September Edition 2022

28 Stock-for-stock mergers and acquisitions are also starting to gain more traction in Israel. In addition to the increase in the costs of funds, which makes cash investment more expensive, this trend may be attributed also to psychological reasons that arise from giving up equity under a low company value by investors who have not too long ago seen their stock going for much higher figures. In this sense, it is somewhat difficult to convince an investor whose stock was sold last December for USD 100, to now sell it for a third the sum. But when an acquiring entity who also took a hit to its share price offers to acquire a company with a consideration consisting of shares of its own, the picture turns into amore comfortable transaction from the shareholders' view who may consider the current situation in the capital markets to be temporary and expects the purchaser's stock to increase in value, much like their own case. A look on the recently-announced merger between Israel's IronSource and Unity Software., the popular video game software developer, shows exactly this. The transaction took place early last month, after valuations of both companies dropped by roughly 80% in the preceding seven months. Reflecting a company valuation of USD 4.4 billion while being entirely stock-for-stock, this transaction may have been easier to swallow for both parties: IronSource's shareholders were not required to liquidate their holdings for low figures, while Unity was not required to bear the rising costs of funds. Similarly, such transaction, in which employee stock options are usually rolled-over into the buyer's stock instead of being cashed-out, obviates some of the concerns of this important group of constituencies. Another practice, which may also become more common for companies seeking finance as the market transforms into a new phase, is debt financing. In light of current market conditions, companies that find themselves in financial hardships and in need of swift funds are not too eager to give up equity portions given their relatively low valuation at present. This mostly psychological effect is heightened by the fact that most investors receive anti-dilution protections as part of their investment, which guarantees at least partial protection from a dilution of an investment round which reflects a lower valuation than the one at which they have invested. This means that the dilution of ordinary shareholders in such “down round” is usually higher than that of the investors, and, accordingly, the incentive of such ordinary shareholders (which typically include the management of the company) to agree to such investment is lower. In these situations, financing through debt becomes a more attractive solution, and together with the increase in the number of institutions that specialize in financing early-stage

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