Multinational Companies (MNC) – Contribution to the Israeli Tech Ecosystem

December 2019 Overview • This report relates to the activity of Multinational Technology Companies (MNCs) in .

• MNC refers to a foreign corporation that controls the R&D or owns a high-tech company in Israel (some entities such as Intel and HP have in addition to R&D large manufacturing facilities in Israel).

• With the growth of M&A activity in the last two decades, the presence of MNCs is an integral part and a major contributor to the Israeli tech ecosystem.

• In addition, dozens of Israeli-based companies (both public companies and growth stage start-ups) have become multinational, operating foreign R&D centers overseas, in addition to the local centers.

• The pace of newly established MNCs in Israel decreased dramatically in 2017 while the number of tech M&As did not change significantly, correlated to the trend of new IT based MNCs.

• However, 2018 and 2019 again presented an uptrend in new MNCs. Overview in Numbers

• 362 active multinationals in Israel in 2019.

• 132 IT & Enterprise Software active MNCs – the leading sector with the highest number of MNCs.

• Leading Clusters: Machine Vision, IoT and Cyber Security.

• Approx. 62,000 employees are employed by MNCs in Israel.

• Leading cities in Israel with MNC presence: Tel-Aviv, , Petach Tikva.

• Based on the assumptions in this report, the estimated MNC tax payment account for 18% of the direct tax income in 2019.

• Intel is the most active corporation in Israel (2014–2019): Intel Capital participated in 52 investment deals; Intel corp. acquired 5 companies totaling $17.5B.

• Most active corporate buyers of Israeli companies in the last 5 years are Google (10, including 4 acqui-hires) and Microsoft (8).

• Foreign corporate investments in 2019 reached $983m in 196 deals. Number of MNCs Established by Year: 2010–2019

No. of Active MNC's No. of Established MNC's No. of Closed MNC's 400 • Number of active MNCs in Israel in 356 353 353 362 2019: 362. 350 335 301 300 268 • The last decade was significant for 241 250 250 220 multinational corporation activity 200 in Israel. 150

• The growth rate of new MNCs in 100 44 Israel slowed dramatically in 2017- 50 30 32 39 40 28 24 19 1818 19 2018 but has recovered in 2019. 9 9 15 14 6 10 1417 6 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: IVC-GKH-IATI Multinationals Report, December 2019 * Data for 2019 is not final and is subject to changes in the coming months as more information becomes available. Leading MNCs by Sector: 2010-2019 2019 1 3 (4%) (13%) • The growth of new MNCs in 2014–2016 was led by companies in the IT & Software and 4 Communication sectors. (17%) 3 • The difference in the growth rate between 2014–2016 and 2017–2019 is the aggregate number of (13%) new MNCs in these sectors.

• The number of new IT-based MNCs more than doubled in 2019, compared to 2017-2018. 40 11 (48%) 35 3 (8%) 30 3 (8%) 1 (3%) 2 (6%)

25 12 (32%) 1 (4%) 20 1 (5%) 2 (7%) 19(54%) 4 (17%) (5%) 2 (7%) 3 4 (18%) 1 (6%) 15 3 (15%) 7(19%) 3 (17%) 11(41%) 11(48%) 1 (7%) 3 (23%) 10 6 (30%) 10(45%) 5 (28%) 5 (45%) 4 (29%) 2 (6%) 1 (8%) (10%) 2 (7%) (27%) 5 2 (14%) 1 (5%) 2 10 6 (46%) 4 (22%) 3 (13%) (20%) 6 (55%) 7 4 (29%) 5 (25%) (18%) 4 (15%) 4 (15%) 3 (17%) 3 (13%) 0 2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Communications Internet IT & Enterprise Software Life Sciences Semiconductors Source: IVC-GKH-IATI Multinationals Report, December 2019

* Data for 2019 is not final and is subject to change in the coming months as more information becomes available. Notable MNCs - Established & Ceased in recent years 51 Multinational Corporations opened new R&D activity in Israel between 2017 and 2019; 41 MNCs ceased to operate in Israel in the same period.

New MNCs Ceased MNCs

Source: IVC-GKH-IATI Multinationals Report, December 2019 Top Clusters in Active MNCs in Israel – 2019

The three top technology clusters in MNCs in Israel are: Machine Vision, IoT and Cyber Security.

115 companies, 32% of all MNCs active in Israel, develop technologies in at least one of the three clusters mentioned.

5G DevOps RetailTech Digital Health SaaS Automotive FinTech Artificial Intelligence Cyber Security Machine Vision Source: IVC-GKH-IATI Multinationals Report, December 2019 0 10 20 30 40 50 60 Top Clusters of Newly Established MNCs – 2014–2019*

1 1 2019 2 2 1 4 4 2 4

5 7 3 3 6 1 1 6 2 4 1 1 2 3 3 3 1 3 1 5 2 1 1 4 2 2 2 1 1 2 2 3 2 1 3 Source: IVC-GKH-IATI Multinationals Report, December 2019 5 7 2 4 1 3 2 1 2 2 1 1 3 1 1 6 3 2 5 1 4 4 1 2 2014 2015 2016 2017 2018 2019

Artificial Intelligence Automotive Big Data Cloud Cyber Security FinTech Internet of Things Machine Learning Machine Vision RetailTech Digital Health

* Data for 2019 is not final and is subject to changes in the coming months as more information becomes available. Number of Employees in Active MNCs in Israel – 2019

• Most MNCs in Israel employ between 10 and 50 employees and serve as R&D centers for the parent company abroad.

• The largest number of employees is in a manufacturing facility (Intel Fab in Kiryat-Gat) and not an R&D center. Interestingly, no other High-Tech facility in Israel comes close to this scale, other than the Intel R&D center.

151

61 55 39 24 21 10 1

1. Less than 10 2. Between 10 and 50 3. Between 50 and 100 4. Between 100 and 5. Between 200 and 6. Between 400 and 7. Between 1000 and 8. 5000 or More 200 400 1000 5000 Source: IVC-GKH-IATI Multinationals Report, December 2019 Number of Active MNCs in Israel by Location – 2019

Other 31 Carmiel 3 Migdal Haemek 3

Yoqneam 3

Caesarea 12

Tirat Carmel 3 13 13

Kfar Saba 11

Raanana 16

Herzliya 37 • Most MNCs in Israel are in the central region of Israel: , Herzliya, and 14 Petach Tikva. 3 Tel Aviv 96 4 • Of the 362 active MNCs operating in Israel in 2019, more than 44% have Rosh Haayin 10

Rehovot 10 branches located in central Israel: Tel Aviv, Herzliya and . Petach Tikva 25 7 Hod Hasharon 8 • However in terms of number of employees, in southern Israel, 5 with its Intel and HP manufacturing facilities, is a much more significant Beer Sheva 4 5 location.

Lod 7

Airport City 4

Ness Ziona 4

Yavne 4 Source: IVC-GKH-IATI Multinationals Report, December 2019 Selected Active MNCs in Israel by Location

Caesarea Haifa

Netanya Yoqneam Herzliya

Raanana

Tel Aviv \ Ramat-Gan\ Bnei Brak \

Petach Tikva \ Yehud

Rehovot / Jerusalem

Kiryat Gat Beer Sheva

Source: IVC-GKH-IATI Multinationals Report, December 2019 MNC Tax Payment Estimates: 18% of direct tax income

$8.85B $48B $7.125M

Israeli based MNCs are This amount is equivalent to The median tax payment about to pay nearly $8.85 approximately 2.6% of Israel’s per MNC is expected to billion in 2019* estimated GDP for 2019 (in be $7.125m in 2019. fixed prices, assuming 3.1% GDP growth this year), and 18% of the total income from direct tax, which is expected to be $48 billion this year.

* This estimation is based on tax payment of $142,500 per employee, see Appendix on page 23 for details. Number of MNCs by Country of Parent Company

The majority of MNCs in Israel are U.S. based corporations, accounting for 63% of the 362 companies.

The decrease in the number of new MNCs during 2017–2018 is geographically related to US corporate activity in Israel.

250 229

200

150

100

24 50 17 12 10 9 8 7 4 6 5 4 3 3 3 3 3 3 1 1 1 1 1 1 1 1 1 0

Source: IVC-GKH-IATI Multinationals Report, December 2019 Newly Established MNCs by Country of Parent Company The presence of US tech companies was trending historically around 50% of newly established MNCs per year. While there was a noticeable German presence in 2016 and Chinese presence during 2017, currently there is no other country with any significant 40 presence other than US, yet. United States 35 The Netherlands

Taiwan 30 Switzerland Sweden 23 25 21 Spain Singapore 20 Russia 20 12 Panama 15 Luxembourg 1 3 1 Japan 1 13 1 1 1 10 1 7 1 Ireland 2 1 1 1 India 1 2 2 1 1 5 2 5 1 1 2 Hong Kong 1 2 1 1 1 1 1 1 2 1 3 1 2 0 1 1 1 1 1 2014 2015 2016 2017 2018 2019 Source: IVC-GKH-IATI Multinationals Report, December 2019

* Data for 2019 is not final and is subject to changes in the coming months as more information becomes available. MNC Corporate VC Investments*: 2014–2019

# of investment Most Active Foreign Corporations in 2014-2019 deals Intel 52 Samsung 36 Qualcomm 28 EMC* 26 Cisco 22 Mitsui & Co. 21

• The most active foreign corporate investors in Israeli tech companies are somewhat correlated with the scale of activity of the large MNCs.

• Samsung and Mitsui are relatively new to the Israeli ecosystem and we may see expansion of their MNC activity in the following years.

*Merged with Dell Capital in 2017. *Each funding deal contains one or more investments, according to the number of investors that took part in this transaction Foreign Corporate Investments* in Israeli High-Tech 2014–2019 CVC investment amounts in 2014–2018 more than doubled

Amount $m No. of Deals 1,200 324 Foreign Corporate VC Foreign Corporates All Corporate Investments $1,108 1,000 271 $1,023

800 221 216 $821 216 198 $692 185 600 $630 170 $884 146 145 $745 400 $451 117 $584 $456 83 $396 $270 200 $318 $209 $201 $177 65

$106 48 48 45 $99 - 31 26 2014 2015 2016 2017 2018 2019

Foreign Corporate VC Foreign Corporates All Corporate Investments Source: IVC-GKH-IATI Multinationals Report, December 2019 • Data for 2019 is not final and is subject to changes in the coming months as more information becomes available.

• Each funding deal contains one or more investments according to the number of investors that took part in this transaction. MNCs M&A Activity in Israel: 2014–2019 • Most global companies acquiring Israeli startups are from the US, with a steady number of more than 50 exit deals each year. • Most active corporate buyers of Israeli companies in the last 5 years are Google (10, including 4 acqui-hires) and Microsoft (8). • 70% of all M&As between 2014 and 2019 were by foreign companies.

140 $14,000

3 4 2 # of deals Amount ($m) $1 120 2 1 $12,000 6 2 $1,014 14 9 $212 1 8 $357 3 $135 8 8 3 3 100 9 $10,000 12 5 3 8 9 $51 $2,779 4 8 $1 $16 $29 10 $577 7 4 $370 $487 80 4 $3 $8,000 43 40 40 $558 27 23 35 $233 60 $16 $4,688 $830 $6,000 $106 $1,400 $638 $80 $895 $265 $1,074 $335 $247 40 $50 $1,399 $7,848 $4,000 $570 $114 $7,297 $1,064 $1,040 $1 54 55 56 55 55 $537 46 20 $2,000 $3,476 $2,849 $2,540 $2,606

0 $-m 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 Source: IVC-GKH-IATI Multinationals Report, December 2019 Number of Israeli High-Tech Companies with Overseas Activity

42 active Israeli high-tech companies in growth stage (with over 300 employees) have opened several branches overseas, most of them in North America and Europe.

45

40

35

30 23 23 25

18 20

15 15

11 10 17 14 11 5 6 7 4 0 0 Oceania North America Europe Central & South America Asia Africa

# of Private Companies # of Public Companies Source: IVC-GKH-IATI Multinationals Report, December 2019 Number of Israeli Tech Companies with Overseas Activity

Mumbai Madrid Bangkok Bangalore Seoul Melbourne, Victoria Moscow San Francisco and the Bay Area Paris Sydney, NSW Shanghai Sao Paulo Beijing Singapore New York Tokyo London

18 16 14 12 10 8 6 4 2 0

Source: IVC-GKH-IATI Multinationals Report, December 2019 Appendix: Tax Revenue Impact of Multinationals The activities of multinationals generate the following tax revenues: Direct corporate tax; Taxation of employee’s compensation; Taxation of third parties servicing the multinationals. Direct Taxes:

Direct corporate tax paid by the multinational (16% of net profits if approved enterprise, or 23% otherwise). Taxation on value of 102 options (following the Kontera Supreme Court decision). Taxation of dividend distributions. Due to BEPS (Base erosion and profit shifting – tax planning strategy) regime, the net income of Israeli based R&D centers is expected to grow significantly compared to cost plus model currently in use. Before BEPS the direct corporate tax was estimated to be 2–3% of total costs of the multinational (3.5% after dividend tax). Applying the OECD BEPS regime the direct corporate tax can be doubled and increased to 5–10% of total multinational costs (6–12% after dividend tax). Employee Related Taxes: Income tax and social security taxes on compensation income (approximately 50% of cost of employee). Taxation of Third Parties: Taxation of third parties providing services to the multinationals such as outsourcing services, professional services, rent, municipal taxes, travel, events, food ("third-party expenses"). Assuming a 20%–40% profit margin and a tax rate of 23%, this results in tax of about 5%–10% of third-party expenses. The cost per employee (cost to employer) is estimated to be approximately $220K per annum. The third-party expenses are assumed to be $70–$100K per annum. Cumulatively, total tax per employee is estimated to range from $125,000 to $160,000 (corporate tax, employee tax and third-party taxes). Produced by:

Founded in 1997, IVC is the leading data source and business information company in Israel's high-tech industry. We help our clients understand the market, make connections and identify opportunities with access to the latest news, trends and developments. From venture capital and private equity funds to industry leading companies and emerging startups across Israel's varied high-tech sectors, we cater to the varied business information needs that make up the Israeli high-tech ecosystem. We bring more than 20 years of experience of gathering and analyzing data, serving the IVC community. Our dedicated team of industry researchers and analysts has deep knowledge and hands-on experience working with Israel’s high-tech sector. Our management, professional sales and marketing teams drive IVC’s commitment to excellence and client service. We enable a wide range of local and global clients, including entrepreneurs, local and foreign investors of all types and service providers such as lawyers and accountants, to get to know the Israeli high-tech ecosystem better. (Registered Database #366723)

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Gross, Kleinhendler, Hodak, Halevy, Greenberg, Shenhav & Co. (GKH) is one of the largest and most influential law firms in Israel, particularly in the fields of securities, mergers and acquisitions (M&A), hi-tech, corporate law and cross border activity. Combining profound legal understanding, academic depth and an innovative approach, the firm is widely recognized for its local and global transactional experience and is ranked as one of the top law firms in Israel, Legal 500 and Chambers Global. The firm’s professional staff consists well over 170 professionals, including more than 60 partners, and a large group of experienced licensed attorneys in Europe, USA, Brazil and more.

GKH has a unique place in the Israeli tech ecosystem and over the past decades our professionals have worked with the top multinational corporations, hottest startups, the most active venture capital funds, corporate VCs, private equity funds and strategic investors – giving GKH a cutting hedge experience of legal and business developments.

The firm has a true tech power house with technology transactions being the main firms business for more than 40 years with an incredible collegial team and top-notch professionals specializing in complementary fields, such as intellectual property, cyber, privacy, tax, labor, litigation, crypto and other specific specialists that can attend to any tech client need.

The pillars of Hi-Tech & Investment Funds at GKH are (a) extensive start-up work with some of the leaders in the industry, (b) merger and acquisition, (c) fund formation, (d) venture capital investments and (e) ongoing representation of multinational technology companies.

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Israel Advanced Technology Industries IATI is Israel’s umbrella organization of the high-tech, life science and other advanced technology industries, with hundreds of paying members from every level and aspect of the ecosystem - including Venture Capital Funds, R&D Centers, Multinational Companies, Israeli Start-Ups and Large Companies, Incubators, Workspaces, Tech Transfer Organization, Academic Institutions, Innovation Centers, Hospitals, Municipalities, Leading Stock Exchanges, Service Providers and more. Through this broad range of members, IATI connects Israel’s tech ecosystem, provides solutions and support at all levels, and integrates the various sectors of the industry with strategic and ongoing governmental goals.

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