How Corporations Establish Activities in Israel

This article will be devoted to the so-called “acquihire” – a practice in the M&A world where an acquiring party decides to utilize the teams and activities of the acquired company in addition to or as a basis for its own presence in the market. Not every acquisition leads to acquihire and sometimes the acquired companies continue as independent brands (e.g. like in the case of the Walt Disney company acquiring Marvell). Having said that, the practice of acquihire is one of the most popular ways for multinational corporations to enter the Israeli innovation ecosystem.

There are around 500 multinational corporations (MNCs) from over 35 countries present in the Israeli ecosystem, with the majority focusing on R&D and/or innovation and scouting activities. It is by far the densest MNC ecosystem worldwide, where by visiting a tiny country in the Middle East you are able to meet innovation and R&D teams of the global corporations from anywhere in the world, starting with Apple and Microsoft and finishing with Alibaba and Toyota.

Some of these organizations established their operations in Israel because of their presence in the consumer and production markets here, e.g. Unilever, but the majority deliberately chose Israel as their innovation destination, which in 40% of all cases followed a successful acquisition of an Israeli high-tech startup – some examples include Apple, AT&T, Alibaba, Yandex, and, fairly recently, Nike. This is what I refer to as “acquihire” in this blogpost.

The presence in the Israeli market is thus established by acquiring a high-tech startup specifically for its skills and people on top of (or in some cases rather than) its product and creates a way for the MNCs in Israel to build a critical mass of engineering talent without wasting many months of recruiting to build teams and achieve operational capabilities.

How Does Acquihire Typically Work?

In many cases, MNCs that are interested in the Israeli market start with scouting and investments first. In this way, they can familiarize themselves with the Israeli ecosystem and its opportunities before making a more profound decision about a permanent presence in Israel.

Once an organization starts investing, it becomes a part of the startup space and can assess its potential better. Often, a follow-up round of investments in relevant startups takes place and – sometimes – an opportunity to acquire a startup and establish a permanent place on the Israeli innovation map.

If the acquihire happens, the next step of transforming such startup’s operations into the R&D center is less complicated than establishing such presence from scratch. Employees of the startup are offered (or are sometimes obligated) to work for the newly established local branch of the MNC and the operational capabilities of the startup are utilized for a quick transition. Of course, there are other cases where startups are bought but remain independent or retain their brand – I do not refer to such cases as acquihire.

Once the R&D operation is established, it is often gradually transformed into a more holistic innovation center. This can happen by adding other activities to the local office, e.g. a scouting team, an open innovation program or a partnerships program with startups. Examples of such expansion include Microsoft’s R&D activities followed by an open innovation activity and eventually “Microsoft for Startups” and Merck Group’s engagement in the Israeli open innovation, investments and incubators space on top of its research and development division.

It is worth noting that acquisitions, including acquihire, continue in the Israeli ecosystem even with the local startup scene becoming more mature. Although there has been a slowdown a few years ago in earlier-stage acquisitions, the market has seen a growth again in the number of acquired early-stage startups, with 61 exits worth $4.9b in 2018.

 Corporate Journey in Israel

According to “The State of Innovation” report released by Start-Up Nation Central and PwC Israel last year (LINK) out of 536 MNCs present in Israel, 55% are based in the US, 27% in Europe and 15% in Asia. Around 38% of these companies are technological, followed by pharmaceutical corporations (11%), financial ones (10%), industry products (10%) and media (8%).

These companies enter the Israeli market primarily in order to tap into the Israeli R&D capabilities, but also enjoy entrepreneurial culture, changing their internal innovation capacity, and a swift POC potential with existing startups.

Although MNCs have been entering the Israeli market for decades, the recent years saw an accelerated growth of their Israeli R&D and open innovation activities. These companies often start their operations either by hiring a local staff (60% of surveyed companies) or through acquihire (40%) and with time expand their R&D operations, adding other open innovation or CVC activities as well.

Some examples of the typical corporate journey include AT&T, Ford, Alibaba and Nike.

In 2007, AT&T acquired Israeli company Interwise and turned the 60-person team into its R&D center in 2010, which has grown to over 600 employees today. In 2011, the company opened AT&T Foundry, its open innovation arm that scouts for and co-creates innovation. Today, AT&T Foundry has six locations worldwide and creates around 500 projects a year.

In 2016, Ford acquired SAIPS and turned it into its R&D center. In 2018, the center’s operations were further expanded by creating a local $12m research investment to develop a decision-making system for autonomous cars – a joint project with the Haifa-based technical university Technion.

Alibaba acquired Visualead in December 2017 and subsequently created its R&D center, using the Visualead staff and operations as a basis for its Israeli activity. It has continued to invest in Israel even more so following this acquisition.

In 2018, Nike bought the computer vision & AI startups Invertex and turned it into its new innovation center. Following an acquihire, Nike’s Chief Digital Officer Adam Sussman said: “The acquisition of Invertex will deepen our bench of digital talent and further our capabilities in computer vision and artificial intelligence as we create the most compelling Nike consumer experience at every touch point.”



About the Author
Monika Rozalska-Lilo serves as the CEO of CREATORS, an innovation lab based in Tel Aviv that supports organizations in developing and improving innovation practices through a range of workshops and innovation programs, formed and tailored to your needs by experts in Israel's Startup Nation with a track record of success. Monika’s expertise includes corporate innovation, startup ecosystems, ideation methodologies and building & facilitating innovation programs. Before CREATORS, Monika served as Deputy Director of TheHive by Gvahim, a startup accelerator program for international teams in Israel.
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