“We’ll see more Japanese investment, but no large acquisitions”
Is the scale of Japanese investment in Israel in general and in Israeli high-tech in particular going to change? Harel-Hertz Investment House Ltd. president Elchanan Harel says the answer is yes. Harel, who ran the company until recently, attributes the anticipated change to a pending amendment in Japan’s merger law, which will come into effect in May 2007. The amendment will allow Japanese companies to make acquisitions by buying shares, and will also institute far-reaching changes in merger-related taxation.
“Many more Japanese companies will be able to go out and make acquisitions as a result of the legislative change,” said Harel at a conference on Japanese venture capital held at the College of Management. “The Japanese barely know the concept ‘venture capital’, and it’s far less important in Japan than in the Israeli or US economies. In Japan, in-house financing is much more prevalent than external financing. If a company such as Sony wants to create something new in the field of video, it won’t seek this in an outside start-up, but will set up the activity within the company, or will invest in a corporate venture capital fund, and later spin it off.”
In order to assess the change, Harel-Hertz will launch its $100 million Rodum Synergy fund next month. The fund will focus on mergers and acquisitions in collaboration with Japanese investors. Elchanan Harel’s son, Harel-Hertz managing director Eran Harel, will manage the fund.
Elchanan Harel and the Meir group founded Harel-Hertz in 1994. The company specializes in investments and investment advice in the Japanese market. Rodum Synergy is not the company’s first attempt at activating Japanese investment in Israel. Since 2004, the company has been the Israeli representative for mergers and acquisitions of the Development Bank of Japan. A year ago, the company began representing the venture capital arm of electronics giant Fujitsu Ltd. (TSE: 6702; FJTSY.PK) in Israel. The company also seeks investment opportunities for ITX Corporation and other Japanese companies.
There is little Japanese activity in Israeli high tech. Despite the longstanding presence in Israel of Japanese electronics giants, no Japanese company has ever acquired an Israeli start-up.
Elchanan Harel says, “There are no Japanese exits. You have to take into account that exits greatly disturb the Japanese. They invest in a company and then a competitor suddenly buys it. They’re not ready for that. The Japanese see an investment as a long-term relationship, and they operate in the field in a manner totally different from us.”
In order to explain the difference between the Western approach towards start-ups and venture capital and the Japanese approach, Harel relates that when he once met a Japanese counterpart, he noticed that the business card said “Manager R&B”. Harel relates, “I told him that there was a mistake, and that he was probably the R&D manager. He replied, ‘You have a mistake in concept. This is research and business, not research and development.’ The Japanese don’t understand the significance of investment in a company without a product.”
Harel says that although Japan has many start-ups, the cultural environment is different. “Japanese start-ups are more in-house. Japan is a powerhouse of large companies, and we’re only now seeing the start of ‘new economy’ companies operating in the Japanese market.”
On the venture capital investment side, there has been extensive activity in Israel by the investment arms of large Japanese corporations, such as Nomura Holdings (TSE: 8604; NYSE: NMR), which invested $10 million in Moshe Cohen’s dot.com company, Security Village, which was ultimately liquidated. The poor luck of Japanese investment was also seen in the sale of Chromatis Networks, in which Nomura invested without seeing a return on investment because the sale was in shares.
Japanese avoidance of making acquisitions in Israel is not only because of financial or industrial problems, but also because of political considerations. Japan is highly sensitive to the Middle East issue and is very dependent on Arab oil, which prevents other collaboration with the Israeli economy.
Harel says, “We’ll see more investment by Japanese companies in Israel, but we’re unlikely to see large acquisitions in Israel, because of the political situation. We won’t see an acquisition by a Japanese company in Israel like the acquisition of Iscar Ltd.. So long as there is no peace, they will not operate on that scale.”
Nevertheless, a lot of Japanese capital can be found in Israeli venture capital. Apax Partners, Giza Venture Capital, Pitango Venture Capital, Vertex Venture Capital, and Walden Israel all have many Japanese investors, some of whom have made financial investments, while other have made strategic investments.
Published by Globes [online], Israel business news - www.globes.co.il - on October 19, 2006
