The American dream could end in nightmare for Israeli tech hopefuls

The Tel Aviv Stock Exchange (TASE) is the big winner of 2021, at least according to a current TV ad campaign featuring Israeli comedian Adi Ashkenazi who explains that major indices in Israel, which are up more than 30% the last year, outperformed returns on bigger, more important indexes, like the NASDAQ and the S&P 500. But despite this good local news, Israeli companies can’t stop dreaming of becoming big in America. Nayax, which develops payment systems on remote machines and completed the biggest IPO ever by a tech company on the TASE in 2021, announced yesterday that it has submitted a draft prospectus for an IPO to Wall Street. A week ago, cyber company HUB Security, which entered TASE through a merger with an inactive company in June 2021, announced the signing of a memorandum of understanding for an IPO on NASDAQ through a SPAC merger.

The very fact that a company like Nayax, which was the very first Israeli unicorn on TASE, and apparently could have broadcast directly to the US last year, but chose a local offering instead, is an achievement for Ittai Ben. Zeev, CEO of TASE. With its revenue hitting the $100 million mark in 2021, Nayax could have easily gone straight for the traditional tech route.

From right: Ittai Ben Zev, CEO of TASE; Yair Nechmad, CEO Nayax – Photo credit: Orel Cohen, Yuval Chen

Similarly, HUB Security, which was unable to broadcast in the United States before it acquired Comsec last September for NIS 70 million (about $21.8 million), dramatically increasing its operations and revenues, has also been convinced to go public near his home. Nayax and HUB Security are just two representatives of a much more dramatic trend in Tel Aviv IPOs. These are two of the 55 companies in the technology sector that joined the exchange in 2021, out of 97 companies that did so in total. But the big question is what’s next? Based on data published by the exchange itself, the weight of trading in tech stocks is negligible in the overall trading volume, which is focused on finance and real estate.

In Israel, fewer people buy to dream

Trading volume is only one, albeit important, indicator of the level of investor interest in these stocks. The second, crucial element that interests companies is value. And here, Israeli investors have yet to learn how to “properly” value growth companies after years of trading mostly in value companies. In other words, Israelis are less likely to buy the dream.

At Nayax, which has a market capitalization of NIS 2.8 billion after the stock has fallen 23% since the IPO, there is no talk of the value the company is striving for, however, around HUB Security, which trades at half a billion shekels, there is talk of a value of nearly $1 billion. In any case, the company SPAC with which the memorandum of understanding was signed has already raised $150 million, so it is clear that the offer abroad will have to be of a significantly higher value. As for HUB, the high gap between the value at which it trades in Tel Aviv and the value offered by SPAC is explained by the claim that US investors have a better ability to value companies. “Institutions in Israel still don’t know how to give the ‘dream multipliers’ they know how to give to the United States,” HUB sources said, claiming that a company that receives a 1-2 multiplier on its income in Tel Aviv will receive at least a 10 multiplier in New York.

Yair Nechmad, CEO and co-founder of Nayax, said similar things in an interview with Calcalist in late 2021, after experimenting with both Israeli and American investors, who bought 70% of the shares in the public offering. initial of Nayax. “Israeli investors are completely different from Americans: Americans only talk about business, ask questions only related to the mandate entrusted to them, while Israelis do not ask questions about the business model, but above all want to make sure that you are reliable and that you have no demons in your closet. They don’t want to be taken for idiots.

Nayax and HUB Security are unmoved by the fact that in 2021, the Tel Aviv-90 index was the best index in the world in terms of return, with a 33% increase that year. It wasn’t a one-time event either, as over the past five years, Tel Aviv-90 has posted a 159% return, second only to the NASDAQ 100 index, which includes the world’s 100 largest technology companies. About a fifth of the companies that make up Tel Aviv-90 are technology companies, including Gilat, Nayax, Matrix, CamTek, Sapiens and Perion.

Courting risky

Apparently, the very strong performance of the Tel Aviv-90 is supposed to be great news – not only for investors in Israel, but also for companies that are traded here and stand to benefit from the rise in value. Long gone are the days when the Tel Aviv Stock Exchange was far behind the glittering stock exchanges of the world. The strength of the TASE, which is also partly linked to the strength of the shekel currency, was felt even more in the last two months of 2021, when the blows suffered on Wall Street were much stronger than on Tel Aviv. “At the worst times, Americans throw stocks like crazy and the Israeli market is more conservative and works the other way,” Hani Shitrit Bach, director of the economics department at the Tel Aviv Stock Exchange, told Calcalist. “Beyond that, there’s a huge mutual fund market here, and the companies that are in the big indices have a huge captive market.”

At Nayax, there is talk that after the IPO in New York, the company will remain in Tel Aviv mainly to operate in the local bond market, while HUB Security will probably be completely eliminated from exchanges here. Both companies are fully aware of the case of Mellanox, which was a dual company that was knocked out of trading in Tel Aviv in 2013, when it traded at less than $2 billion, to be sold for $7 billion five years later. . But Mellanox is the exception that does not prove the rule. Other companies, which decided that the listing in Tel Aviv interfered with the maximum spillover of value on the NASDAQ and were removed from the local stock exchange, did not realize the dream.

Take for example Ceragon, which was scrapped in 2017 and is still hanging on NASDAQ below a valuation of $200 million. Nano Dimension and MeaTech, which were removed from Tel Aviv in 2020, also show negative performance. The temptation of the NASDAQ is great, but as Shitrit rightly points out, American investors lack sentiment and know how to part very quickly with dreams that do not come true at the expected pace. A large number of Israeli companies issued on Wall Street in 2021 have been feeling this for a few months. Ben Zeev indeed strikes when the iron is hot.

Calcalist has learned that the exchange is currently courting companies like Riskified, in hopes that it will list locally, alongside the New York Stock Exchange. The company, which develops payment systems and helps prevent credit fraud in online commerce, has seen its shares see steep declines since its July 2021 issuance at a value of $3.3 billion. Today, the company is valued at just $1.1 billion. Ben Zeev does so knowing that a company worth less than $1 billion is off the radar of American investors, while in Israel a company worth NIS 3 billion or more enters the market. best performing index in the world.

About Rodney Fletcher

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