End of the Israeli digital print era

A decade ago, Scitex - Indigo talks went nowhere but now they've finally merged in HP. Plus, I sell off Mercury Interactive.

It wasnt what they were thinking about when they first negotiated a merger between them, but a merger between Israeli companies Scitex (Nasdaq: SCIX; TASE: SCIX) and Indigo can finally be celebrated. Their merger did not create an Israeli digital printing giant, as their entrepreneurs hoped a decade ago. Both of them have now jointly disappeared - first Indigo, and now Scitex Vision - into the great house of printing and computer giant HP-Hewlett-Packard (NYSE: HPQ). Most of what once was Scitex has been taken over by another giant - Eastman Kodak (NYSE: EK).

Ten years ago, Indigo founder and former CEO Benzion (Benny) Landa held merger talks with Scitex, the flagship of Israeli high tech at the time. CEO Yoav Chelouche and chairman Dov Tadmor managed Scitex at the time, but the man who made the decisions was the late Rafael Recanati, head of the IDB group at the time, who represented the Scitex controlling shareholders.

The proposed mergers was intended to create a global digital printing giant based in Israel, using prepress technology developed 35 years ago under the leadership of Efi Arazi, an inveterate entrepreneur. This technology, together with the high-speed digital printing technology developed by Landa at Indigo, was a generation ahead of its time. It became the Mercedes-Benz of digital printing.

All of the parties in the unsuccessful merger negotiations moved into other business over the years. The Recanati family sold the IDB group, the controlling shareholders in Scitex, to the Nochi Dankner group. Only one of the people who played a key role in those merger talks is still deeply involved in digital printing Landa.

Landa is a strategic advisor for digital printing to HP president and CEO Mark Hurd. Hurd inherited the job from Cary Fiorina, who acquired Indigo from Landa. As an advisor, Landa took an active part in the acquisition of Scitex Vision. I assume that the negotiations in recent weeks brought back memories from distant past.

If you dont want me as a partner, youll get me as an advisor to your new owner, Landa might have told Scitexs controlling shareholders a decade ago. I assume, however, that even a visionary like Landa, who was able to predict what would happen in printing a generation later, did not anticipate the many ownership changes and upheavals in digital printing that have taken place in recent years.

Well never know whether the merger under discussion a decade ago would have created an Israeli Nokia in the printing industry, as was hoped at the time. In 2001, when he had already left Discount Investment Corporation (TASE: DISI), the controlling shareholder in Scitex, I met Tadmor, the man who led the negotiations with Landa. I asked him directly whether negotiations had taken place for a merger with Indigo, and if so, why they didnt produce a deal.

Tadmor confirmed that merger talks had taken place. His explanation of why no merger resulted put most of the blame on Landa. George Soros, one of the main investors in Indigo, pushed hard for a deal, but Landa caused us a lot of problems, Tadmor claimed, without specifying whether those problems involved money or ego. For his part, Landa told me several months later, Nonsense. They were never serious about a merger.

In my opinion, the responsibility for the failure to create an Israeli Nokia in the printing industry lies in the fact that the problems afflicting each of the two companies (Indigo and Scitex) made them realize that the printing market was very conservative. They understood that achieving penetration in digital printing was not the same as achieving penetration in wireless telephony, for example; it would take many years. Very deep pockets were therefore required, which only the industry giants had.

Indigo and Scitex both began a mad dash in the direction of the giants, a race which finally ended last Friday, when Eastman Kodak and HP divided up Israeli know-how between them, while managing to leave the third giant, Xerox (NYSE: XRX), high and dry. The era of Israeli-owned digital printing has ended, over 35 years after Arazi put the word Scitex on a sign in front of the company plant.

Today after trading, HP will publish its results for the quarter ending in July its first full quarter under Hurd. It will be interesting to see whether the acquisition of Scitex Vision a few days before the results are published hinted at a significant change of direction on Hurds part.

Fiorinas acquisition of computer company Compaq, her first, was an expression of megalomania. Hurds first acquisition was a small one in digital printing. Many analysts are gambling that this is only Hurds first step in shoring up HPs printing business. They believe that disposal of the PC division, the acquisition that led to Fiorinas downfall, is just around the corner.

IBM (NYSE: IBM) had no hesitation about admitting its historic failure by selling its PC division to the Chinese, 30 years after showing the door to a young bespectacled geek named Bill Gates, who wanted to develop his vision of a computer in every home. Analysts assume that Hurd wont hesitate to use any means to unload most of what Fiorina acquired from Compaq for billions of dollars.

Last Thursday night, when it published its results, even Dell Computer (Nasdaq: DELL), the undisputed leader in the computer field, admitted that its price-cutting strategy was not increasing its sales as expected. Dell was forced to slightly lower its guidance for the next quarter. As we saw two days before that with another gorilla, Cisco Systems (Nasdaq: CSCO), investors do not let such events go by unpunished. Dell suffered the same fate as Cisco; its share plunged over 7%.

Five other technology companies, all on the Nasdaq 100 index, are publishing their results this week for the quarter ending in July. Chip manufacturing equipment giant Applied Materials Inc. (Nasdaq: AMAT) is publishing its report today, and tomorrow will come the turns of enterprise software company BEA Systems (Nasdaq: BEAS) and network data storage systems producer Network Appliance (Nasdaq: NTAP), which issued a profit warning a week ago.

Of most interest to me are the companies that will report their results on Thursday after trading, including the largest company producing software for automation of planning, design, and drafting - Autodesk (Nasdaq: ADSK), which is in my portfolio. A chip company with a large presence in Israel, Marvell Technology Group (Nasdaq: MRVL), which I used to keep in my portfolio, will also be reporting its results. I sold my stake in Marvell, and waited for profit taking that never came. The share is now at a five-year peak of $45, $12 higher than when I sold it.

After I saw how excellent technology shares like Cisco and Dell were taking it on the chin because of their managements conservatism, I prefer getting out of Autodesk now, and perhaps buying it back next week or later, after the company releases its results. Theres no doubt that Autodesk will exceed the markets expectations of a profit of $0.24 per share on $356 million in sales for the quarter ending in July.

On the other hand, the relative weakness of the summer quarter, combined with the strengthening of the dollar (compared with the corresponding quarter last year) and general concern on the part of corporate management that high oil prices will nevertheless slow the economy down somewhat, is liable to persuade Autodesk chairman, president and CEO Carol Bartz to provide conservative guidance. This will be a disappointment, and cause a temporary dive in the share. The huge Chinese market with its enormous construction momentum, is the joker in Autodesks deck, which could generate a very positive surprise, and push the share up to a new peak of above $40.

All superlatives have already been used to describe Marvell, which will apparently once again not be a disappointment. When youve got luck, even your ox has calves. Marvell is on the right track to become a communications powerhouse in the long term of the caliber of Texas Instruments (NYSE: TXN), after chasing and finally catching up to its main competitor in recent years, Broadcom (Nasdaq: BRCM).

Ive already written on other occasions that Marvell is in all the hottest fields in broadband communications and electronic gadgets. Marvell makes storage chips for iPods, very high-speed Ethernet communications chips for laptops and communications equipment, and WLAN chips for mobile games consoles and energy consumption management.

In its conference call on Thursday, Marvell will probably discuss the next consumer market it will enter optical disc drives (ODD), mostly for DVD players, with the highest speeds in the computer market. If Marvell enters the market for DVD players as an independent device, it will confront a half-Israel competitor there Zoran Microelectronics (Nasdaq: ZRAN).

Only ten million DVD recorders were sold in 2004. Sales are expected to rise to 23 million by 2008, with consumers switching from VCRs to DVD recorders. Marvell is mainly interested in repeating in the optical market its huge success in storage chips for hard disk drives (HDD). Marvells HDD chips are use in computers with a target market of 308 million devices, while the optical market is estimated at 251 million devices a year. Merrill Lynch estimates the chip market for these devices at $3.8 billion.

In addition to Autodesk, Im also selling my holdings in Mercury Interactive Corporation (Nasdaq: MERQ), until the situation regarding the companys own inquiry and the US Securities and Exchange Commissions (SEC) unofficial investigation into options previously granted by the company.

Published by Globes [online] - www.globes.co.il - on August 16, 2005

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