The extensive layoffs at Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) in Israel initiated by a recently arrived foreign CEO are raising the question of to what extent Teva is still an Israeli company. When late Teva CEO Eli Hurvitz began Teva's efforts to expand into the global market, he was already thinking ahead by supplying the company with a poison pill designed to prevent the company from abandoning its activity in Israel. The question now, however, is whether the poison pills are preserving the company's Israeli character, or whether they have wound up poisoning Teva itself.
After many years of dominating the leading indices on the Tel Aviv Stock Exchange (TASE), Teva has now fallen to second place on the Tel Aviv 35 Index, even after the TASE artificially increased Teva's weight on the index in order to avoid a shock to the indices. Teva is no longer considered the "people's share." It is no longer a particularly safe investment or a source of pride for an Israeli who holds it; it is just like any other company and any other share. 90% of Teva's shares are not held by Israelis. Of the remaining 10%, the founding families own half. The public, through Israeli investment institutions, holds only 5% with a current value of a mere $800 million.
The proportion of Israeli employees in Teva's workforce is another element of its Israeli character. As of the end of November, Teva had 6,800 Israel employees, 12% of its 57,000 total. The acquisition of Actavis added 14,000 employees to the company, of whom almost none were Israelis. Since 2011, the number of Teva's Israeli employees has remained virtually constant at 6,900, while its total workforce has increased by 16%. If the company's cutbacks go through, reducing the number of its employees by 3,000 in Israel and by 10,000 worldwide, the proportion of Israeli employees will drop to 8%.
The state of Teva's management is also changing. Kare Schultz is Teva's first CEO with no built-in sentiment for Israel. Jeremy Levin, who was criticized for bringing foreign habits with him and ending cooperation with local startups, was nevertheless a Jewish lover of Israel, who immediately moved to Israel and began learning Hebrew after getting the job. Even former chairperson Phillip Frost, who was regarded as an "anti-Israeli force," was a Jew who was active in Israel, and the company he controlled, Opko Health Inc. (NYSE: OPK; TASE: OPK), was also listed on the Tel Aviv Stock Exchange (TASE).
Today, Teva chairperson Sol Barer is a Jew who did a lot for Israel's medical industry even before his appointment at Teva, but he has strong connections in the international pharma market, and Schultz lacks any affinity for Israel, as his cold manner makes absolutely clear. The names of Histadrut (General Federation of Labor in Israel) chairperson Avi Nissenkorn and MK Shelly Yachimovich (Zionist Union) mean nothing to him. The company's articles of association require him to live in Israel, and he is indeed spending most of his time here since his appointment, and has taken practical steps to move his residence and his wife to Israel, but he is moving to Israel because of his job at Teva, not for love of Israel.
After the period of Frost and Levin, the Israeli board of directors wanted to preserve the company's Israeli character at all costs. That was one of the reasons why Erez Vigodman was selected as CEO. The market also welcomed his being an Israeli, assuming that this would prevent the friction on the board of directors that harmed the company's functioning during the Frost-Levin period.
When it came time to choose a chairperson, Amir Elstein, from one of Teva's founding families, sought the appointment, but Frost prevented it. Elstein proposed a number of other possible chairpersons from the group identified with him. Finally, after many votes, Yitzhak Peterburg was selected as a candidate acceptable to both sides. For a while, it appeared that Teva had returned to the golden path of its Israeli management, until that management got the company into its current plight.
Today, after Peterburg's resignation yesterday, Teva's board of directors includes six Israeli directors: Elstein, Galia Maor, Chemi Peres, Dan Suesskind, Jean-Michel Halfon and Murray Goldberg, who live in Israel.
Including Shultz himself, who was appointed to the board of directors and is moving to Israel, seven of the 13 directors live in Israel, four of whom are regarded as part of the "Israeli group" that formerly dominated the company and guarded its Israeli character (on the other hand, this group was also accused of keeping the company provincial and uninvolved in the global pharma market).
Teva's articles of association state that a majority of the board of directors must live in Israel, and the current board of directors barely fulfills this condition. The Israeli directors have the most seniority, and they will therefore be the first in line for a revote on their candidacy. This event will probably have a significant effect on the company's character.
The articles of association states that Teva's management center will remain in Israel, unless a 75% majority of the board of directors decides to move it away from Israel. An absolute majority of the current directors are Israelis or Jews with an affinity for Israel, and it is therefore unlikely that such an official decision will be taken. Unofficially, however, the company is losing its hold in Israel.
It all depends on Schultz
In a situation in which the vast majority of the investors are foreigners, and Teva lacks confidence and has a large debt, it is at constant risk of a hostile takeover. The layoffs are designed to preserve its independence, but at the price of undermining its Israeli base.
The restructuring being led by Schultz is not just layoffs. It is a drastic change in the company's structure, a massive cut in its management backbone, a fundamental shaking of Teva's old power structures. In such a measure, the focus of power can move to another place, even if the official headquarters continues to be in Israel.
"In effect, Teva has already been sold," a source close to the company says. "It was unintentionally sold when it assumed the big debt. Now everything is in the CEO's hands."
Schultz has already conducted a similar restructuring, albeit on a slightly smaller scale at Lundbeck, where he was responsible for laying off 1,000 employees - 17% of its workforce. In this process, Lundbeck remained completely Danish, like Novo Nordisk, where Schultz rose almost to the position of CEO before moving to Lundbeck. It may be that even though he is not an Israeli, Schultz realizes the significance of the Teva's connection with the people, and will refrain from taking it in a foreign direction.
Published by Globes [online], Israel Business News - www.globes-online.com - on December 13, 2017
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