China's Yifang buys Pegasus Technologies

The $60 million acquisition is the first by a Chinese company in Israel.

Digital pen developer Pegasus Technologies Ltd. is the first Israeli company to be acquired by a Chinese company - Yifang Digital Technology Co. Ltd. - for $60 million in cash and shares.

Pegasus long ago ceased to be a start-up. CEO Gideon Shenholz and CTO Isaac Zloter founded the company in 1991, and it was a long march to the present deal. The company's proprietary solutions are based on military electronic surveillance technology. The entrepreneurs converted the technology to applications relevant to the computer world.

Pegasus's first product was a 3D mouse, and it was only in 2000 that it switched to developing its current product line of digital pens, which translate handwriting into digital formats that work with various computer standards.

Pegasus and Yifang have a four-year history of cooperation. Yifang is Pegasus's distributor in China and other countries. Shenholz says that the present plan is to keep the company's R&D center in Israel, which has 20 of the company's 30 employees, and to expand activity over the coming year in order to develop products for additional electronic devices.

Shenholz adds that Pegasus has grown rapidly in the past two years, selling one million units and achieving millions of dollars in revenue per year.

Since 2000, Pegasus has focused on Far Eastern markets. "After the bubble years, we decided to focus on Japan," says Stenholz. "Almost all our investors and partners are Japanese, and a third of our business turnover is there. Reality was such that we were in advanced negotiations with Japanese companies about an acquisition, but no deal was reached because of the crisis."

Asia Direct chairman Gal Dymant mediated the Pegasus-Yifang deal. With its partner, Poalim Capital Markets - Investment Bank Ltd., Asia Direct provides investment banking and business development services for companies seeking to operate in China. He said that although the Chinese were cautious about integration through the acquisition of technologies, the deal was struck quite quickly, within months. "I believe that within five years, the Chinese will be very interested in mergers and acquisitions," he said by phone from China today.

Dymant said that Yifang made the acquisition because of its pending IPO on the Shenzhen Stock Exchange. Yifang mainly operates on the manufacturing side of electronic products, which it then distributes. The company decided to acquire the digital pen technology with the intention of boosting its company value for the IPO.

During its 19 years, Pegasus has obtained capital from a variety of investors, albeit in the modest amount of $21 million. Most of the investors are Japanese: Bridge Capital Fund LP (BCF) (whose managing partner Yoav Keidar is chairman of Pegasus), Hitachi Corporate Venture Catalyst Fund, Mitsubishi UFJ Capital, Nippon Ventures, and Pentel Co. Ltd. Israeli investors include Cedar Fund, Marathon Venture Capital Fund (TASE: MARA), Israel Amlat Investments Ltd., and Teuza - A Fairchild Technology Venture Ltd. (TASE:TUZA). Since most of the acquisition will be in Yifang shares, investors may see an upside in the deal after the company's IPO.

This this is an unusual deal, although the amount is not extraordinary, the Ministry of Foreign Affairs has decided to mark the occasion with an official signing ceremony in the presence of Pegasus and Yifang executives, Keidar, the Israeli ambassador to China, and Shenzhen municipal officials.

Published by Globes [online], Israel business news - www.globes-online.com - on February 3, 2010

© Copyright of Globes Publisher Itonut (1983) Ltd. 2010

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