HP Israel Ltd. has countersued Israeli telecommunications equipment maker ECI Telecom Ltd., three weeks after ECI filed a NIS 38 million lawsuit against HP. On Thursday, HP Israel filed a $23 million (NIS 83 million) lawsuit against ECI for breach of contract. Under the computer services contract, which the companies signed in 2010, HP Israel was to manage ECI's computer systems for ten years for $119 million.
HP Israel claims that ECI "has not paid for services rendered", and accumulated a debt of over $7.2 million by July 2012. HP says that most of the debt was paid after it threatened legal action. It claims that ECI has not paid the debt in full, and that it warned ECI earlier this year that non-payment constituted a breach of the original contract.
According to HP Israel, ECI's lawsuit, filed in early April, was a "tactical motion" to avoid paying the agreed cancellation fee, which HP calculates at $23 million.
The case involves one of the most more intriguing projects in Israel's computers market in recent years. Reading between the lawsuit's the lines, however, offers an interesting indication of ECI's financial condition, about which there have been various assessments in the past year.
"When ECI was required to put its debts into order, its managers said that the company was facing a very severe cash flow problem, and that it was struggling to meet payments (to suppliers)," HP Israel states in offering reasons why it thinks that ECI has avoided payment. HP Israel also contends that, under the agreement it reached with ECI in August 2012, it was compelled to demand "personal guarantees" from ECI controlling shareholders - Shaul Shani's Swarth Investments - for the money that ECI owed it, citing "ECI's worrying business and financial circumstances." It is doubtful if this was ECI's condition when Shani acquired the company.
Swarth acquired 51% of ECI in 2007 for $1.24 billion, in partnership with Ashmore Investment Management Ltd. (LSE: ASHM), of the UK. But the world has changed since the acquisition. The economic crisis of 2008-09 severely hurt ECI, as telecommunications companies halted procurements.
In addition, rising competition, especially from Huawei Ltd., greatly hurt ECI's revenue and profits, and reduced its company value to a few hundred million dollars. Its 2012 revenue has been estimated at $500 million.
ECI said in response, "It is odd that HP chose to sue when it knows that it failed to meet its commitments stipulated under the contract with ECI. We view this lawsuit with great severity."
Published by Globes [online], Israel business news - www.globes-online.com - on May 5, 2013
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