As Israelis pop the champagne and take pride in the $15 billion sale of Mobileye to Intel Corp. — a deal that prompted Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon to talk about tax cuts for citizens to benefit from the bonanza of tax revenues the Startup Nation will be getting — a closer look suggests the widely reported “biggest deal in Israeli history” requires may not be the windfall politicians are expecting.
For all the noise made around the deal — the largest ever cross-border sale of an Israeli tech firm — experts say only a small fraction of the sale sum will end up going into state coffers.
Because Mobileye was not a privately held Israeli company, but a publicly traded company whose shares are now held mostly by international funds and institutional investors — the Israeli founders, initial investors and employees of the firm hold an estimated 25 percent stake — analysts believe that Israel will likely only see about $1 billion in tax money from the sale, and that may be an optimistic assessment.
The Israeli tax authority declined to disclose an official figure due to privacy issues, a Finance Ministry spokeswoman said by email.
Professor Avi Simhon, the head of the National Economic Council, said in an interview to Israel Radio that the country is expected to gain some NIS 3 billion ($830 million) in taxes from the deal this year, and in the longer term the revenues will reach some NIS 10 billion, he said.
To calculate the amount of taxes to be collected, many things need to be taken into account, including which owners have Israeli citizenship, the employees’ options, the capital gains they made, and whether the company is subject to special tax incentives in Israel.
Yaniv Pagot, an economist and head of strategy for the Ayalon Group, an Israeli institutional investor, said that based on the assumption that some 25 percent of the shares are owned by the founders, initial investors and the employees, Israel is expected to get some $1 billion in taxes once the deal is completed.
Mobileye was and for now remains a publicly traded company, at least until Intel conducts a tender to acquire the outstanding shares held by the public. In this tender, the date of which was not specified at the time of the announcement of the deal on March 13, a subsidiary of Intel will offer to acquire all of the issued and outstanding ordinary shares of Mobileye for $63.54 per share in cash, representing an equity value of approximately $15.3 billion, and a premium of 34 percent to Mobileye’s closing price before the deal was announced. A disclaimer on the Mobileye website indicates that the tender has not commenced yet.
Mobileye’s Israeli founders, initial investors and its employees hold shares in the company. But the lion’s share of the deal money will go to the institutional investors and funds that were invested in the company. Based on data compiled from public filings by Bloomberg and companies like Yahoo Finance and Morningstar, the majority of these holders are US and global funds.
To be fair, it should be remembered that the founders and some Israeli institutional investors have also reaped profit from the sale of stakes along the way, at the time Mobileye issued shares in its initial public offering on the New York Stock Exchange in 2014, for example, or at its secondary share offering in 2015.
What becomes evident from scrutinizing the shareholder data is that no Israeli institutional investors are listed among the major shareholders, meaning that Israeli pensioners will be largely excluded from the bonanza.
That is because Mobileye, like many other tech firms, preferred to list its shares in the US and not in Tel Aviv.
“We know that company founders, initial investors, employees and insiders held approximately 23-26% of the company, and that the majority of non-insider holders were institutional investors and mutual funds from outside of Israel, primarily US and global index investors, and active investors,” said Steven Schoenfeld, chief investment officer of BlueStar indexes, a financial firm that has developed indices and exchange traded funds (ETFs) with a focus on the Israeli capital markets.
“The only clear-cut losers from this massive Mobileye deal are Israeli institutional investors, and the Israeli citizens they serve,” he said.
These Israeli institutional investors use the primary indices of the Tel Aviv Stock Exchange – the TA-35 and the TA-125 — as their benchmarks, and Israeli companies that are listed abroad, on the New York Stock Exchange, the Nasdaq and London, are not included on these benchmarks. Mobileye, Checkpoint Software Technologies Ltd., Amdocs and Mellanox Technologies and Wix.com, for example, are not listed in Tel Aviv, and thus are not included in the local indices which are tracked by the local institutional investors.
“Even though these investors can and could invest in Mobileye, they tend not to do so, or do so in very little amounts, because it is not their benchmark,” Schoenfeld said. “The risk/reward of holding a large position in a non-index stock is not worth it to pension funds and insurance managers, who are judged by how they perform relative to the TA-125 index.”
Israel’s benchmark bluechip index, the TA-35 (it used to be the TA-25 until recently), includes Tower Semiconductor Ltd. a chip maker, Ormat Technologies Inc., a provider of alternative and renewable energy technology, Nice Systems Ltd., a software developer, and Elbit Systems Ltd. a defense systems manufacturer. The TA-125 index has companies such as AudioCodes, a maker of data networking products, Compugen, a drug discovery company, and medical device maker Mazor Robotics. But a big chunk of the Israeli technology firms are simply not on the exchange, and as a consequence not tracked by the Israeli institutional investors via the benchmark indices.
“Had Mobileye shares been traded in Israel, they would have been included in the indices and then Israeli institutions would have held the shares because it is in the index,” said Ayalon’s Pagot. “Israeli pensioners are at the sidelines of this deal.”
Pagot attributed the lack of prominence of the Israeli institutional investors in the stock to its price. “The company was trading at 100 times its reported earnings and 30 times its income, and that is not the kind of stock a portfolio manager goes for,” said Yaniv Pagot, chief strategist for Ayalon Investment House, an institutional investor. “The company was trading at a very high price, something that a strategic investor like Intel is ready to pay for and not so much a financial investor.”
Israeli tech companies have spurned the local stock exchange and opted for offering their shares on the Nasdaq or NYSE to be closer to their markets, get higher valuations, and avoid what they see as burdensome local regulation. Mellanox Technologies Ltd., whose shares are listed on the Nasdaq, delisted from the Tel Aviv Stock Exchange in 2013, citing regulation as one of the reasons. At the end of 2016 there were 73 Israeli companies listed on the Nasdaq, according to data provided by the Bank of Israel.
In addition, a 2014 report commissioned by the Israel Securities
Authority to promote investment in publicly traded tech companies showed that Israeli institutional investors shy away from investing in technology shares because such shares are perceived as being more risky, investors often lack the expertise to understand the technologies involved, and tech companies are relatively small and don’t offer the liquidity these investors require.
The Marker reported that Menora Mivtachim Holdings Ltd., one of Israel’s five largest insurance and finance groups and an institutional investor, held some 941,000 shares in Mobileye at a value of some $60 million at the time of the sale, with the other funds holding just a few million dollars’ worth of shares in the firm.
“Israeli institutional investors can and are allowed to invest directly in technology shares like Mobileye and they have invested there in the past,” Moshe Bareket, a senior adviser to the US investment bank Jefferies, said in a phone interview. But these investors shy away from investing in stocks that are not included in the benchmark index. If they invest in a stock outside of the benchmark and if it performs badly, that is something they could get criticized for, he said. “There is a negative incentive not to invest,” he said. Bareket is a board member of and former chairman of Phoenix, and a former senior regulator at the Israeli Securities Authority.
The lack of tech companies on its exchange, and the steady decline of Israeli companies choosing to go public, has prompted the Israel Securities Authority and the Tel Aviv Stock Exchange to spur efforts to ease regulations to encourage small and medium Israeli tech companies to list their shares with it. It has also started a project in which it provides investors with analysis about tech firms, to bridge the knowledge gap.
Leonard Rosen, the chief executive officer of Barclays Plc in Israel, said in a phone interview that listing shares abroad for a company like Mobileye is essential for it “to be able to get access to the largest pool of capital in the world and to reach the widest group of investors.”
Barclays was a bookrunner for Mobileye’s initial public offering of shares in 2014 and also its secondary offering in 2015. A bookrunner is usually the main underwriter or lead-manager in a securities offering.
“If we want people to make investments in Israel they need to know that they can get a good return on their investment,” Rosen said. “It is better to be sold for $15 billion with only part of it coming into Israel, versus being sold for $1 billion, and never growing to achieve your potential, with all of it coming to Israel,” Rosen said.