Uzia Galil was pleasantly surprised. The man who laid one of the cornerstones of Israeli high tech, Elron Electronic Industries Ltd. (TASE: ELRN), from which Elscint, Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT), and many other companies were spun off, was skeptical as he arrived for the gala meeting with Elron CEO Ari Bronshtein, to mark the company's 50th anniversary.
"I came here," said Galil near the end of the interview with "Globes", "with reservations; the only thing I thought I was about to hear from him (Bronshtein) was how to make money. It's not that that isn't important, but I thought to myself, for heaven's sake, every signal the company sends isn't of a company that wants to build, but a signal that there is someone who needs money which can be taken from it. Instead, I see that he believes in innovation and in investment in new things."
From the perspective of his 88 years and his legendary track record, Galil can allow himself to speak with complete frankness, while citing examples of his mistakes rather than his successes. Bronshtein, who is half Galil's age, is much more calculating in his remarks and gently tries to turn the conversation in the directions he wants, without forgetting to honor Galil and explain how much contemporary Elron retains the vision of its founder.
Elron is not the high-tech powerhouse that it once was, but a mid-sized investment company with a market cap of NIS 570 million, which has put up for sale its most important portfolio company, Given Imaging Ltd. (Nasdaq: GIVN; TASE: GIVN). A sale could greatly help Elron's parent company, IDB Holding Corp. Ltd. (TASE:IDBH) get through its current crisis.
Galil is not only Elron's founder, but also a shareholder. "I've never sold an Elron share," he says. "There were times when the share was at $50, and you know where it is now (its current share price is NIS 19.86). These are called sentimental shares. Fortunately, I have another sentimental share, Elbit Systems." (An Elron spin-off controlled by the Federmann family, and which is doing great business and has a market cap of NIS 6 billion).
Galil not only created a high-tech industry before the term was coined, but before Israel had a real knowledge-intensive industry at all. Elron began as a laboratory in 1957, and it was established as a company in 1962. Moshe Arens introduced Galil to Dan Tolkowsky, a former Air Force commander and subsequently a VP at Discount Investment Corporation (TASE: DISI) (he would go on to become its CEO), which was owned by the Recanati family at the time. Through Michael Doron, Israel's economic attaché in New York, Galil approached Laurance and David Rockefeller. "Between the Recanatis and Rockefellers, I raised $160,000, which was a lot of money at the time," he laughs.
Elron does not operate in a vacuum, but is a unit of Nochi Dankner's troubled IDB, held through Discount Investment. Elron used to say that it could rely on its strong parent holding company, but that is no longer the case. How does this affect Elron's conduct? Is there, as Uzia implied, pressure to generate income more quickly?"
Bronshtein: "It definitely affects the atmosphere. It's not pleasant. The parent company's situation does not improve the mood, and I really hope that it will be solved as quickly as possible. As for day-to-day operations and the company's vision, it has no effect. First of all this is because we properly prepared for it, we have sufficient cash to finance our follow-on investments, and we have a credit line which we can use to make longer term investments. We've only had to use a small part of this credit line to date, so we have industrial quiet to continue operating."
No close-out sale
In the past four years, Elron has sold stakes in portfolio companies for $400 million. Sales include 013 NetVision Ltd., Medingo, Teledata Networks, and Safend, giving the impression of a close-out sale. But Bronshtein says that this was a process of focusing to concentrate on investing in life sciences companies. "None of these companies was a close-out sale; they were all part of Elron's strategy, regardless of what happening at IDB," he says.
But it is quite clear that Elron's largest holding, Given Imaging, the producer of the diagnostic Pillcam endoscopic camera for the intestinal tract, which is definitely part of Elron's core business in the life sciences, is up for sale. Given Imaging is the largest company held by Elron, with a market cap of NIS 1.8 billion, and the only portfolio company that currently generates profits. Most of Elron's value is derived from Given Imaging. Elron owns 22.4% of Given Imaging, and Elron's parent company, Discount Investment, directly owns another 15.6%. It is easy to understand why Discount Investment is so eager for Given Imaging to be sold.
If Given Imaging is sold, there's an impression that there will be little left of Elron.
Bronshtein: "Today's Elron is basically two companies: the Elron which holds Given Imaging, and previously also held NetVision, as well as many other companies in the more distant past; and the Elron which is an incubator of new technologies and ventures which are ultimately supposed to grow and become companies. These are two completely different businesses, and at the day-to-day level too, the investment of time and resources is completely different between the two.
"Of course, in terms of Elron's market cap, there will be a significant change if and when Given Imaging is sold. But in terms of day-to-day business, it is insignificant, because Elron's support for Given Imaging does not take away time or money, but is carried out through membership of the board of directors. I want to hope that if and when Given Imaging is sold, we can use the sale proceeds to continue investing in companies and moving our business forward."
You'll have to distribute part of the proceeds as a dividend to your parent company.
"Not necessarily. The company's board of directors decides on the distribution of a dividend. But as management, when the company's cash situation is greater than its needs for the coming years, we don’t keep the money with us because that's nice, but advise the board of directors to distribute a dividend. At a time of negligible interest rates, there is no point in just sitting on money."
It's obvious why Discount Investment wants to sell Given Imaging; it wants to see the money. As the CEO of Elron, do you think this is the right time to sell Given Imaging?
"For Elron, Given Imaging is not a contributor of dividends. On the other hand, it's a company that Elron established and nurtured for years. The question whether to sell or not to sell is also a question of price and a question of the situation. It's not a company that we can sell overnight. A decision to sell will therefore be taken when we can see the results of the process. Meanwhile, neither Elron's board nor its management has decided to embark on the process."
Uzia, do you agree that we should forego the dream of huge companies and be satisfied with the modest dream of contemporary Elron?
Galil: "Until three years ago, I would tell young people, 'Do you know how we succeeded? We did this and that.' I would not dare say that today. What we did then is not the right thing to do now. What was right for yesterday could be a mistake today. I love to talk about my historical mistakes, some of which were because I wasn’t always prepared to believe in new things. There was the time that I brought to Elron Dr. Abe Feld, who was the global R&D director at IBM. He was supposed to succeed me at Elron, instead of the man who did (Ami Erel), but I had a problem with him in that he was uninterested in the defense side (a major part of Elron's portfolio at the time). He didn’t like the defense side, and wanted to push us in the direction of the Internet, and I didn’t understand him.
"One bright day, he proposed that we invest in Check Point Software Technologies Ltd. (Nasdaq: CHKP), but I didn’t understand why it was interesting, and neither did the board of management, and we didn’t make the investment. That was a huge mistake. So I am not like parents or other people who tell our children, 'When we were…' I say that everything we say is the right way today, we should check whether it's the right thing tomorrow. I think that Elron should set up a team to clearly define what its advantages are in each field."
Published by Globes [online], Israel business news - www.globes-online.com - on March 10, 2013
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