Israel – Peak performance

Freshfields Bruckhaus Deringer’s ‘man on the ground’ in Tel Aviv, Adir Waldman, had a relatively typical New England upbringing. Having grown up in Fairfield, Connecticut, the academically gifted Waldman studied at nearby Yale University, before returning two years later to attend Yale Law School, where he became senior editor of The Yale Law Journal.

In between, Waldman took the unusual step of serving in the Israeli army for 18 months. ‘I had been accepted for law school and I knew that I didn’t want to go directly. Thankfully, Yale has a policy of actively encouraging students to take a year or two off to do interesting things,’ he says. The army was a positive experience and serves him well in his current position. ‘I certainly know most of my Hebrew from the army and I probably feel more at home here as a result,’ he comments.

Waldman is in good company in Tel Aviv. Israel’s principle financial and legal centre receives a constant influx of Wall Street attorneys, London solicitors and lawyers from other parts of the globe. Many are seeking a new life for religious, cultural, or other reasons. With a steady flow of highly qualified immigrants, Tel Aviv has a high concentration of first-rate lawyers.

‘Israel has a sophisticated legal market with world-class lawyers,’ comments Freshfields’ Frank Miller, the London-based corporate partner who is responsible for the firm’s Israel practice. The domestic law firms are now awash with international talent. And many have taken a direct route from Wall Street. Waldman did a seven-year stint at Wachtell, Lipton, Rosen & Katz.

Cliff Felig, a corporate partner at leading domestic firm Meitar Liquornik Geva & Leshem Brandwein, was born in New Haven, Connecticut, also practised at a Wall Street firm – Cravath, Swaine & Moore – for six years before deciding to move to Israel in 1992.

He explains: ‘I was surprised by how little change there was from Wall Street. When I moved here in 1992, Israel was going through a major change to a high-tech and export-led economy. It was becoming much less heavily regulated and the demand for lawyers who could get documents turned around quickly was growing. There were real opportunities for people with these skills rather than connections. There was a sense that an immigrant lawyer could really flourish here.’

Israel’s law firms have done well to take advantage of the growing influx of internationally qualified lawyers relocating from their native jurisdictions. But what does this new influx of foreign firms mean for Israel’s legal market?

Cross-border growth

The growth of capital flows and entrepreneurial activity over the last decade is an attractive phenomenon for both domestic and international law firms. ‘The Israeli economy has grown. It didn’t suffer the debilitating crises that Western economies have suffered,’ confirms Herzog Fox & Neeman’s Alan Sacks. ‘There has been a great deal of interest internationally and a steady and significant flow of investment into Israel.’

Cross-border M&A is no longer entirely between Israel and the US, but it is now worldwide. Last year, for example, China National Chemical Corporation (ChinaChem) acquired Israeli agrochemicals manufacturer Makhteshim Agan Industries for some $2.4bn. This was one of the largest ever deals to involve an Israeli company, with domestic firms Herzog Fox & Neeman advising Makhteshim Agan, while Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co represented ChinaChem.

‘Israel is no longer purely engaged in a bilateral relationship with the US, but more of a multilateral relationship with other major trading partners in Europe, Asia and elsewhere,’ comments Miller, who admits that Wall Street law firms still have a stranglehold on US-Israeli deals, but explains that his firm’s increasing focus on Israel is down to the flow of capital between it and other regions.

Miller believes that Israeli clients have the potential to be an incredibly lucrative source of instructions in the same way that acquisitive private equity houses and strategic buyers are in other parts of the world. ‘Israelis are not afraid of risk. They embrace risk. They see opportunities and say “let’s go there” and then they need to find a law firm that can help them do that,’ he explains.

‘The Israeli economy has grown. It didn’t suffer the debilitating crises that Western economies have suffered.’ – Alan Sacks, Herzog Fox & Neeman

Freshfields isn’t doing too badly in the region. In 2011, the firm represented Israeli transit bus company Egged on its successful Ä500m bid to operate the public transport system in Amsterdam for eight years. At the end of 2010, the firm advised Israel-based Zim Integrated Shipping Services on the sale of a 47.5% interest in the Tin-Can Island Container Terminal in Lagos, Nigeria. The deal was led out of London by Miller and former partner Presley Warner, who has since joined Sullivan & Cromwell.

Israeli companies are also thought to be more willing to be acquired by foreign investors in the current climate. Their traditional exit via an IPO on the domestic or overseas exchange is no longer as attractive as before the global financial crisis. Israel used to boast the second largest number of companies listed on the Nasdaq until China took over. Indeed, Israel headquartered Teva Pharmaceutical Industries remains one of the largest companies by market capitalisation on the Nasdaq.

Naschitz Brandes’ Tuvia Geffen believes that the growth in cross-border M&A has more than balanced out the reduction in capital markets activity. Geffen, who has a strong focus on the high-tech sector says: ‘In the past there was a larger focus on IPOs, but now Israelis are more willing to allow the Microsofts of this world to come and buy the company.’ Microsoft has a substantial research and development centre in Israel, which it launched in April 2006, recognising that Israel is home to the largest startup community outside of the US.

Furthermore, in the technology sector Israel is making a substantial and meaningful contribution. It was recently announced that Intel Israel now accounts for some 40% of Intel Corporation’s global revenue. According to a report in The Times, investment in research and development accounts for 4.4% of Israel’s GDP, compared to a mere 1.6% in Britain. Indeed, 50% of Israel’s exports are technology related.

Private equity houses are also demonstrating a keen interest in Israel. Apax Partners owns a majority stake in Israeli food maker Tnuva and a majority shareholding in Israel’s largest investment house Psagot. And last year Israeli conglomerate IDB Holdings Corporation was in talks to sell a 10% stake in Clal Insurance to Permira.

For Israeli law firms such as Zellermayer Pelossof Rosovsky Tsafrir Toledano & Co, which has a strong focus on private equity, this growth in cross-border deals is immensely positive. Corporate partner Doni Toledano advised Apax on its $1.025bn acquisition of a controlling interest in Tnuva in 2008. And with the imminent break up of Israel’s large conglomerates, this raises the prospect of Israel becoming a genuine hotspot for private equity activity.

Foreign interest

Low local rates have not dissuaded foreign law firms from focusing their sights on the deals emanating from or connected to Israel. According to one partner at another leading domestic firm, the rates for a junior partner in Tel Aviv can be as low as $350 to $360 an hour, a rate that would get little more than a junior associate in London or New York.

Miami-based Greenberg Traurig launched an office in Tel Aviv in January. Senior figures Gary Epstein, the firm’s global corporate and securities chair, and fellow Miami partner and co-chair of the Israel practice Bob Grossman, are in charge of building a permanent team of fee-earners on the ground. The firm will not practise Israeli law. Epstein, who will spend time there without permanently relocating, says that the firm is ambitious about its build-out phase and will not be hindered by the more modest chargeout rates.

‘Greenberg Traurig always charges the local rate. My rates are significantly lower in Miami than my rates in New York,’ he comments. ‘We are able to compete effectively in local jurisdictions with rates that are commensurate to the local market. Within a day of announcing this new office we had more than 75 unsolicited resumés from people that found this very appealing and were prepared to work at local salaries.’

Epstein says that the intention is to build a full-service offering, modelled on the firm’s offices around the world. He, however, will continue to base himself primarily in Miami.

Greenberg Traurig has been active in Israel since 2002 when the dot-com bubble burst and at the height of the Middle East tensions. Though the legal market has yet to be fully liberalised, Epstein says that the firm has received no resistance from the Israel Bar Association.

‘We do not purport to practise Israeli law and we will not practise Israeli law,’ he states. ‘We hope to provide a service to Israeli clients and continue to do what we have been doing. We will just be providing these services at a more convenient location and at a cost-effective level.’

Epstein says that the launch of the new office is merely a culmination of the work that it has been doing over the last decade: ‘After ten years we felt that we had accumulated a sufficient critical mass of Israeli clients to be able to provide additional value at the local time.’ The connection is not just with Israeli clients. In 2006, Epstein acted for IVAX Corporation in its merger with Israel’s Teva Pharmaceutical Industries, creating the largest generic drug company in the world.

Greenberg Traurig aside, international firms have not been fighting en masse to establish offices in Tel Aviv. Yet many are present in Israel’s principle financial and commercial hub.

Freshfields does not have an official office there, though Waldman is located there permanently and is managing director of the firm’s Israel focus group. Over the last decade, the firm has experienced increasing exposure to Israeli deals, including the transactions involving Egged and Zim Integrated Shipping Services.

Thanks to the longstanding bilateral relationship between Israel and the US, it is Wall Street that is thought to have the closest nexus with Tel Aviv.

Joshua Kiernan, a US-qualified corporate and capital markets partner based in White & Case’s London office, spends much of his time in Israel and has advised on many of the headline IPOs that have emanated from the jurisdiction since the late 1990s. He advised on the two largest ever Israeli IPOs, the $1.6bn Tel Aviv listing of Oil Refineries and the $1.4bn London Stock Exchange offering of AFI Development, both in 2007. And despite the slowdown in international equity capital markets activity since the global financial crisis, Kiernan remains busy on Israel-related deals.

In 2011 alone he and the firm worked on five such deals. ‘The capital markets work is still very busy,’ he says. ‘A lot of the London Stock Exchange IPOs have slowed down, but at the same time there is still a good deal flow of Israelis listing in the US.’

Berwin Leighton Paisner is another London-based firm that has successfully targeted the Israeli market. The firm opened a representative office in Tel Aviv late last month. London corporate finance partner Jonathan Morris is chair of the firm’s Israel desk and is well known within the Tel Aviv legal market, despite not actually being permanently based there. In 2009, Morris represented AIM and Tel Aviv-listed Pilat Media Global on its £16.3m merger with US-based SintecMedia. It was the first such merger to be governed by the UK Takeover Code and the rules of the Israeli Securities Authority.

Yet thanks to the longstanding bilateral relationship between Israel and the US, it is Wall Street that is thought to have the closest nexus with Tel Aviv. After years of cross-border deals between the US and Israel, and with numerous Israeli corporates listed on the Nasdaq, it is New York’s finest firms that have the greater brand recognition on the streets of Tel Aviv. Notably, Skadden, Arps, Slate, Meagher & Flom has an impressive record on Israeli deals. In 2008, for instance, it advised Israel’s Omrix Biopharmaceuticals on its $438m acquisition by Johnson & Johnson. Since then, one of Skadden’s key Israel-focused partners, David Fox, has joined Kirkland & Ellis. Last year, he advised Teva Pharmaceuticals Industries on its $6.8bn acquisition of US-based Cephalon. Fox is a big name on Wall Street in his own right and spent much of his childhood and early adult life in Israel. Yet even with his move to Kirkland, Skadden retains an immense record on Israeli deals and a strong contingent of well-connected partners, such as New York partners Yossi Vebman and David Goldschmidt.

Overall, UK and US firms in particular have shown genuine interest in the Israeli economy, yet few if any are willing to take the plunge as Greenberg Traurig has and launch an office there. The modest size of the economy and the relatively low fees charged by domestic firms means that international firms find it hard to see how they could make a Tel Aviv office financially viable. Israel’s corporate wealth, fast-growing high-tech community and quickly developing energy sector is of genuine interest to international firms, but it still remains a relatively small economy compared to the new economic giants of China, India or Brazil. Freshfields’ Miller calls it a relatively ‘narrow market’, but one with increasing capital flows, entrepreneurial activity and companies that are becoming more global in nature.

Firm expansion

This positive outlook has encouraged substantial growth among Israel’s leading law firms. They have an enormous talent pool to draw from. Thanks to the law becoming a preferred choice of career for many in Israel and the continuing flow of legally qualified immigrants, the nation now boasts the highest concentration of lawyers per capita in the world. In 2010, Israel’s Courts Administration reported that there were 585 attorneys per 100,000 Israeli residents.

Meitar Liquornik’s Cliff Felig says the increase in cross-border M&A and the demands of foreign clients has encouraged Israeli law firms to expand quickly: ‘The large financial institutions, corporations and private equity houses are used to working with large full-service law firms. Local firms here are not as large as in many of these clients’ home jurisdictions, but they want to know that they can go to one firm that can provide all the necessary specialist fields of expertise. It has pushed the market in that direction.’

Herzog Fox now boasts over 200 fee-earners and Sacks says that this is purely a reflection of the demands on the firm: ‘Our firm has grown and our peers have grown in line with the growth of the Israeli economy as a whole. Our size is a function of the scale of the work that we do and the number of specialisations that we offer.’

In 2011, Israel experienced one of the most newsworthy mergers in its legal history when Goldfarb, Levy, Eran, Meiri, Tzafrir & Co merged with M. Seligman & Co to form Goldfarb Seligman & Co, one of the nation’s largest law firms. Ashok Chandrasekhar, a legacy Goldfarb Levy partner, who is in the new firm’s corporate and securities department and a member of its executive committee, says that the time was ripe for attaining greater resources and visibility.

‘We had long felt that the Israeli legal market was at a mature enough stage to support very large firms by our standards. We had built the firm over the years to that objective and then we saw a further opportunity with the partners at M. Seligman,’ he reveals. ‘It enables us to provide a broad offering of legal solutions to clients.’

‘Israeli law firms are excellent. Pound for pound, any of these firms in the top ten can easily match anything you can find in Wall Street or the City of London.’ – Clifford Davis, S. Horowitz & Co

Israeli firms are also expanding due to the sustained flow of immigrant lawyers into the jurisdiction, something that is enabling them to gain even greater exposure to cross-border deals. Among a number of headline transactions for Meitar Liquornik, Felig worked on Berkshire Hathaway’s $4bn acquisition of an 80% stake in Israel-based Iscar Metalworking Companies back in 2006. In 2011, he represented Cool Holdings in its bid to increase its stake in Israel’s HOT Telecommunication Systems. For Felig, he experienced no shortage of challenging, high-value and cross-border deals, following his relocation to Israel. He says that as a result, the firm now has a ‘high percentage’ of partners and associates that previously practised in New York or London.

Clifford Davis, an English solicitor who worked at Gouldens before it became the London office of Jones Day, moved to Israel in 1994. His wife was brought up in Israel and the two decided to try living there.

He now co-heads the corporate practice at S. Horowitz & Co. ‘I felt I could really build something and they haven’t fired me yet,’ he jokes about his decision to move. ‘Israeli law firms are excellent. Pound for pound, any of these firms in the top ten can easily match anything you can find in Wall Street or the City of London.’

Tuvia Geffen, a partner at Israeli firm Naschitz Brandes practised for eight years at Sullivan & Cromwell in New York before returning to Israel again in 2006. He says that while working for a Wall Street firm may be prestigious and give a lawyer greater exposure to higher-value deals, the work in Israel is no less challenging or interesting. ‘It was surprisingly a lot closer to Wall Street than I thought,’ he explains. ‘Originally I thought I might be taking a step back to a slower pace and less exciting deals, but they are doing the same kind of deals with just one less zero. It might just be $100m rather than $1bn, but it’s the same type of work and most deals have a cross-border aspect.’ In 2011, the firm advised Provigent on its $340m acquisition by US-based Broadcom, one of a series of high-value deals involving Israeli high-tech companies.

Sacks moved out to Israel with his wife from the UK in the 1980s just after getting married.

‘There is a steady stream of young quality professionals coming to Israel who are making a life decision as much as a professional decision. They may work harder here and get paid less, but they are trading one quality of life for another,’ he says.

Striking connections

Over the years, the large firms have struck up fruitful working relationships with their foreign and international counterparts, but few are willing to go another stage further and develop formal affiliations. With a quickening flow of cross-border M&A, most firms regard multiple sources of referrals as preferable to a guaranteed trickle from one source.

Sacks says: ‘We have excellent relations with many law firms in all of the major cities of the world. We have always avoided exclusive arrangements with any one firm because we don’t want to spoil our relations with so many others.’

Medium-sized firms have more to gain from allying themselves with or even merging with overseas colleagues, as it is often the large firms that are the first port of call for big referral mandates.

Indeed, smaller firms are already exploring these options. Last year Tel Aviv-based Rosenberg Abramovich Keren-Polak Epelman, Advocates affiliated itself with Spanish firm Cremades & Calvo-Sotelo in an effort to exploit increasing cross-border activity with Spain and Latin America.

Oded Oz, a junior partner at the Israeli firm says that it is working on establishing alliances in a number of other jurisdictions, but is not in a position to announce anything formal at this stage. ‘We have many affiliations that are not formalised yet,’ he confirms. ‘Most of our operation is international by nature and we want to be able to provide more efficient services around the globe. Once you achieve a certain volume of business between firms it is the natural step to feel more comfortable with publicising this relationship.’

Shenhav, Konforti, Shavit & Co is another medium-sized firm with a similar strategy. It established an association with US firm McGuireWoods two years ago and is further building its international connections. Partner Yaron Shavit says that trying to develop multiple referral relationships in numerous jurisdictions is not sufficient for his firm:
‘A referral connection is a model that is always there, but it is not good for long-term co-operation. It is built on opportunities that may happen, but you can’t keep an employee in the firm waiting for an opportunity to come, when you have already developed experience of a deal that was done under a referral. You can’t really build expertise on cross-border deals under that model. Under an association, you develop long-term know-how through these cross-border experiences and this is constantly nourished.’

Israel was ranked 41st by size of GDP in 2010 by the International Monetary Fund, yet its exposure to cross-border M&A and investment means that it is increasingly becoming a focal point for the international legal community.

Shavit says that the firm is receiving substantially more work through its association with McGuireWoods than it did under previous informal relationships. ‘We are working with our partners to build new deals that otherwise would not be here,’ he states. Shavit says that the firm is developing further ‘co-operations’ in France, China and South America.

Israel was ranked 41st by size of GDP in 2010 by the International Monetary Fund, yet its exposure to cross-border M&A and investment means that it is increasingly becoming a focal point for the international legal community. The rapid growth of Israel’s top firms over the last few years and the nation’s resistance to the global financial crisis and economic downturn means that the outlook remains impressively positive. The only blot on the landscape is Israel’s security. With ongoing tensions with its Middle East neighbours, particularly Iran, Israel still has to work hard to convince investors that it is a safe haven.

Until now foreign banks have taken a very limited role in Israel financings, but Moriel Matalon, the managing partner of leading Israeli firm Gornitzky & Co, says that Middle East tensions are still a major source of concern for international investors: ‘It is an interesting place for foreign players with the only setback being the political or security issues. The question of Iran is still in the air.’

However, Matalon has already noted a changing sentiment among the foreign and international banks: ‘We’ve recently seen much more interest shown by foreign banks looking at Israel for private wealth but also to participate in financing of major transactions. In most cases they will probably try to join a consortium of banks with the local bank acting as agent or organiser. When will we see local banks taking a smaller part and letting the foreign banks take a much larger role? I believe with Israel joining the Organisation for Economic Co-operation and Development (OECD) and with banks seeing beyond the security situation or political crisis, I think that the risk attributed to Israel will be minimised.’

With foreign investors and financiers becoming ever more comfortable with the Israel story, it is not surprising that the jurisdiction’s impressively international legal community continues to grow. LB

chris@crowemedia.co.uk