Why Israel Is A Land Of Tech Promise -- Again

After a years-long slump, Israel is seeing a slew of IPOs, mergers, and new startups

Israel's high-tech sector finally is emerging from a long financial drought. On Aug. 25, Cisco Systems Inc. acquired P-Cube Inc., a Tel Aviv developer of network-traffic-management hardware, for $200 million. The deal was Cisco's second in Israel in three months, and it's not the only Silicon Valley player on the prowl. 'There's a lot of talk about several of the major global technology players on the verge of cutting deals in the next few weeks,' says Gilay Dolev, senior analyst at D&A High Tech Information Ltd., an industry-analysis firm based just outside Tel Aviv.

Why the renewed interest in Israel? First, for a small country, Israel has lots of startups. And startups, unlike big Western tech giants, didn't have the luxury of cutting back research & development to get through the downturn. So the Israelis kept innovating even as the global tech industry swooned and fighting surged between Israelis and Palestinians. Now there are lots of small survivors with leading-edge technology in areas such as Internet security, wireless broadband, and medical devices. No wonder acquisition activity is up by some 25% over the past year.

The global recovery has energized Israel's so-called silicon wadis, the collective term for the dozen-plus high-technology parks scattered throughout the country. Tech exports surged 20% in the first six months of the year, to more than $6 billion. And the Tel-Tech 15 index is up 48% in the past 12 months.

Israeli high-tech companies also are returning to Wall Street after a lengthy hiatus. So far this year three outfits -- Lipman Electronic Engineering Ltd., which develops electronic payment systems, PowerDsine Ltd. (PDSN ), a maker of integrated circuits for telecoms, and Syneron Medical Ltd. (ELOS ) -- have joined the over 70 local high-tech outfits traded on the NASDAQ. 'There are at least a half-dozen initial public offerings and a number of follow-on offerings ready to go to market by the end of the year,' says Leonard G. Rosen, Lehman Brothers Inc. managing director and head of the investment bank's Israeli business.

One of Israel's successful tech entrepreneurs is Giora Yaron, co-founder of P-Cube. The 56-year-old physicist has launched four companies, two of which he sold to Cisco. Before picking up P-Cube in August, Cisco paid $118 million for Pentacom Ltd. in 2000. 'There's no secret recipe for successful startups. It's just having the right technology when the big boys need it,' claims Yaron. In the case of P-Cube, Cisco was hearing from its own customers about the need to integrate the Israeli startup's technology into its networking routers.

Cisco's love affair with Israeli high tech began in 1998, when it acquired Class Data Systems, a maker of quality-control software, for $50 million. Since then it has ponied up nearly $1 billion for seven Israeli startups, three of them in the past few months. '[The Israelis] have a strong tradition of innovation in engineering and a strong technical tradition. It's similar to what we see in Silicon Valley,' says Ned Hooper, senior director for corporate development for Cisco.

DOWN-TO-EARTH VALUATIONS
Despite the new deals, no one anticipates a return to the heady days of 2000. In June of that year, Lucent Technologies Inc. bought Chromatis Networks for a hefty $4.8 billion, the most ever paid for an Israeli startup. By contrast, 17 of 31 deals in the past year have been for less than $10 million. 'Valuations have come down to earth,' says Zeev Holtzman, founding partner of Tel Aviv-based Giza Venture Capital, a leading local fund.

That's one of the main factors drawing venture capitalists to Israel. Industry experts predict local venture funds will raise over $1 billion this year, with most of the funds coming from American and European institutional investors. The wadis certainly need the rain."