Last week, with little media hoopla, ICQ marked its tenth anniversary. Mirabilis, the inventor of ICQ, became an Israeli symbol in mid-1998 as one of the first great deals in the country’s high-tech industry
Very few companies have sold since then for the kind of price paid by AOL - $407 million - certainly not 18 months after being founded. You won’t find another example of “four barefoot boys”, as Yossi Vardi once described them, earning so much and instantly becoming an inspiration for Internet and high-tech entrepreneurs in Israel and around the world. The sale had a huge impact on an entire generation.
The inspiration was partly due to the amount paid, but mainly because ICQ has accumulated over 400 million downloads to date, and is still a quite successful part of Time Warner Inc. (NYSE:TWX), the parent company of AOL. This is why the story of the ICQ sale casts a far greater spell on investors than others, such as that of Chromatis Networks, sold to Lucent Technologies Inc. (NYSE:LU) for $4.7 billion in shares. The real value of the Chromatis sale shrank as Lucent's share plummeted, and Chromatis itself was closed shortly afterwards, and its technology almost completely buried. This was not a “merger by the book.”
Even after the sale of ICQ, some people criticized Miribilis’s co-founders Amnon Amir, Yair Goldfinger, Sefi Vigiser, Arik Vardi and his father Dr. Yossi Vardi, who was their mentor, for the exit. They were criticized for selling the company and making money, for selling it prematurely, and for exporting Israeli technology. Today, ten years later, when Israeli business is in the midst of a wave of mergers and acquisitions, the same criticisms are heard. “Why did M-Systems Flash Disk Pioneers Ltd. (Nasdaq: FLSH) chairman, president and CEO Dov Moran sell his company to SanDisk Corporation (Nasdaq:SNDK)?” is a question many high-tech executives are asking. Many of them believe that the answer lies in the stock options scandal M-Systems is embroiled in. Were it not for that, Moran would never have sold his life’s work. Moran himself said, “It would be immoral not to accept the proposal.”
2005 and 2006 have been the years of the merger, partly because Nasdaq is unfriendly towards new companies. But what about longstanding ones? Quite a few companies that could have had a chance of becoming a “high-tech Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA)” that could have given US giants a run for their money have been sold to them instead. Among the Israeli giants, only Amdocs Ltd. (NYSE: DOX) is left, and it isn't really an Israeli company. Comverse Technology Inc. (Nasdaq: CMVT) is up to its neck in a stock options scandal of its own, and the IT security giant Check Point Software Technologies Ltd. (Nasdaq: CHKP) is not meeting its promise as far as growth is concerned. These are Israel’s representatives in the billionaires club, as you is quite an exclusive group.
There are promising Israeli companies with a very good chance of becoming international gorillas, if they play their cards right. ECI Telecom Ltd. (Nasdaq: ECIL) and Orbotech Ltd. (Nasdaq: ORBK) are examples. At a time when we’re seeing mature companies on the block, the question is: Why are managers who claim that an exit isn’t the goal aiming to sell their companies? Can’t they go it alone? Are good, mid-sized Israeli companies hitting a glass ceiling and fated to be sold?
RAD Data Communications Ltd. chairman Zohar Zisapel is a man eminently qualified to answer these questions. He has made a number of exits, including Lannet and Radlan, and floated several others (e.g. Radware Ltd. (Nasdaq: RDWR; TASE: RDWR), Radvision Ltd. (Nasdaq: RVSN; TASE: RVSN) and Ceragon Networks Ltd. (Nasdaq: CRNT; TASE:CRNT)) as he built successful high-tech companies some more so than others. He has founded start-ups, invested in others unconnected with the Rad Group, and closed some down (the most famous case is RadGuard).
“In Utopia, companies should be built to become a Microsoft, Intel, or Cisco Systems, but it doesn’t always work,” says Zisapel. “Sometimes, you have to sell the company en route. I think that as long as the price is high and all the parties profit, it’s not a failure, but it isn't the epitome of success, either.”
“Globes”: By your reckoning, then, was Radlan a failure?
Zisapel: “It was an amazing success as a company. For me personally, the fact that we sold it was also a failure. I must admit it.”
What’s your analysis of the sale of M-Systems and Mercury Interactive Corp. (Pink Sheets:MERQ)?
“I’m not close to either company or their sale. I only know the story as an onlooker. However, I assume that the options scandals triggered the sales, which is regrettable because these are two very good companies. Moran, for example, I know well. He isn't a man who builds a company in order to sell it. It was his baby, and he wanted to reach $2 billion, $10 billion, and more.”
Moran also said that he thought that growth beyond $1 billion revenue would be difficult. In other words, the competition was tough.
“I don’t think that he realized that he couldn’t beat the competition. After all, for years, he competed against the big companies and won hands down. Mercury also competed successfully and continued to win. In my opinion, they didn’t face any glass ceiling. There was a side issue of the options scandals - which was by no means unimportant and which I consider to be very negative - and this led to where it led. I assume that legal claims against management and other developments drove them to get out in time. They tossed the hot potatoes of claims and scandals into someone else’s hands: Hewlett Packard and SanDisk, who have big ovens.”
Are you saddened by the sale of Israeli high-tech companies? You’ve also sold a few.
“Saddened? Not at all. I have a perspective of many years on the matter. Look, 25 years ago, when we just started out, we were told that the problem was to make the first $1 million. When that came easily, we were told that the problem was $10 million. When we did that they raised the threshold to $100 million, and when we achieved that, we were told that the real problem was to float a company at $1 billion. We did that, too. Therefore, I don’t think there’s any size limitation for companies growing in Israel. It’s true that we’re good at start-ups, but that’s good because then we’ve got a lot of growing seedlings, some of which will become large companies. This seems to be the nature of things; we’re not a big market. Israel has a few large companies, several mid-sized ones, and a lot of small ones, and that’s enough to create a wonderful economy.
“I’m often asked, ‘Why isn't there an Israeli Nokia?’ I tell them that there won’t be one. We’re not suited to it. We’re more entrepreneurial and less administrative, and that’s OK. The Nokia model? I receive so many Finnish delegations seeking to discover how to create start-ups because they’re stuck with just one Nokia. It’s very dangerous for a country’s entire economy to depend on one company. Something could happen to the cellular market tomorrow, a strategic mistake or an external factor such as an options scandal, giving Nokia a cold and Finland pneumonia.”
Do you consider the recent deals as a wave? What if we go back to include Technomatix, Creo and Verisity, and not just Mercury, M-Systems, and Iscar Ltd.?
“I use a timeline of the last 25 years. Even if there are two or three such years that you call a wave, we’re talking about trends that don’t last. There’s no need for panic; there are simply such times, and everything has an explanation. For example, it’s been more difficult to go public lately, so there have been more mergers and acquisitions than IPOs on Nasdaq. Personally, I don’t think that selling a company for $200, $300 or $400 million is bad. On the contrary, it’s not bad, but it isn't a law of nature that will last, either. It’s only the present circumstances. IPOs will make a comeback, and we’ll probably again see fewer sales of companies and more independent growth. When I look around, I don’t see a tendency among managers to sell companies.
“What is certain is that Israeli companies are not destined to be sold. If someone decides in advance to sell, it’s a mistake. I know quite a few people, both overseas and in Israel, who leave a large company to found a small one that will meet a need of the large company, and later sell their company to it. That’s a riskier business model, and less common in Israel. We have also sold companies. We’ve sold them at points at which we thought someone else could take them much farther, but that’s not something you plan in advance. I always try to persuade entrepreneurs not to sell. We sometimes have a tendency to sell prematurely.”
Published by Globes [online], Israel business news - www.globes.co.il - on August 8, 2006
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