Few Israelis recognize the name Efi Gildor. That is because he has never been interviewed, and because the $460 million company he founded, Arbitrade Holdings (of which he owned one third), was not registered in Israel nor had any Israeli affiliations. Nevertheless, in the high-tech industry of the 1990s before the venture capital hysteria, Gildor was well-known. He invested in quite a number of Israeli companies listed overseas, took profits on several, and currently has a stake in some successful start-ups, such as Chiaro Networks.
Gildor broke his anonymity to comment on the recent wave of accounting scandals hitting the US. An experienced US trader with degrees in finance and statistics, Gildor has recently been mentioned in the US financial media thanks to his article condemning methods of executive compensation.
Gildor is Israeli-born and a former fighter pilot. He began his doctoral studies at the University of Chicago, and worked as an options trader for well-know broker Irvin Kessler. He developed computer solutions for advanced options trading, worked for Goldman Sachs and other companies, before rejoining Kessler in 1995 to found Arbitrade with a third partner who specialized in computerized options trading.
Gildor says, “The options trading market at the time was very inefficient. It was very easy to make money then, because the options market was not properly priced at all. The options market was later made more sophisticated and priced correctly, but it didn't happen fast enough. At the time, I developed algorithms for more accurate options and derivatives trading. Every day, we printed pages full of theoretical calculations for options at a time when all trading was based only on estimates. Later, we gave traders hand-held computers enabling convenient computerized options trading.”
“Globes”: Did Irvin Kessler provide the funding?
Gildor: Irvin Kessler supported me initially, as a key Chicago commodities trader. He is still one of the best traders in the world, and I learned most of the profession from him. In 1995, I reconnected with him to found Arbitrade. By the way, I tried to raise the money in Israel to found the company, but was unsuccessful. We didn’t need to raise a lot of money, since building the company’s computer system cost only $1 million, and I was the chief programmer, with a staff of two other people.
“We posted a $6 million profit on a $1 million investment in the first year. The software provided market players with fast, accurate values for options trading. In fact, we earned a profit of $1 per $100,000 of trading, and there were only two other companies in the sector that were less computerized and mathematically oriented. That’s how we succeeded.”
Was $460 million a good price for Arbitrade?
“The price was fair. We’re talking about a profitable firm, not a high-tech company based on potential and a dream. Arbitrade posted a pre-tax profit of $40 million, so if you deduct taxes and multiply the amount by the standard multiple of 12 for that kind of company, we obtained a fair price. Unlike high-tech companies, we weren’t trading with three-digit multiples, because financial companies are conservative. I had a 30% share in Arbitrade, so you can figure out how much I earned.”
Under the agreement, you agreed to work for Knight Securities, but soon left. Why?
“Correct. I began working for Knight and soon left, because I wasn’t realizing my potential there, since Knight didn’t accept my philosophy. I’m a great believer in computers and thought Knight didn’t focus enough on computerized trading. Knight focused more on human capital, and since I didn’t think that was my expertise to try to change and influence things from inside, I left the company to work independently. I still have a non-competition agreement with Knight in certain fields, especially in technical matters for stock trading.”
Was the decision to quit right, in light of the Knight scandal?
“I don’t evaluate my decisions retrospectively. I haven’t been with Knight since 2000, so I cannot comment on what happened there after I left. I now mainly trade with my own money, often on European exchanges.”
one-man venture capital
After leaving Knight, Gildor founded a private investment arm, Gildor Investments, to seek out new opportunities for high-tech investments. “I wanted to invest in start-ups, but I don’t think there's been serious investment potential in the past year, so I haven’t invested,” he says.
Nevertheless, Israeli venture capitalists got to know Gildor as a serial investor when it was easy to profit on investments at the start of the venture capital boom of the late 1990s. At the time, Gildor had several exits in successful companies.
His best-known exit was Medinol, earning $6 million by 1994, thanks to his acquaintance with Kobi Richter. He was also linked with Metalink (Nasdaq: MTLK), Accord Networks (Nasdaq: ACCD), Creo Products (Nasdaq: CREO) and Ceragon Networks (Nasdaq: CRNT). “I made most of my investments in Israeli start-ups before 1997, when there was little venture capital activity in Israel,” says Gildor.
Why did you decide to invest?
“I was lucky with my investments, apparently, because I immediately liked the ideas of all the companies that approached me. However, the wisdom is not just making the investment, but getting out in time. I’m no high-tech expert, but I think there are some quite good Israeli venture capital funds. On the other hand, I didn’t invest in the US high-tech market, because I had no advantage there. In Israel, I simply met people and had a relative advantage. If someone was to call me from Silicon Valley to ask for my money, he’s probably not worth investing in. Things work differently in Israel.”
Why did you stop investing in Israel?
“A lot of money flowed into Israel with the high-tech boom, and the venture capital funds had a lot of experience in the sector. Therefore, anyone who approached me after already approaching the funds wasn’t worth investing in. The funds analytical ability to determine the feasibility of investments is better than mine.”
But there are now many opportunities in the market. Why don’t you invest now?
“You know what? I’m now looking at quite a few Israeli companies and I might invest inthem"
Are there any fields you’d recommend Israeli companies to focus on?
“For years, I worked only in options, but it was so boring, I began working in venture capital, too. It’s now much harder to invest in Israel than in 1997. I simply don’t know enough about the Israeli market to give advice, but I’ve begun looking at some interesting companies. In 1997, the market was steadily rising and it was easier to realize investments. You’ve written about enough companies that weren’t so good, but which were acquired at fantastic prices.”
Which investments are you proud of?
“At the time, I was proud of Chiaro Networks , because I founded it. I now think Chiaro will be the company that raised the most money, but won’t succeed. I still have major stake in Chiaro. Many leading funds convinced the company to go in a certain direction, while I thought it should go another way, so I haven’t made follow-up investments recently, diluting my stake to a few percent.”
Was Medinol a very successful investment in the end?
“I invested money, but no effort, in Medinol. It was all thanks to my acquaintance with Kobi Richter. I met him in the Israel Air Force, when he was a reserve pilot in my unit, and my trainer in the Kfir squadron. At the time, Kobi’s partner in Medinol wanted to buy an apartment, so I bought a stake in the company in 1993. I sold my stake to Kobi year later for just over $6 million. Kobi is a very interesting and talented man, but I simply don’t understand enough about stents to stay and invest in the company.”
Is Israeli high-tech properly grounded?
“The US economy is growing, even though Nasdaq plunged 80%. One reason is that it does not only consist of technology start-ups, but has many other sectors. I therefore think it’s wrong for Israel to consider the economy to consist only of high-tech investments. Israel has tourism and banking, and they are in trouble now. If you ask me whether foreigners will invest in Israel again, I think the answer is yes, but I don’t think that will bring the economy out of its crisis. Peace will revive the economy. The US market is very pro-Israel, but people think Israel is now a very risky place.”
Gildor concludes that he doesn’t understand high-tech enough. “You’re asking me a lot of questions about the sector as if I have words of wisdom, but I don’t. I don’t understand the sector enough. I was simply in the right place at the right time. I had the chance to invest in companies at the right time, but I have no economic or industrial expertise.”
The options plague
”It was no wonder US managers were too tempted to raise share prices so high. They simply lied in order to increase their personal reward,” says Gildor.
Gildor knows accountancy and finance well. In the wake of the WorldCom scandal, Gildor says there is a silver lining. Together with other accounting experts, Gildor recently published a series of articles criticizing accounting practices, and has been cited by “The Wall Street Journal”.
What’s your take on the situation? What caused the scandals?
“I think scandals like WorldCom were caused by the plague affecting most US companies that weakened boards of directors by over-compensating them for their work, and the compensation was directly linked to profits. In the 1980s, there was no link between executive pay and company performance, so executives flew on private jets and lived the good life, just like in the movie ‘Wall Street’.
“As the result of unprofessional and uncaring management, companies changed to other compensation methods, giving executives too many options. Executives now had a personal interest to raise the company’s share price. The temptation was too great, and so they lied. Also, most companies were unprofitable in recent years, because people dealt with dreams, rather than real business plans. The only method of payments was with shares, both for employees and acquisitions. It’s no wonder executives were tempted to raise the share price so high and simply lied, in order to increase their personal reward.”
Can we expect a wave of scandals in Israel?
“Israel has an advantage over the US, because high-tech is mostly managed by venture capital funds that take care that boards of directors are very strong and tough. There is almost no chance for accountancy scandals in Israel. Venture capital has many disadvantages, but one of their clear advantages of this type of investment is that a case like WorldCom can’t happen in Israel, or rather more accurately, the chances are very low. This is actually proof why it’s worthwhile to invest in venture capital funds, where there is virtually no fraud. By the way, I expect that WorldCom won’t be the last scandal. I’m certain that the US market can expect to suffer from a series of further scandals.”
Published by Globes [online] - www.globes.co.il - on July 1, 2002