Take Check Point CEO Gil Shwed and offer him the chance to be Mirabilis. Take Yossi Vardi, the man behind Mirabilis, and offer him to be Check Point. I'm sure both will politely decline. No one hands in one dream for another.
Vardi's refusal would hardly need any explanation. Very few people would exchange $400 million for a lengthy, difficult battle for survival. Check Point's quarterly sales turnover is $35 million, but its very existence will always be in doubt. The big fall could wait patiently for another 20 years, but could arrive as early as next year. That's how it works when you go out to play with the big boys.
Business at Check Point, as the company's recent financial report testifies, has never been better. The company posted $19.2 million in net profits in Q2 '98, and is galloping along at an 11% growth rate from quarter to quarter. Check Point is selling now at an annual rate of $140 million, and almost half that sum rolls over into the net profit line. The company recently expanded distribution channels in North America, and the success of the move is evidenced by the fact that those channels posted a 28% growth rate in comparison to the previous quarter.
Nonetheless, the share's behavior repeatedly indicates just how thin the ice is. In the previous quarter, Microsoft threatened to compete directly with Check Point in network security, and the share tanked 20% (and hasn't recovered since).
Check Point got the hint and signed cooperation agreements with the industry's big gorilla in Q2. In Thursday's trading, the day after publication of the quarterly report, it became clear that the company was once again prepared for the wrong war. Robertson Stephens dropped its recommendation on Check Point, partially because of projected trouble in Sun Microsystems' Far East sales. Check Point did report continued progress in the process of decreasing dependency on sales to Sun, but it looks like Robertson Stephens wasn't terribly impressed.
Because network security is so critical today, and because Check Point has a near-monopoly in the field, the company can expect an especially tough life. Large US companies have a lot of respect for the Israeli company and its products, but also a strong desire to provide their clients with independent solutions in a variety of fields.
When I asked Ed Zander, Sun's number 2 man, about the possibility of competing with Check Point, he smiled and talked about the close ties between the two companies. It was the perfect coopetition presentation. "I'm sure that by the time our network security product is ready, Check Point will be two or three steps ahead," Zander summarized. And with compliments like these, who needs enemies?
And Yossi Vardi would say to himself, "The analysts, financial newspapers, and giant US corporations wouldn't be my only nightmares if I were Gil Shwed. What about investors? What about brokers?
Thousands of Check Point options expired Friday in the $30-35 range. Brokers, who feared investors would want to exchange the options for shares, dumped Check Point onto the market to force it below $30. In this case, investors lose their money and can't convert the options, while the brokers keep the shares (which should go up this week) and the premium on the options. In short, another cynical plot, whose connection to Check Point's fantastic business is entirely coincidental. The company's share, in any case, nosedived 12% on Thursday.
Shwed isn't dreaming of Vardi. Shwed doesn't have time to dream. He probably once dreamt of establishing an Israeli high tech empire, that would play in the computer world's major league, and even take the championship in its field. The dream came true, and Shwed now knows it is much easier to ask for $400 million and send all your employees to party in a Manhattan club. He knows, but isn't willing to switch places with Vardi.
Recently, one could receive the impression that the entire sector, not to mention the entire country, is willing to switch places with Vardi. This is only natural, and doesn't tell us anything bad or immoral about ourselves that we didn't already know. But real Israeli competition with the Silicon Valley will come only from entrepreneurs who dream of being Gil Shwed. Mirabilis, from this not-so-narrow perspective, is just wasting time.
Published by Israel's Business Arena July 19, 1998