Maybe because everything in Israel is so small and everybody knows everyone else, or maybe it's just coincidence, but the following tale might teach us how small things really are here; how everything stays in the family; and how decisions are made, that is to say, sometimes not altogether on a wholly rational or purely business basis.
So here it is. Sources inform “Globes” that start-up Cash-U Mobile Technologies has been forced to merge with another start-up Niragongo Technologies. Both companies, neither of which is in the best of shape, have been undergoing advanced merger proceedings in recent weeks as part of a struggle for survival. Sources close to the deal say a preliminary agreement has already been signed and that the final agreement will be signed when legal examinations have been completed in the coming weeks. Although a final agreement is still unsigned, Niragongo employees have already moved from the company's office in Herzliya Pituah to Cash-U's office in Netanya. Senior Niragongo managers have already been appointed to key posts in Cash-U: president and CTO Danny Kalish is now Cash-U CTO, and executive VP Yaron Kalish is now Cash-U VP business development.
What's the connection, you might ask? First of all, both companies develop wireless technologies. But there is another significant link: one of Cash-U's investors is prestigious Pitango Venture Capital, and one of its directors is Pitango managing director Rami Kalish, one of Israel's top venture capitalists alongside Pitango managing director Chemi Peres; and as you might already suspect, Danny and Yaron Kalish are Rami's brothers.
Niragongo has been backed since it was founded by Carmel Ventures, controlled by Aharon and Shlomo Dovrat. Other investors are Time Warner Ventures and Pitango's management company. In other words, Pitango managing directors, including Rami Kalish, privately invested about $1 million in Niragongo when it was founded. If Niragongo is closed, their personal investment would be wiped out, aside from leaving Rami Kalish's two brothers unemployed.
Merger as a success story
Top industry sources claim that Niragongo was never a great success. They say that if its executives had not been close to Israel's top venture capitalists, it would have shut down, or at best, had its intellectual property acquired for a few hundred thousand dollars. Instead of this dismal end, it will merge with Cash-U for a reported company value of $3-5 million.
In effect, the merger will save Niragongo from closure and bring new investors, such as Carmel Ventures, to Cash-U. The result is that the two Israeli funds that invested in the two companies - Pitango and Carmel Ventures - which are both now raising new funds, will not have to write off their investments.
Sources close to the deal said in response that the malicious assertions were made by mud-slingers trying to sully the pending merger, regardless of personal investments and personal ties. These sources agree that Niragongo has had some tough years, but that it has been recovering lately. The company signed some contracts and important strategic agreements, and has even had some acquisition offers for a good price.
Sources inform “Globes” that Carmel Ventures will invest in the merged company as part of the merger agreement. "Globes" reported in May that Cash-U was about to close a $15 million third financing round. Carmel Ventures, the main investor in Niragongo, is due to participate in the round alongside Cash-U's existing investors. Cash-U's existing investors have sought other investors, without much success so far. It seems that the Cash-U-Niragongo merger is one of the conditions for obtaining additional financing for Cash-U.
Cash-U, a developer of games and entertainment systems for cellular networks, has had to cope with hard times in recent years, common to all Israeli start-ups in its field. It seemed recently that Cash-U had survived the crisis and was about to get a boost from a capital injection. Cash-U president and CEO Gabby Levy took up his post after 15 years in various positions at Amdocs (NYSE: DOX), including his final post as president of Amdocs billing division. In early May, he declined to comment on the financing round, but told "Globes", "We're raising capital. Our previous investors support and help us, but nothing has been closed yet."
Cash-U has benefited from investors who supported it during the lean years, including Pitango, Intel Capital and Greylock, represented in Israel by Moshe Mor.
Reinforcements
In response to the report, Rami Kalish, a Cash-U's director on behalf of Pitango, said in May, "Cash-U has been an industry leader since it was founded. Despite the tough times, it has grown every year. Few employees were laid off in streamlining measures. Cash-U has never been a problem company."
Kalish added that Levy's appointment as CEO was made about the same time as the deliberations about the new financing round.
Niragongo, founded in late 1999 by Danny and Yaron Kalish, develops infrastructure for transmitting data over wireless networks. As CTO, Danny Kalish, is considered one of Israel's leading Java experts. Before joining his brother to found Niragongo, he cofounded Internet consultancy firm Interbit & Co. He served in an IDF intelligence unit for seven years as manger of software projects. He has a degree in computer science from the Technion - Israel Institute of Technology and an MBA from Tel Aviv University.
As Niragongo executive VP, Yaron Kalish was responsible for the company's vision and business strategy. He is a lawyer with a background in corporate and trade law.
Pitango declined to comment about the merger of the two companies, Cash-U's expected financing round, that Pitango's management company was an investor in Niragongo, or about the family ties.
Carmel Ventures stated in response that Niragongo had made considerable progress in recent months, signed contracts worth over $1 million, and strategic cooperation agreements. "Carmel Ventures has received several business offers for Niragongo, but as a fund that believes in building leading companies in their fields, we decided on the alternative of a potential merger between Niragongo and Cash-U. Carmel Ventures believes that a merger between the two companies, with the support of the investing funds, including Greylock of the US, will create a significant and leading wireless player. The term sheet that has been signed means the deal will be closed when the examination procedures have been completed."
Levy confirmed yesterday that the two companies had signed a preliminary agreement. "Cash-U's board of directors has given us approval for moving forward on the examinations toward a merger of the two companies. We believe that the merger will move the two companies faster and better toward our goals. Niragongo has recently signed important contracts and it appears that a merger with Cash-U will move us forward, enabling us to expand the technologies and products we offer our customers."
Danny and Yaron Kalish were unavailable for comment.
Published by Globes [online] - www.globes.co.il - on July 5, 2004