2019: Challenges and Opportunities
As we head into 2019, we wanted to share with you, based on our worldwide advice to clients, some of the likely challenges and opportunities we see facing corporations around the globe in the coming period. We believe the following are key areas to watch for any Israeli company operating an international business.
1. Volatility in capital markets
Last year in this space, we incorrectly predicted that 2018 would see "the return of the IPO." Instead, the major trend in 2018 has been the return to volatility in both debt and equity markets. During the first half of this year alone, the CBOE Volatility Index, or the VIX, experienced 38 sessions where the day closed up or down by at least 5%—numbers that had not been experienced since 1994. This volatility has had enormous impact on share values—Apple hit a peak of $1.10 trillion in August, then proceeded to shed over $150 billion in value in just a few months.
We will refrain from offering any predictions about how long the current volatility lasts, but as long as it does, management and boards at public companies, or any company seeking to go public, will need to account for potentially violent swings in their stock price, and companies seeking to raise debt financing will need to account for the possibility of quickly changing circumstances. Like many of the other topics addressed in this memo, volatility is both a challenge and an opportunity. A company that enters the new year with well thought-out contingency plans may find itself suddenly in position to acquire an attractive but beaten down target, or to quickly raise capital on an upswing.
Finally, we note that due in part to the uncertainty brought by the recent volatility, many of the world’s largest tech companies are now queuing for IPO’s. With Uber, Lyft, Softbank, Airbnb and Slack, among others, aiming for 2019 listings, this could indeed be the year of the return of the IPO.
2. Innovation: striking the right balance
Innovation will continue to be a key issue for executives and boards in 2019. No matter what your industry—from old economy automotives to new economy mobile—innovation is critical. While the challenges vary, the overall goal is the same—to remain relevant in an era in which technology can render obsolete even the most storied companies. While this drive towards innovation will bring with it increased efficiencies for company and consumer it will also bring along many difficult to contend with side-effects. One of the prime issues already being discussed is the digitizing and automation of jobs previously held by the workforce. When pursuing innovation, it is integral for companies to understand the level of disruption in their industry and the effects that are already being experienced.
For Israeli companies, innovation poses a challenge but also a major opportunity. The worldwide perception of Israel as an innovation hub shines a spotlight on Israeli companies, many of whom are positioned to capitalize on the need for multinational corporations to innovate.
3. Regulatory risk and tone at the top
We live in an ever more regulated world, and regulators across different jurisdictions are cooperating with one another more than ever before. A bribery problem in Africa can quickly become a problem in the U.S., the EU or Tel Aviv. At the same time, regulators continue to apply often inconsistent or nationalist approaches, which makes compliance across borders exceedingly tricky. Areas such as anti-bribery, trade sanctions, tax and cartel behavior continue to pose potentially devastating risks for corporations that run afoul of regulators.
In addition to robust and fully updated compliance policies, a cornerstone of healthy corporate culture is what has become known as “tone at the top”—the attitude of the board of directors and senior management towards ethical behavior. When companies do trip up, they must act quickly and effectively to handle the problem. The consequences for even minor infractions can be massive if the company was negligent in not implementing appropriate policies or the discovery of an issue was not handled properly: investigations can last years, morph into investigations of other corporate misbehavior and spur civil litigation.
4. Geopolitical risk
Whether it’s the latest Trump tweet or the business impact of the ongoing Brexit saga, geopolitical risk continues to be at the top of the global CEO agenda. In 2019, significant elections are scheduled to be held in Canada, India, Nigeria and Greece and are widely expected in Israel. In addition to electoral surprises, geopolitical risk lurks in global warming, natural disasters, wars (including the much discussed potential “tariff war”) and migration flows. These developments affect any company operating internationally. They impact, sometimes personally, on employees, customers and suppliers, and on revenues and profits.
5. The continued growth of private equity
The last year was another strong year for private equity deals globally. With committed but uninvested capital, so-called “dry powder,” at yet new record high levels, we expect this trend to continue well into 2019. In Israel, private equity has been a recognized phenomenon for a number of years already, with foreign firms executing some of the largest deals in recent years, including this year’s acquisition of Leumi Card by Warburg Pincus. We expect continued growth in private equity activity in Israel, particularly as the market becomes more familiar with it, including through the strong success of a number of Israeli private equity firms. Any Israeli business-owner seeking to raise capital or exit his or her business must now consider private equity among the array of potential options.
6. Shareholder activism
One thing we predicted correctly last year is that 2018 would be the year that shareholder activism finally arrives on the shores of Israel. Bezeq, Mellanox and Paz are just a few examples of Israeli companies that have come under pressure from shareholders over the last year. By some estimates, activist hedge funds now manage over $200 billion, with some individual funds now topping $35 billion. As dispersed shareholding becomes increasingly common for companies traded on TASE, and as activist funds become increasingly familiar with the Israeli market, we expect to see a continued rise in activist situations. The increased volatility in capital markets (see Item 1) also makes public companies more vulnerable to activist attacks. As the phenomenon spreads to Israel, we urge all public Israeli companies to maintain preparedness to deal with activist investors.
7. Competition and the rise of protectionism
Experienced businesspeople will know that antitrust law bears critical implications for their companies, whether in regard to the need to avoid illegal cartel behavior and abusive market dominance, or in regard to competition considerations for winning regulatory approval of mergers and acquisitions. These considerations have continued to gain importance in recent years as antitrust law becomes increasingly institutionalized in previously less regulated economies and as positions taken by companies in one jurisdiction may bear follow-on impacts in other jurisdictions.
Foreign investment protection is now assuming ever greater importance as national regulators in many countries are moving to restrict foreign ownership of sensitive industries or national champions, with principles of antitrust and trade law often playing a role in the analysis. Since writing about US Congress considering enacting a more restrictive approach to the approval of foreign acquisition of US assets – the CFIUS review – in our 2017 year-end memorandum, in August of 2018 President Trump brought it to fruition. The legislation, Foreign Investment Risk Review Modernization Act of 2018 (‘‘FIRRMA’’), grants the CFIUS committee enhanced powers to review and restrict foreign ownership of US assets. Legislatures across Europe, including in Germany and France, are also currently working on efforts to tighten foreign ownership controls.
8. Disputes: risk and opportunity
With U.S.-style class action mechanisms becoming more widely available in the EU and elsewhere, companies operating in global markets are increasingly exposed to the threat of group claims. This is clearly the case in Israel, where class actions continue to rise. Globally, we’re seeing a trend of newly styled mass torts cases being brought against corporations for alleged environmental pollution and climate change. In our experience, companies facing potential exposure to group liability benefit from giving early thought as to where they may be sued, potential damages exposure, the window of opportunity during which claims may be brought, and critically, how to navigate, and possibly exploit, the substantive and procedural differences between class action regimes.
Litigation and arbitration are of course double-edged swords: while our corporate clients are often on the defensive side of these claims, it bears noting that courts and arbitration forums may also present opportunity: whether to keep a competitor from misusing your proprietary technology or for redress against a wayward counterparty. A trend we see continuing into 2019 is the increasing openness to international arbitration as a more effective and neutral forum for redress than national courts when resolving disputes abroad. Companies entering new ventures with foreign counterparts or in foreign countries should consider in advance whether their business agreements should include arbitration provisions and take care to structure their investments so as to enjoy protection of applicable investment treaties and their access to international arbitration rather than national courts.
9. Cybersecurity and data privacy
Managing and protecting data has become a key issue for businesses, particularly as regulators and consumers become more vigilant about how that data is processed and stored. Marriot, Uber and British Airways are only among the latest high profile names to fall victim to data breaches in 2018. It has become increasingly clear that whatever your industry, cybersecurity is a critical concern. As your organization holds more data, and your staff use their own devices to perform professional tasks, you become increasingly vulnerable to security breaches. Companies need to be aware of the rules and regulations across the jurisdictions in which they operate and be prepared to act quickly in the event of a breach.
In last year’s memorandum we warned that the EU-wide General Data Protection Regulation ‘‘GDPR’’ regime would take effect in May 2018. Since its entry into force, regulators have taken a stringent enforcement approach. We do not see the regulators slowing down and we expect to see continued enforcement actions in this area across 2019.
10. Crisis preparedness: When is enough?
In today’s world businesses can be subject to sudden crises, “life or death” experiences for the firm. The past year saw several high profile crises at Israeli companies arising from problems varying from alleged bribery to sexual misconduct. These companies are not alone: in recent years some of the world’s biggest organizations have faced serious crises: Facebook, Samsung and Volkswagen to name a few. Whether it’s the theft or loss of sensitive information, environmental disaster, or a cross-border product recall, businesses are vulnerable to potentially lethal levels of risk. The behavior of a single employee can have devastating consequences for the entire firm.
While crises are dangerous they may even present opportunity if well-handled. The key is being ready and knowing, to the extent possible, the nature and level of risk your organization faces and having a robust disaster management plan in place. In our experience, being ready to act deftly in the first 48 hours is critical. One helpful step is pre-planning responses to the most likely crisis scenarios and identifying the team, including internal personnel, outside PR advisors and law firms, that you will call upon.
If you would like to discuss further any of the points raised above, please contact us.
Please find the Hebrew version of the briefing attached below.