After the coup, On Track faces uncertainty

Tali Tsipori

After the success of the investor putsch, what does the future hold for the company and its employees?

"I chose to accede to the request of the board, which, like me, disagreed with the criticism of the management, and even went to the lengths of mentioning its gratitude and high esteem for what I had done. On the other hand, the perception that guided the board, which I share, is that the handing over of the reins that will be completed with my retirement from the company will help to calm matters, to end the dissemination of the reports and rumors, and accordingly will also bring to an end the processes that have harmed the everyday work of On Track and its competitiveness."

With these words Oded Bashan (65), founder, chairman and CEO of OTI - On Track Innovations Ltd. (Nasdaq: OTIV; DAX: OT5) chose to part from the company after 23 years, although the word "chose" is perhaps not the appropriate one. Bashan was forced to resign from almost all his roles in the company (he will continue to serve as a director), after two US institutional shareholders showed him what "institutional activism" means. On Track's board, for all its "gratitude and high esteem", was really left with no choice, and showed Bashan the door. Now, the board will seek another chairperson and another CEO (or perhaps the same person will again wear both hats), with whom it will attempt to resuscitate the company.

On Track, a veteran Israeli company on the US market, has always maintained anonymity and has kept away from media exposure. Its low market cap (at its peak it was worth only $164 million) and the fact that its founder, Bashan, shunned the media (he still refuses to be interviewed), have made it almost invisible among its Israeli peers. Despite this, or perhaps because of it, the management coup that recently took place in its corridors, the outcome of aggressive US institutional activism, is something unusual among Israeli companies traded on Wall Street. To the best of my memory, this is the first time that a US investor, institutional or private, that is among the main shareholders, has achieved almost all its aims in a campaign against the management of the company in which it is invested, has removed the person who controlled the company high-handedly and served as chairman and CEO, and in fact cut a thick umbilical cord that had not been touched for a quarter of a century.

Before we start to analyze the consequences of the coup for the company's future, let us go back a little, by about 23 years. Bashan founded On Track when he was 42, after leaving the position of president of Electro Galil, an Israeli producer of radio-wave based identification and tracking systems. He tried to turn On Track into a world leader in its field: development of microprocessor-based contactless smart cards, designed for various uses, such as electronic passports, smart ID cards, and even means of payment for a tank of fuel.

The beginning was promising, but On Track, despite its innovativeness, did not succeed in making the breakthrough. Its revenue did not grow substantially, particularly in the past two years, and since the beginning of 2008 it has lost almost $94 million.

At the end of the third quarter of 2012, it had $20 million left in cash. Its debt totaled $7.8 million, and its shareholders' equity was just $25 million, the result of an accumulated loss of $184.3 million.

In fact, checks by "Globes" show that the company did not make a cent in the past fifteen years. In the period 1998 to 2012 (third quarter) it accumulated a net loss of $175.3 million.

This loss was undoubtedly a result of Bashan's failed management, and in retrospect it may be that he resigned too late.

Incidentally, in his letter to the company's employees, Bashan refrained from taking responsibility for the performance of the company and its stock, even though the responsibility lay with him. As chairman and CEO, the company was his alone.

The miserable results did not prevent On Track from making a secondary offering in February 2011. It raised $18 million, at $3 per share. Since that offering, the share price has been on a steady downward path. On Track first went public not on the US market, but on the now defunct Geerman Neuer Markt. The company held its IPO in the summer of 1999 at €8.5 per share. Its euro price is currently €1.054, giving an 88% loss.

Now, after the management revolution at the company has almost been accomplished, the great question is what will happen to its employees, who numbered 279 in December 2011? Generally, a financial investor, private or institutional, does not hesitate to wield the axe in trying to generate value from his investment.

On Track, based in Rosh Pina, employs 123 people in Israel, and they have presumably been suffering sleepless nights since Bashan was ousted. Jerry Ivy and Silk Investment have not set out their plans for the company in detail, and it may be that layoffs will be the lot of the employees. Even Bashan himself almost admitted as much, when he wrote in his letter, "I am certainly aware of the fears and the uncertainty over your professional futures. I have clear hopes, and a moral and professional commitment to hand over the management torch in the best possible way. On the other hand, I have no clear answers."

Another question is what will happen to the company? It is doubtful whether a financial investor like Ivy (despite the fine words in the video clip on his website) will succeed in turning On Track into the successful company that Bashan tried to build over 23 years. A break-up of the company into separate activities and an attempt to sell them to the highest bidder is a much more realistic scenario, as bad as it sounds, particularly for the employees.

Bashan himself leaves with few financial worries. Apart from the shares he still owns (currently worth NIS 10 million), over the years, he has sold On Track shares to the tune of NIS 35-40 million. In other words, he has accumulated about NIS 50 million, before tax. Not bad, for someone who never really created value for his investors.

Published by Globes [online], Israel business news - - on January 9, 2013

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