led out of London by Miller and former partner Presley Warner, who has since joined Sullivan & Cromwell.

Israeli companies are also thought to be more willing to be acquired by foreign investors in the current climate. Their traditional exit via an IPO on the domestic or overseas exchange is no longer as attractive as before the global fi nancial crisis. Israel used to boast the second largest number of companies listed on the NASDAQ until China took over. Indeed, Israel headquartered Teva Pharmaceutical Industries remains one of the largest companies by market capitalisation on the NASDAQ.

Naschitz Brandes’ Tuvia Geffen believes that the growth in cross-border M&A has more than balanced out the reduction in capital markets activity. Geffen, who has a strong focus on the high-tech sector says: ‘In the past there was a larger focus on IPOs, but now Israelis are more willing to allow the Microsofts of this world to come and buy the company.’ Microsoft has a substantial research and development centre in Israel, which it launched in April 2006, u

‘A lot of the London Stock Exchange IPOs have slowed down, but at the same time there is still a good deal fl ow of Israelis listing in the US.’Joshua Kiernan, White & Case

ENERGY AND INFRASTRUCTURE PROJECTSIsrael’s discovery of huge natural gas reserves off the Mediterranean coast may now be old news, but it is driving wider initiatives to augment Israel’s infrastructure. With the advent of build-operate-transfer (BOT) projects, it is generating a healthy fl ow of legal work.

Israel’s immense gas reserves include the huge Tamar fi eld, estimated at 247 billion cubic metres and the Leviathan fi eld containing some 453 billion cubic metres. They form part of a giant discovery, but gas underground does not equate to immediate riches.

Simon Jaffa, a partner at Barnea & Co, says there is a huge amount of interest in Israel’s infrastructure and energy initiatives, but there is still a need for international fi nanciers to become more comfortable with these projects: ‘What I see at the moment is a long queue of overseas companies wanting to participate in the construction or operation of these projects, but what I rarely see is foreign

banks wanting to fi nance these projects. There are a number of reasons why they are concerned about fi nancing these projects in Israel, including the political risk of taking on a project in the Middle East.’

Despite the tight fi nancing environment, the projects arena remains incredibly active. The natural gas discovery is believed to have the potential to transform the Israeli economy, but there is a long road from discovery and exploration to actually commercialising these reserves.

Israel’s rather primitive infrastructure is illustrated by residential gas use, which involves the delivery of a ‘gas balloon’. There is still no mains gas supply to homes by underground pipes and there is a constant threat that electricity demand will outstrip supply and lead to the sort of blackouts that occur in California.

Jaffa explains: ‘Israel doesn’t have the infrastructure to provide gas on demand for

domestic and commercial use. It needs to build the infrastructure for gas distribution around the country, but exporting it is another matter altogether. How the government commercialises these gas reserves is still open to question.’

Israel’s infrastructure initiatives are not limited to the gas sector. Independent power plants, desalination plants, as well as schools, hospitals and police facilities are also underway.

The energy sector is one that numerous Israeli fi rms are targeting with some considerable success. Agmon & Co and Rosenberg, Hacohen & Co recently advised the Tamar group on its $8bn gas supply deal with Israel Electric. Herzog Fox & Neeman recently represented the consortium of lenders in connection with the Dorad Energy power plant fi nancing, Israel’s largest IPP project. The fi rm was also involved in the fi nancing of Jerusalem Light Rail and the Cross-Israel Highway.

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recognising that Israel is home to the largest startup community outside of the US.

Furthermore, in the technology sector Israel is making a substantial and meaningful contribution. It was recently announced that Intel Israel now accounts for some 40% of Intel Corporation’s global revenue. According to a report in The Times, investment in research and development accounts for 4.4% of Israel’s GDP, compared to a mere 1.6% in Britain. Indeed, 50% of Israel’s exports are technology related.

Private equity houses are also demonstrating a keen interest in Israel. Apax Partners owns a majority stake in Israeli food maker Tnuva and a majority shareholding in Israel’s largest investment house Psagot. And last year Israeli conglomerate IDB Holdings Corporation was in talks to sell a 10% stake in Clal Insurance to Permira.

For Israeli law fi rms such as Zellermayer Pelossof Rosovsky Tsafrir Toledano & Co, which has a strong focus on private equity, this growth in cross-border deals is immensely positive. Corporate partner Doni Toledano advised Apax on its $1.025bn acquisition of a controlling interest in Tnuva in 2008. And with the imminent break up of Israel’s large conglomerates, this raises the prospect of Israel becoming a genuine hotspot for private equity activity.

FOREIGN INTERESTLow local rates have not dissuaded foreign law fi rms from focusing their sights on the deals emanating from or connected to Israel. According to one partner at another leading domestic fi rm, the rates for a junior partner in Tel Aviv can be as low as $350 to $360 an hour, a rate that would get little more than a junior associate in London or New York.

Miami-based Greenberg Traurig launched an offi ce in Tel Aviv in January. Senior fi gures Gary Epstein, the fi rm’s global corporate and securities chair, and fellow Miami partner and co-chair of the Israel practice Bob Grossman, are in charge of building a permanent team of fee-earners on the ground. The fi rm will not practise Israeli law. Epstein, who will spend time there without permanently relocating, says that the fi rm is ambitious about its build-out phase and will not be hindered by the more modest chargeout rates.

‘ Greenberg Traurig always charges the local rate. My rates are signifi cantly lower in Miami than my rates in New York,’ he comments. ‘We are able to compete effectively in local jurisdictions with rates that are

commensurate to the local market. Within a day of announcing this new offi ce we had more than 75 unsolicited resumés from people that found this very appealing and were prepared to work at local salaries.’

Epstein says that the intention is to build a full-service offering, modelled on the fi rm’s offi ces around the world. He, however, will continue to base himself primarily in Miami.

Greenberg Traurig has been active in Israel since 2002 when the dot-com bubble burst and at the height of the Middle East tensions. Though the legal market has yet to be fully liberalised, Epstein says that the fi rm has received no resistance from the Israel Bar Association.

‘We do not purport to practise Israeli law and we will not practise Israeli law,’ he states. ‘We hope to provide a service to Israeli clients and continue to do what we have been doing. We will just be providing these services at a more convenient location and at a cost-effective level.’

Epstein says that the launch of the new offi ce is merely a culmination of the work that

it has been doing over the last decade: ‘After ten years we felt that we had accumulated a suffi cient critical mass of Israeli clients to be able to provide additional value at the local time.’ The connection is not just with Israeli clients. In 2006, Epstein acted for IVAX Corporation in its merger with Israel’s Teva Pharmaceutical Industries, creating the largest generic drug company in the world.

Greenberg Traurig aside, international fi rms have not been fi ghting en masse to establish offi ces in Tel Aviv. Yet many are present in Israel’s principle fi nancial and commercial hub.

Freshfi elds does not have an offi cial offi ce there, though Waldman is located there permanently and is managing director of the fi rm’s Israel focus group. Over the last decade, the fi rm has experienced increasing exposure to Israeli deals, including the transactions involving Egged and Zim Integrated Shipping Services.

Joshua Kiernan, a US-qualifi ed corporate and capital markets partner based in White & Case’s London offi ce, spends much of his time in Israel and has advised on many of the headline IPOs that have emanated from the jurisdiction since the late 1990s. He advised on the two largest ever Israeli IPOs, the $1.6bn Tel Aviv listing of Oil Refi neries and the $1.4bn London Stock Exchange offering of AFI Development, both in 2007. And despite the slowdown in international equity capital markets activity since the global fi nancial crisis, Kiernan remains busy on Israel-related deals.

In 2011 alone he and the fi rm worked on fi ve such deals. ‘The capital markets work is still very busy,’ he says. ‘A lot of the London Stock Exchange IPOs have slowed down, but at the same time there is still a good deal fl ow of Israelis listing in the US.’

Berwin Leighton Paisner is another London-based fi rm that has successfully targeted the Israeli market. The fi rm opened a representative offi ce in Tel Aviv late last month. London corporate fi nance partner Jonathan Morris is chair of the fi rm’s Israel desk and is well known within the Tel Aviv legal market, despite not actually being permanently based there. In 2009, Morris represented AIM and Tel Aviv-listed Pilat Media Global on its £16.3m merger with US-based SintecMedia. It was the fi rst such merger to be governed by the UK Takeover Code and the rules of the Israeli Securities Authority.

Yet thanks to the longstanding bilateral relationship between Israel and the US, it is Wall Street that is thought to have the closest nexus with Tel Aviv. After years of

‘The Israeli economy has grown. It didn’t suffer the debilitating crises that Western economies have suffered.’Alan Sacks, Herzog Fox & Neeman

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cross-border deals between the US and Israel, and with numerous Israeli corporates listed on the NASDAQ, it is New York’s fi nest fi rms that have the greater brand recognition on the streets of Tel Aviv. Notably, Skadden, Arps, Slate, Meagher & Flom has an impressive record on Israeli deals. In 2008, for instance, it advised Israel’s Omrix Biopharmaceuticals on its $438m acquisition by Johnson & Johnson. Since then, one of Skadden’s key Israel-focused partners, David Fox, has joined Kirkland & Ellis. Last year, he advised Teva Pharmaceuticals Industries on its $6.8bn acquisition of US-based Cephalon. Fox is a big name on Wall Street in his own right and spent much of his childhood and early adult life in Israel. Yet even with his move to Kirkland, Skadden retains an immense record on Israeli deals and a strong contingent of well-connected partners, such as New York partners Yossi Vebman and David Goldschmidt.

Overall, UK and US fi rms in particular have shown genuine interest in the Israeli economy, yet few if any are willing to take the plunge as Greenberg Traurig has and launch an offi ce there. The modest size of the economy and the relatively low fees charged by domestic fi rms means that international fi rms fi nd it hard to see how they could make a Tel Aviv offi ce fi nancially viable. Israel’s corporate wealth, fast-growing high-tech community and quickly developing energy sector is of genuine interest to international fi rms, but it still remains a relatively small economy compared to the new economic giants of China, India or Brazil. Freshfi elds’ Miller calls it a relatively ‘narrow market’, but one with increasing capital fl ows, entrepreneurial activity and companies that are becoming more global in nature.

FIRM EXPANSIONThis positive outlook has encouraged substantial growth among Israel’s leading

law fi rms. They have an enormous talent pool to draw from. Thanks to the law becoming a preferred choice of career for many in Israel and the continuing fl ow of legally qualifi ed immigrants, the nation now boasts the highest concentration of lawyers per capita in the world. In 2010, Israel’s Courts Administration reported that there were 585 attorneys per 100,000 Israeli residents.

Meitar Liquornik’s Cliff Felig says the increase in cross-border M&A and the demands of foreign clients has encouraged Israeli law fi rms to expand quickly: ‘The large fi nancial institutions, corporations and private equity houses are used to working with large full-service law fi rms. Local fi rms here are not as large as in many of these clients’ home jurisdictions, but they want to know that they can go to one fi rm that can provide all the necessary specialist fi elds of expertise. It has pushed the market in that direction.’ u


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Herzog Fox now boasts over 200 fee-earners and Sacks says that this is purely a refl ection of the demands on the fi rm: ‘Our fi rm has grown and our peers have grown in line with the growth of the Israeli economy as a whole. Our size is a function of the scale of the work that we do and the number of specialisations that we offer.’

In 2011, Israel experienced one of the most newsworthy mergers in its legal history when Goldfarb, Levy, Eran, Meiri, Tzafrir & Co merged with M. Seligman & Co to form Goldfarb Seligman & Co, one of the nation’s largest law fi rms. Ashok Chandrasekhar, a legacy Goldfarb Levy partner, who is in the new fi rm’s corporate and securities department and a member of its executive committee, says that the time was ripe for attaining greater resources and visibility.

‘We had long felt that the Israeli legal market was at a mature enough stage to support very large fi rms by our standards. We had built the fi rm over the years to that objective and then we saw a further opportunity with the partners at M. Seligman,’ he reveals. ‘It enables us to provide a broad offering of legal solutions to clients.’

Israeli fi rms are also expanding due to the sustained fl ow of immigrant lawyers into the jurisdiction, something that is enabling them to gain even greater exposure to cross-border deals. Among a number of headline transactions for Meitar Liquornik, Felig worked on Berkshire Hathaway’s $4bn acquisition of an 80% stake in Israel-based Iscar Metalworking Companies back in 2006. In 2011, he represented Cool Holdings in its bid to increase its stake in Israel’s HOT Telecommunication Systems. For Felig, he experienced no shortage of challenging, high-value and cross-border deals,

following his relocation to Israel. He says that as a result, the fi rm now has a ‘high percentage’ of partners and associates that previously practised in New York or London.

Clifford Davis, an English solicitor who worked at Gouldens before it became the London offi ce of Jones Day, moved to Israel in 1994. His wife was brought up in Israel and the two decided to try living there.

He now co-heads the corporate practice at S. Horowitz & Co. ‘I felt I could really build something and they haven’t fi red me yet,’ he jokes about his decision to move. ‘Israeli law fi rms are excellent. Pound for pound, any of these fi rms in the top ten can easily match anything you can fi nd in Wall Street or the City of London.’

Tuvia Geffen, a partner at Israeli fi rm Naschitz Brandes practised for eight years at Sullivan & Cromwell in New York before returning to Israel again in 2006. He says that

while working for a Wall Street fi rm may be prestigious and give a lawyer greater exposure to higher-value deals, the work in Israel is no less challenging or interesting. ‘It was surprisingly a lot closer to Wall Street than I thought,’ he explains. ‘Originally I thought I might be taking a step back to a slower pace and less exciting deals, but they are doing the same kind of deals with just one less zero. It might just be $100m rather than $1bn, but it’s the same type of work and most deals have a cross-border aspect.’ In 2011, the fi rm advised Provigent on its $340m acquisition by US-based Broadcom, one of a series of high-value deals involving Israeli high-tech companies.

Sacks moved out to Israel with his wife from the UK in the 1980s just after getting married.

‘There is a steady stream of young quality professionals coming to Israel who are making a life decision as much as a professional decision. They may work harder here and get paid less, but they are trading one quality of life for another,’ he says.

STRIKING CONNECTIONSOver the years, the large fi rms have struck up fruitful working relationships with their foreign and international counterparts, but few are willing to go another stage further and develop formal affi liations. With a quickening fl ow of cross-border M&A, most fi rms regard multiple sources of referrals as preferable to a guaranteed trickle from one source.

Sacks says: ‘We have excellent relations with many law fi rms in all of the major cities of the world. We have always avoided exclusive arrangements with any one fi rm because we don’t want to spoil our relations with so many others.’

Davis: Israeli fi rms can match Wall Street and London

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TEL-AVIV HEAD OFFICE 1 Azrieli Center, Round Bldg., 17th Floor, 67021 Tel-Aviv, Israel Tel +972-(0)3-608 1451 Fax +972-(0)3-608 1452E-MAIL: [email protected] WEB: www.rosak-law.com

With offi ces in Tel-Aviv (head offi ce), Haifa, and Zurich, Switzerland.

Proactive and responsive, ROSAK is ranked by Th e Legal 500 as one of Israel’s leading law fi rms in corporate and M&A’s, Venture Capital and Start Ups, and Taxation.

Rosenberg Abramovich Keren-Polak Epelman, Advocates is a boutique international law fi rm.

Our focus is on international tax planning, trusts, corporate law and cross-border transactions, technology transactions, private banking and fi nancial products.

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Medium-sized fi rms have more to gain from allying themselves with or even merging with overseas colleagues, as it is often the large fi rms that are the fi rst port of call for big referral mandates.

Indeed, smaller fi rms are already exploring these options. Last year Tel Aviv-based Rosenberg Abramovich Keren-Polak Epelman, Advocates affi liated itself with Spanish fi rm Cremades & Calvo-Sotelo in an effort to exploit increasing cross-border activity with Spain and Latin America.

Oded Oz, a junior partner at the Israeli fi rm says that it is working on establishing alliances in a number of other jurisdictions, but is not in a position to announce anything formal at this stage. ‘We have many affi liations that are not formalised yet,’ he confi rms. ‘Most of our operation is international by nature and we want to be able to provide more effi cient services around the globe. Once you achieve a certain volume of business between fi rms it is the natural step to feel more comfortable with publicising this relationship.’

Shenhav, Konforti, Shavit & Co is another medium-sized fi rm with a similar strategy. It established an association with US fi rm McGuireWoods two years ago and is further building its international connections. Partner Yaron Shavit says that trying to develop multiple referral relationships in numerous jurisdictions is not suffi cient for his fi rm: ‘A referral connection is a model that is always there, but it is not good for long-term co-operation. It is built on opportunities that may happen, but you can’t keep an employee in the fi rm waiting for an opportunity to come, when you have already developed experience

of a deal that was done under a referral. You can’t really build expertise on cross-border deals under that model. Under an association, you develop long-term know-how through these cross-border experiences and this is constantly nourished.’

Shavit says that the fi rm is receiving substantially more work through its association with McGuireWoods than it did under previous informal relationships. ‘We are working with our partners to build new deals that otherwise would not be here,’ he states. Shavit says that the fi rm is developing further ‘co-operations’ in France, China and South America.

Israel was ranked 41st by size of GDP in 2010 by the International Monetary Fund, yet its exposure to cross-border M&A and investment means that it is increasingly becoming a focal point for the international legal community. The rapid growth of Israel’s top fi rms over the last few years and the nation’s resistance to the global fi nancial crisis and economic downturn means that the

outlook remains impressively positive. The only blot on the landscape is Israel’s security. With ongoing tensions with its Middle East neighbours, particularly Iran, Israel still has to work hard to convince investors that it is a safe haven.

Until now foreign banks have taken a very limited role in Israel fi nancings, but Moriel Matalon, the managing partner of leading Israeli fi rm Gornitzky & Co, says that Middle East tensions are still a major source of concern for international investors: ‘It is an interesting place for foreign players with the only setback being the political or security issues. The question of Iran is still in the air.’

However, Matalon has already noted a changing sentiment among the foreign and international banks: ‘We’ve recently seen much more interest shown by foreign banks looking at Israel for private wealth but also to participate in fi nancing of major transactions. In most cases they will probably try to join a consortium of banks with the local bank acting as agent or organiser. When will we see local banks taking a smaller part and letting the foreign banks take a much larger role? I believe with Israel joining the Organisation for Economic Co-operation and Development (OECD) and with banks seeing beyond the security situation or political crisis, I think that the risk attributed to Israel will be minimised.’

With foreign investors and fi nanciers becoming ever more comfortable with the Israel story, it is not surprising that the jurisdiction’s impressively international legal community continues to grow. LB

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‘We’ve recently seen much more interest shown by foreign banks looking at Israel.’Moriel Matalon, Gornitzky & Co


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OPEN SEASONAs Israeli conglomerates are forced to divest assets due to impending regulations, the country is poised for yet another wave of cross-border M&ACHRIS CROWE

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While many nations in the Middle East witnessed full-scale revolution in 2011, Israel was experiencing civil unrest for more

prosaic reasons: the cost of cottage cheese. In the summer of 2011 a Facebook campaign launched by Israelis against the rising cost of food products spilled onto the streets. The protestors blamed an over-concentration of economic power within Israel’s handful of large business conglomerates.

Israel is a young nation with a developing economy. As it moved towards a Western-style capitalist model over the last 20 years, a number of wealthy families developed giant business empires spanning various industries from fi nancial institutions through to food manufacturers, retail outlets and construction companies.

For years the Israeli government had allowed these conglomerates to operate without interference but, given the public antipathy towards rising food and housing costs, and other welfare issues, the tide turned. The thousands of people who took to the streets in Jerusalem, Tel Aviv and other Israeli cities had fi nally caught the attention of the government.

In February this year, the government-appointed body charged with dealing with the issue, known in Israel as the Concentration Committee, published its fi nal report. Although legislation has yet to be enacted, the report indicates that Israel’s major conglomerates will have to be disbanded, in part at least. And with tighter regulations being imposed on business tycoons having multiple business assets under one pyramid holding structure, Israel is bracing itself for a wave of foreign investment.

Moriel Matalon, managing partner of leading Israeli fi rm Gornitzky & Co, believes that the report signals a milestone in Israel’s economic life cycle. ‘I think we are witnessing a very interesting process with an attempt by the regulators to increase the distribution of wealth in Israel by requiring some of the major groups to disassociate themselves from some of their holdings. It is quite a unique process.’

Simon Jaffa, a founding partner of Israeli law fi rm Barnea & Co is expecting to see foreign acquirers taking advantage of this economic restructuring. ‘If people have to divest, then their main motivation will be to sell at the highest price possible. It may be that to get the better price they will have to sell to an overseas buyer rather than trying to sell locally,’ he explains.

And the signifi cance of cottage cheese? A staple of the Israeli breakfast table, it was reported to have become twice as expensive as in New York. The Israeli media is prone to illustrating the expense of various products by comparing local prices with those in other countries. Jaffa says that Israeli-manufactured soup croutons were discovered to be half the price in America than they were at home. More protests are expected this summer.

He believes that Israel’s existing competition law is inadequate for managing the power of the conglomerates. ‘It stops competition being further reduced, but doesn’t necessarily increase competition,’ he states.

It now looks certain that Israel’s large multi-layered conglomerates will be broken up. The degree to which they will be taken apart is yet to be defi ned, but it is inevitable that Israel’s already buoyant M&A environment will be further invigorated by the imminent new regulations. Israel’s tycoons are expected to be given a deadline of four years to adhere to the legislation.

For the legal sector at least, it provides numerous opportunities for domestic and cross-border M&A, and also a chance to build relations with the companies that are changing ownership.

PREYING ON THE MARKETNimrod Rosenblum, a partner at Epstein Rosenblum Maoz (ERM), says that foreign

investors are already identifying opportunities to acquire assets that are on the market or may be coming onto the market. ‘Quite a few of our international clients as well as a number of international law fi rms with which we work, have asked us about this,’ he explains. ‘We are trying to tell them what we think will happen and what opportunities will become available in the market.’ He also concedes that some of the fi rm’s domestic clients may be forced to sell assets.

The prospect of the Israeli economy being opened up to greater competition, including an inevitable infl ux of private equity and strategic buyers, has also grabbed the attention of international law fi rms.

Freshfi elds Bruckhaus Deringer recently issued a briefi ng that stated that ‘these reforms are likely to change the current Israeli M&A landscape and in particular create opportunities for foreign acquirers’. There’s also likely to be a spike in outbound work too: with Israel’s tycoons being forced to sell-off part of their business empires, they are likely to use the proceeds to invest overseas.

Adir Waldman, managing director of Freshfi elds’ Israel focus group in Tel Aviv, believes the new regulations are going to have a profound effect on the economy. ‘What the fi nal regulations will look like when implemented remains to be seen,’ he says. ‘Having said that, it is clear that the government is committed to breaking up some of the cross-economy conglomerates, particularly those that control both fi nancial institutions as well as non-fi nancial companies. I expect quite a lot of Israeli capital to fl ow abroad. The capital raised from enforced disposals will be deployed abroad and there will also be a lot of foreign capital entering the economy.’

Waldman suggests that foreign investors will discover that expected new regulations will work in their favour, as Israeli tycoons will now be prevented from holding multiple business assets through their notorious pyramid-structured holding vehicles, which comprise holding companies with subsidiaries and further subsidiaries of these subsidiaries. ‘Foreign private equity funds or strategic buyers will be able to enter into one of these positions in a way that other Israeli conglomerates can’t, because they’ll be facing the same restrictions,’ he says.

The pyramid ownership structures employed by Israeli conglomerates have also led to deep concerns over corporate u

‘There is no doubt that the foreign banks are making their presence felt, but there are still regulatory obstacles to deal with before they can compete.’Cliff Felig, Meitar Liquornik Geva & Leshem Brandwein


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governance and investor protection. Many of the conglomerates are believed to have a controlling shareholder with the power to transfer resources between companies on a whim. Consequently the government and its committee are intent on boosting the infl uence of minority shareholders. With fi nancial institutions operating the same pyramid structure as non-fi nancial corporates and borrowers, this is also thought to be a threat to Israel’s fi nancial stability.

For business magnates such as Muzi Wertheim, who owns a dairy business and a Coca-Cola bottling company, as well as the nation’s fourth largest bank, this initiative to break-up Israel’s conglomerates has very serious implications. Nochi Dankner, chairman and controlling shareholder of IDB Holdings Corporation, has indicated that this process is more likely to unsettle the fi nancial system than protect it.

INWARD AND OUTWARDAs with any efforts to promote competition and to prevent corporate and fi nancial power being concentrated in too few business groups, there are inevitable openings for foreign investors and acquirers. Holding companies are likely to exit some of their Israeli businesses so that they can comply with what is expected to be a four-year deadline imposed by the Concentration Committee.

The proceeds from these disposals will need reinvesting and with tighter ownership restrictions on cross-economy conglomerates, Israel’s leading business tycoons are expected to look abroad rather than at home.

Local buyers are also likely to struggle to raise additional capital to make acquisitions, according to Jaffa. ‘It may be diffi cult for them to raise the capital required to make big acquisitions,’ he says. ‘If you look at the major banks, they are all held by the same oligarchs

and magnates, so you still have the same problem of over-concentration.’

This means that foreign investors and acquirers are in a prime position to pick up some of the assets on sale. Private equity houses are known to be circling, particularly as several have made successful investments in Israel already. Last year, European private equity fund Permira acquired Israeli drip irrigation systems manufacturer Netafi m for $870m. Zellermayer Pelossof Rosovsky Tsafrir Toledano & Co, represented Permira and Fischer Behar Chen Well Orion & Co acted for the sellers. Blackstone Group was recently reported to be in preliminary talks to acquire Avgol, an Israeli manufacturer of non-woven fabrics. Apax Partners has also been active in Israel, having acquired food maker Tnuva and Psagot, Israel’s largest investment house.

With private equity funds struggling to attain the necessary leverage to make acquisitions in the US and Europe, and with them now looking at alternative markets, the potential upheaval in the Israeli economy represents an attractive opportunity.

‘If people have to divest, then their main motivation will be to sell at the highest price possible.’Simon Jaffa, Barnea & Co

“The obvious fi rst choice” - Chambers Global Guide

S. Horowitz & Co. is one of Israel’s premier law fi rms. Ranked by the European Legal 500 as Israel’s overall leading law fi rm, we offer a full range of corporate, commercial, dispute resolution and intellectual property services to the international and domestic business and fi nancial communities.

31 Ahad Ha’am Street, Tel-Aviv 65784, Israel P.O.B. 2499, Tel-Aviv 61024tel: (972) 3 567 0700 fax: (972) 3 566 0974 e-mail: [email protected]

www.s-horowitz.comcontact: Clifford Davis

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ISRAEL


In addition, foreign banks, for so long excluded from fi nancing acquisitions in Israel, may soon take a bigger role. ERM’s Nimrod Rosenblum says that the wave of new regulations proposed by the Concentration Committee is likely to hinder Israel’s banks. He explains: ‘The main target of the government through the Concentration Committee is to prevent concentration in the market and the systemic risk associated with it. If a business group is to sell, for example, a large insurance company following the recommendations, it may well be diffi cult for an Israeli bank to fi nance such acquisition by itself. It means you have an Israeli bank which substantially owns or has a large exposure to a large insurance company, which may result in systemic risk. This may create opportunities for foreign fi nancial institutions.’

Even so, Cliff Felig, a partner at leading Israeli fi rm Meitar Liquornik Geva & Leshem Brandwein, says that foreign banks are still going to encounter barriers and so far they have only really penetrated the project fi nance segment in Israel. ‘There is no doubt that the foreign banks are making their presence felt, but there are still regulatory obstacles to deal with before they can compete head to head with the domestic banks,’ he says. ‘Withholding tax on interest is a real issue. Will the government allow the banks to compete? Most governments would want to encourage the fl ow of foreign capital into the country, but it is still an open question.’

RISKS AND OPPORTUNITIESFor the domestic legal market, this imminent regulatory crackdown delivers risks as well as opportunities. All fi rms will welcome a wave of M&A activity resulting from the enforced asset sales, yet several have remained the preferred

counsel of one or two conglomerates for years and as a result may lose part of their day-to-day practice when businesses are sold. Israeli companies do not employ large in-house legal teams and typically will not have a legal panel in place. Relationships between a law fi rm and client are still often among two individuals; a senior partner at the fi rm and a senior executive or owner of a business.

With numerous Israeli businesses poised to come under new ownership, this not only represents a shake-up of the economy, but also a potential reshuffl e of the legal market. A partner at one of the top fi rms in Israel admits: ‘A lot of Israeli public companies are closely held by a dominant shareholder who calls the shots on legal counsel. I think this regulatory change is very good for all the medium-sized fi rms in the market. There is a lot of opportunity there. I also sense that there will be an additional cultural shift. There is already pressure in Israel for companies to change

their accountants every few years and this may well fi lter down to legal advisers as well.’

Even so, Gornitzky’s Matalon says that the big fi rms have not necessarily enjoyed an exclusive hold on legal instructions coming out of one conglomerate. He says that Gornitzky represents roughly a third of Israel’s major business groups and about half of the 12 Israelis listed on Forbes’ billionaires list, yet he stresses that the fi rm is far from being the sole counsel to each entity. ‘It’s been increasingly the case in recent years that when it comes to a major transaction, the parties will look around for fi rms to bid for the work. It could be on fees, but they will look into the ability to perform and the merits of the law fi rms. Major transactions are all subject to some kind of competition among fi rms,’ he explains.

For fi rms merely seeking to ride the wave of M&A activity resulting from the economic shake-up, the prospects are bright. ERM’s Rosenblum is particularly upbeat about this. ‘We are positioned as an international fi rm in Israel – about 60% of our clients are not Israeli,’ he comments. ‘We are being more proactive in telling our clients about the opportunities here and updating our clients on the current situation.’

In March this year, Rosenblum and his team advised Italian insurance giant Assicurazioni Generali on the sale of its controlling stake in Tel Aviv Stock Exchange-listed Migdal Group to Shlomo Eliahu Holdings. Rosenblum expects a fl urry of Israeli fi nancial institutions to change ownership in the coming years.

So, while the Israeli government plans to break the vice-like grip the large conglomerates have on the domestic economy, a radical transformation of the legal market in the country seems more than likely. LB

[email protected]

‘It is clear that the government is committed to breaking up some of the cross-economy conglomerates.’Adir Waldman, Freshfi elds Bruckhaus Deringer


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