TEL AVIV (Reuters) - When one of China's biggest food companies was looking to boost its dairy output it turned to Israel's tiny market, paying about $1.1 billion (£695.8 million) for control of the country's largest food maker.
Even though the company Tnuva is focused on the Israeli market, China's Bright Food was attracted to its efficiency in milk production and cutting-edge technology in quality control for use in China, where demand for dairy products is surging.
The deal is the latest example of how M&A activity in Israel is shifting from the booming high-tech sector, which has been the focus for nearly two decades and is now valued at some $40 billion, or nearly 13 percent of gross domestic product.
High-tech firms are increasingly going for listings rather than seeking buyers, but Israel's reputation as a centre for innovation is rubbing off on more traditional industries.
Firms with a niche, a high level of exports or efficient production processes, such as Tnuva, are attracting buyers, particularly from Asia.
"Clearly one of the things interesting investors is that they are buying some sort of innovation," said Adir Waldman of Freshfields Bruckhaus Deringer, a law firm that represented Bright Food in the Tnuva deal, which closed a month ago.
Israel spends more on research and development as a proportion of its economy than any other country, according to the Organisation for Economic Co-operation and Development (OECD), followed closely by South Korea, and it has more researchers for every 1,000 people than any other country.
The high-tech boom has also been a magnet for professionals such as engineers while companies often tap into the skills of workers trained in the military or intelligence sectors.
Acquisitions of Israeli firms outside the high-tech sector by Asian, European and U.S. investors leapt to $636 million last year from $73 million in 2013, according to Liat Enzel, head of advisory services at PricewaterhouseCoopers in Israel.
That figure has already been eclipsed for 2015 by the Tnuva acquisition and another major deal in the plastics sector is understood to be in the works.
What's more, Israeli businesses are increasingly marketing themselves to Asian investors, who tend to focus on more basic industries such as food and water for their growing populations, areas where Israeli firms have developed specific expertise.
"A few years ago, Israel was not on the map," said Eli Elal, chief executive of the Fair Value consultancy. "A major factor in the appetite for developing relationships with the East comes from Israel."
Calls in parts of the Arab world for a boycott of Israel have also receded, giving once-wary Asian investors more confidence, while an Israeli law to break up conglomerates means dozens of firms worth $25 billion may be sold.
Tnuva was sold because of the new Business Concentration Law which forces conglomerates and investment companies to choose between financial and non-financial holdings.
The law means some of the country's largest and most established companies, from insurers to refined oil product distributors to supermarkets, may be sold in the coming years.
This may go some way to offsetting the slump in the overall value of foreign acquisitions last year. With many high-tech firms going for public offerings instead, the total value of deals slumped 42 percent to $3.8 billion.
According to one industry source, foreign investors have expressed interest in buying plastic storage products and garden furniture maker Keter, and may be willing to pay over $2 billion for the company with annual sales of $1 billion in 90 countries.
A Keter spokeswoman declined to comment.
"People with cash are starting to think about new markets and Israel is on the seam of developing markets' growth rates but developed markets' stability," said Waldman, who has seen higher levels of interest from foreign buyers.
According to Ernst & Young, growth in the global mergers and acquisitions market is set to hit its highest level in five years in 2015 with deal value already up 13 percent on 2014.
In many respects, when it comes to Israel Warren Buffett led the way for foreign investors in 2006. Berkshire Hathaway bought Iscar, an Israeli maker of metal cutting tools, for more than $6 billion in two transactions.
Iscar's precision tools are used by makers of heavy equipment such as cars and planes, it has plants around the world and has always prided itself on its innovative reputation.
British-based BCMS, a sell-side adviser for small- and medium-sized businesses, has set up shop in Israel to take advantage of growing foreign interest. The company is working on four deals and expects to complete 10 this year.
BCMS Israel Co-CEO Doron Ephrati said foreign investors looking to buy Israeli companies tend to seek targets without major consumer brands, such as paint make Tambour bought by Singapore's Kusto Group in 2014, to skirt the risk of boycotts,
Fizzy drink appliance maker SodaStream International, for example, has been targeted by consumer boycotts because its main factory lies in a Jewish settlement in the occupied West Bank.
Enzel at PricewaterhouseCoopers in Israel said she expected a busy year ahead for mergers and acquisitions.
Clal Insurance (CLIS.TA), which is being sold because of the new law, has been courted by Chinese buyers while energy firm Delek Group (DLEKG.TA) has struck a deal to sell control of insurer Phoenix Holdings (PHOE1.TA), reportedly to China's largest private investment firm, Fosun International (0656.HK).
"Our assumption is we will see more very significant deals in 2015," said Enzel.
Editing by David Clarke