"The economic situation in Israel is amazing. There's stable and consistent growth here, and it looks like it will continue. I would have expected that the political situation and the war this past summer might have had an effect, but while the world has its reservations about the war, the credibility of Israel's economy has remained unharmed," says Harvey Krueger, former senior executive and emeritus chairman at Lehman Brothers, and also a member of the strategic advisory board at Markstone Capital Partners Group LLC. Krueger was in Israel to speak at the "Doing Business with the US and Canada" conference organized by the College of Management's School of Business Administration.
Krueger founded Lehman Brothers' Israel office in 1961, at a time when other banks didn't even consider Israel as a country worth investing in. He led offerings by Israeli companies on Wall Street, and as Comverse founder and former chairman Koby Alexander put it several years ago, Krueger was the one who "paved the way on Wall Street for Israeli companies."
Speaking from a perspective of almost five decades on the Israeli economy, Krueger is optimistic. "Today, Israel is viewed as a sophisticated player," he says, noting that the markets' acceptance of Israel has changed over the years. "The bank crisis at the beginning of the 1980s was very deep, but out of it came an important reform," he notes. "The reforms of the mid-1980s were also very successful and put a stop to triple digit inflation. Foreign investors are willing to take risks, but they need to understand them. They're not willing to invest when there's instability in foreign currency and taxation. The reforms created the necessary stability and enabled Israel to be accepted on the flotations market including that of the high-tech sector.
Krueger recalls an offering that Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) made in 1987. "Teva raised $33 million, one third of which was from investment institutions which became the first such institutions to purchase equity from Israel," he says. "It was a 'normal' offering and it was new to everyone. We sold $11 million worth of stock to the institutions, which is peanuts today, and I never felt prouder."
In the 1990s, Israel found its place on the economic map, as Krueger puts it, when many Israeli companies, mostly high-tech, went public. "Until the 1980s, the view worldwide was that Israel had good scientists, but no management," says Krueger. "It was difficult to refute this, until companies like Check Point Software Technologies Ltd. (Nasdaq: CHKP) and Teva, which have always been well-managed, came along. After all, if these companies didn't have good management, investors would never have invested in them from the outset."
Another example that Krueger provides as an indicator of Israel's strength is the bond offering by Israel Electric Corporation (IEC) in 1996, which Lehman Brothers led, and part of which had a maturity of 100 years. "Today they don't issue bonds like these because the rules have changed, but the fact that the debt that IEC raised was for 100 years shows that the capital market knows that Israel will survive and that it will prosper," says Krueger. He notes that in the past, when the market priced an Israeli company, it had what was known as an 'Israel discount', a policy which was phased out in the 1990s.
"When talking about Israeli high-tech you need to remember that we're not talking just about public offerings," explains Krueger. "A lot of high-tech business activity will continue to be financed by private equity funds. That financing source will be forthcoming as long they continue being good companies. There are people in Israel that have been educated in both science and business. In the past, what people saw here were not just technological capabilities but also salaries that were low in comparison to other countries, so you would get the same return for lower pay. Today, pay is no longer low, yet people continue to invest here. They don't invest here because it's cheap but because of the capabilities here."
Globes: The pay is still lower in India.
Krueger: "That's the reason that Israeli companies themselves head for India. A lot of technology companies are opening offices there. The trends and changes in telecommunications and in the Internet enable more efficient use of call centers in India, and this is something that Israelis can also take advantage of. In my estimation Israeli companies will be more, not less profitable, as a result. As a rule, it would be worthwhile maintaining a higher standard of living, in order to obtain more quality and efficiency in output."
Krueger notes in this regard that he, personally, was interested in setting up an Arab-Israeli company that would specialize in call center services. The goal was to help raise standards of living among the Arab population, but an economic survey showed that as pay in India is lower, there would be no logic, economically, in establishing such as company. Notwithstanding this he still insists, "It's important that the Arab population in Israel enjoys economic success and that it remains stable."
Krueger has personally invested in Israeli companies through, among other vehicles, his venture capital fund, Stockton Partners Inc.
What are your criteria for investing in Israel?
"An opportunity to make a profit. It's that simple. But if there were two similar investment opportunities, one of which was in Israel, I would probably opt for the one in Israel. I love the country, I am part of the country, and I look for opportunities to come here."
Krueger says that he now also holds Teva shares, something he was unable to do while with Lehman brothers under company rules. He was also mentioned as the one who helped broker the merger between Teva and Ivax. Krueger has been an adviser to Teva for some years, and he was also a member of the Ivax board, so he was able in his dual capacity to help renew talks between the two sides before the acquisition was finally closed. By coincidence, during the interview with "Globes" an old acquaintance dropped in to say hello to Krueger - former Teva president and CEO Israel Makov, another speaker at the conference.
Do you think that the options backdating scandal in companies with an Israeli connection will have an adverse effect on the image of the Israelis among US investors?
"Companies like Comverse Technology Inc. (Pink Sheets: CMVT.PK), and HP-Mercury Interactive are not viewed in the US as Israeli companies. I can tell you that most investors didn't even know about Comverse's connection with Israel. Microsoft also has managers from Israel. There's a misguided view in Israel that says that a spark from Israel will set off a fire in the US. Hundreds of US companies have been suspected of backdating, it's a widespread occurrence that is not connected at all with Israel. There have been other scandals involving US companies such as Enron and WorldCom, whose managers weren't even Jewish." (laughs).
One issue that Krueger believes will affect Israeli companies, and not just them, is the adoption of the Sarbanes-Oxley regulations. "The problem with these regulations is that while they may have produced the necessary reforms, they have also created a higher level of costs," he says. "Small Israeli, UK, and even US companies will prefer to be listed for trading in other places. I agree that we need total transparency, and that capitalism cannot be free of regulation, but even though there is some value to these regulations, they are exaggerated and there will be changes. Americans cannot operate contrary to their own interests."
Are there, or will there be companies that will prefer to delist from the markets?
"I think not, because they'll learn to live with the regulation. But will new companies list for trading - that's a different question. They can choose a cheaper alternative, such as London’s Alternative Investment Market, with the goal of moving later on to London's primary market. What will happen eventually, is that regulation outside of the US will increase, and costs in the US will come down, so there'll be more balance."
Is there a chance that the coming years will see the development of another bubble, like the one several years ago?
"There's always a chance. The world is cyclical. Right now there are phenomenal returns on investments in private equity funds, and a lot of people are profiting from this. Funds like these are driven by the available liquidity levels, and there's a lot of money around today. Interest rates are also low, and it's easy to carry out deals that have substantial leverage. Will there be change in liquidity? There will, but I don't know when. The question is whether it will be soft or hard landing.
"There could be further changes, and these will affect everyone, everywhere, more than ever before. There are no longer any isolated economies, everyone is vulnerable - and Israel is not unique. Either way, people should not worry but instead prepare in advance, by hedging for example."
Published by Globes [online], Israel business news - www.globes.co.il - on May 14, 2007
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