"The problem with many Israeli companies is that they don’t know what "expectations management" is," says Shlomo Kalish, owner and manager of the Jerusalem Global consultancy. "American investors and management really don’t like unpleasant surprises. The trouble with Israeli companies is that they tend to keep back bad news until the last minute."
Former fighter pilot Kalish set up Jerusalem Global two-and-a-half years ago, at the same time as lecturing in Tel Aviv University’s business administration faculty. Today, the company works very closely with US investment bank Montgomery, which last year took part as sub-underwriter in the issues of Orckit, Memco, ISC, and DSPC.
"American investors dislike very much being surprised at the last minute, and so they also react swiftly and cut the price of the share sharply," Kalish continued. "That’s how it was four years ago with Lannet, that’s how it was with Scitex and Indigo"
"When this happens, analysts feel that they can’t rely any more on a management which fails to meet forecasts," explains Joe Shell, who is in charge of investment banking at Montgomery, and is now in Israel.
"It’s one or the other. Either the managers don’t want to reveal information to investors at the time, for all kinds of reasons, which is bad because American investors don’t like being treated as though they aren’t partners in the company. Or else the managers didn’t know that their forecasts were incorrect, which is also serious, because it means the company’s control systems are no good."
"It’s very important to publish full information even if it isn’t so good," Shell continues. "A management which behaves that way at least won’t lose the trust of the capital market community. Take for example Hewlett Packard, which last week announced a reduction in its profit forecast."
"The share did fall in one go from $59 to $51, but the investors feel that they were privy to the information, and no-one profited at their expense. It could well be that by the time the company publishes its results, the price will already have climbed back again, because the investors will get a clear feel for where the company is headed."
San Francisco based Montgomery is considered one of the specialist investment houses in growth companies and high-tech. Its activity in Israel is undertaken in partnership with Jerusalem Global, whose task is to find companies which are candidates for investment, flotation, or a merger and acquisition deal.
Jerusalem Global is involved in Israel in financial and business consultancy for Galileo, Picture Vision, Finjan, and the Canadian company Creo, which has an Israeli development centre.
According to Kalish and Shell, Montgomery has so far refrained from leading an Israeli company’s issue mainly because most of the companies which have so far approached them were still not sufficiently mature for flotation, and they advised them to wait a year or two.
"It’s more important that the company first establish itself, set up a strong managerial backbone, with a credible financial system, and get appropriate legal advice," says Kalish. "Business maturity is no less important. A management incapable of giving forecasts won’t be able to cope with the demands of the US capital market. It’s preferable for a company to wait a year or two, and only then go public."
In order to approach Israeli high-tech industry, Jerusalem Global and Montgomery are about to set up a venture capital fund together, to be managed by Shlomo Kalish. "In practice," says Shell, "Montgomery won’t invest in this fund. The investors will be private individuals. Of course, I will also be among them, and will invest capital from my private sources."