A shareholders meeting of Romtech approved at the end of last week the terms for Formula Systems (Nasdaq: FORTY) acquiring the controlling interest in the company. Under the terms of the deal, Romtech will allocated 85% of its shares to Formula in exchange for the software activities of Matrix (formerly ForSoft), which it will be integrated within it. Matrix's market value is estimated at $45 million.
Matrix is one of Israel’s largest software companies, with 850 employees, including 65 administrative and headquarters staff, and 500 customers. The company's financial statements for the second half of 2001 show NIS 173 million in revenue for the period, compared with NIS 161 million in the corresponding period last year. Matrix posted a NIS 5.1 million loss for the period, compared with a profit of NIS 8.9 million in the corresponding period last year.
The deal does not present any new faces for the capital market. Matrix was founded in 1985, under the name Idan Software Industries. The company held an IPO on Nasdaq in 1988, and, under the name ForSoft, held a second issue ten years later. In October 2000, Formula published an offer to purchase for the company and delisted it.
Immediately after becoming a private company, as part of Formula's restructuring, ForSoft decided to focus on projects and IT services integration. During the past year, ForSoft sold to Formula all its subsidiaries that did not conform to its new configuration. Most of the subsidiaries were product companies or companies in which it did not have full ownership. At the same time, several IT and software development companies were acquired.
As of now, Matrix's main holdings are: ForSoft ERP Solutions (formerly Nikuv Computers), which develops and markets financial and logistical management systems for large and medium enterprises; E-Soft, which develops and installs applications for small and medium banks); Bashan Systems,, which develops and installs systems and adapts technological solutions for medium and large enterprises; and Elron Telesoft's banking and e-commerce division, which develops banking and financial products and applications.
A condition of the deal is that Romtech will be free of all activities and/or assets, except for equity, by the time the deal is completed, and that the equity, represented by liquid assets, will total $8 million. Romtech's liquid assets totaled $500,000 at the end of September.
Romtech's current controlling shareholder, chairman Zeev Gura, promised to leave $8 million in cash in the company. For this purpose, Formula will see that Israel Discount Bank will provide a loan to Gura against a lien on his shares in the company.
Gura acquired control of Romtech in September 1998, shortly after selling his stake in the Clal-Pharm chain (now New-Pharm) to the Habas family and Ezra Harel for a great deal of money. After acquiring control of Romtech, Gura brought the company into several real estate projects in his hometown of Haifa, headed by the Auditorium Square, together with Cementcal.
However, like many other tycoons in the late 1990s, Gura was enthralled by technology after a quick and profitable round with VCON Telecommunications (Nouveau Marche: VCON) that earned Romtech a handsome capital gain in 1999. VCON was founded by Zeev Gura's brother, Moti Gura, who is mainly synonymous in the capital market with technology holding company Adacom, which collapsed in the mid-1990s, leaving huge debts in its wake.
In March 2000, as technology shares began collapsing, Romtech announced it would end its real estate activities, and focus on venture capital investments. Gura bought the stake in the Auditorium Square project from the company, and directed the rest of the company's liquid assets to a variety of Internet and communications ventures.
The results were not long in coming. Romtech posted a NIS 2.9 million loss in 2000, caused by the write-off of its investment in Internet company Virtualink, which ceased business activity.
In the first nine months of the year, Romtech wrote off all the rest of its NIS 20 million investments, half of them in the third quarter. Romtech's greatest loss came from its investment in Clipscom, which provided video-on-demand by IP protocol over broadband networks. As a result of Clipscom's cessation of business, Romtech posted a NIS 8.7 million allowance in the first quarter of 2001.
There were doubts about the all the rest of Romtech's investments as going concerns, and all were written off, mostly in the third quarter.
As for Matrix, it is expected to absorb Romtech's skeleton in 2002. Matrix gross profitability fell to 23.5% in the first half of 2001, compared with 27.7%, due to increases in wages and low profitability of some projects. Matrix continued to employ professional staff in fields where it competed for major projects, even when there was no work for them during the tenders' waiting stage.
Matrix will find it difficult to exploit Romtech listing on the Tel Aviv Stock Exchange to raise capital, and will probably utilize its negotiable shares to acquire more companies in its field.
Published by Israel's Business Arena on 25 December 2001