TEL AVIV, Israel -- The recent $17.6 billion takeover of Freescale ( FSL) by the Blackstone-led private equity group got the Israeli tech industry buzzing with speculation over the possibility of the elephant-hunting season reaching "Silicon Wadi." At Ernst & Young's 10th annual Journey Conference in Tel Aviv earlier this week, speakers in a panel titled "The Alternative Asset Class -- Trends in Private Equity" couldn't hide their enthusiasm for the "wall of money" heading toward Israel. Private-equity "people are not sitting on their hands anymore," said Jeremy Blank, senior adviser at York Capital Management, an $8 billion private equity fund, and a panelist at the conference. "Private equity is about the opportunity to actively drive growth in a company you buy, and the opportunities in Israel are really forcing us to create more value." Still, Israel is challenging in that is has "asset-light businesses" that require less leverage but a more active engagement of management teams, Blank says. In York's case, a $300 million acquisition of Psagot-Ofek, one of Israel's largest asset management and brokerage companies, turned out to be a slightly tougher challenge than anticipated. Since the deal was announced in late 2005,
regulatory changes in Israel's capital market ignited a wave of mutual fund account redemptions by customers, amounting to hundreds of million of dollars in Psagot's case.
Some other recent private equity deals in Israel include the Cerebrus Capital Management deal to buy a controlling stake in Bank Leumi, Israel's second-largest bank, for roughly $600 million, and the $1 billion acquisition of Israel's monopoly telecom carrier Bezeq by a private equity consortium led by Apax Partners. "Israel's economy is going through a transition from a conglomerate dominated environment to one which is being rapidly controlled by institutional money and private equity firms," Ron Lubash, founder and partner of Markstone Capital Management, which manages roughly $15 billion of American pension fund money dedicated to Israeli investments, said at the conference. "American pension fund money, from New York to California, is restructuring business in Israel." After last week's Freescale buyout, many investors have been anticipating a deal for one of Israel's large, well-established tech firms. "With the enormous amounts of capital these funds have, I wouldn't be surprised if Checkpoint ( CHKP), Amdocs ( DOX) or even Teva Pharmaceuticals ( TEVA) get offers," said Eyal Shamir, vice president at the Tshuva Group, a private investments firm. Technically speaking, a multibillion-dollar equity fund, such as KKR or Blackstone, can quite easily purchase any of the above securities, with little to no leverage at all. Checkpoint, for example, is roughly worth $4.7 billion, which means it could potentially be bought out for $5.7 billion -- a 20% premium. But many consider that with Gil Shwed, its founding chairman and CEO still at the helm, chances for a takeover are quite low. Another company continuously brought up in the local media as a classic buyout target is the options-backdating inflicted Comverse ( CMVT). On the one hand, its founding CEO Kobi Alexander was declared fugitive by the FBI on multiple corporate fraud accounts, and its restatement process of previous financial reports is being delayed to the point at which it might be delisted. On the other hand, the company listed some $600 million in cash in its 2005 third-quarter report (the last report it filed) and is considered a "very good business with a growing market," according to Shamir. With this in mind, the network multimedia software company looks like it's wearing a big "for sale" sign. Finally, an industry source who requested anonymity mentioned that the $44 billion Carlyle Group has been frequenting the land recently, possibly in search for a potential defense contractor. In which case, according to the source, companies such as the intrusion-detection systems company Magal Security ( MAGS) or the defense electronics shop Elbit Systems ( ESLT) come to mind as potential takeover targets.