What is common to Israel, Australia and Norway?

Stanley Fischer raised interest rates in Israel for the second time in relatively quick succession today. After the 0.25% rise, they now stand at 1.25%.

The only other countries that have managed to raise rates are Norway and Australia. Unlike Israel, Australia and Norway are resource rich countries and have seen increased economic activity based on the slowly emerging global pick up in demand, which has been reflected in commodity prices recently.

Most of you will know the famous joke about biblical Moses that he took the wrong turn after the exodus from Egypt bringing the Children of Israel to Israel, rather than the oil rich countries surrounding. As a result, Israel is sadly not rich in physical resources.

We must then ask the question why Israel is feeling the need to increase rates well ahead of the major developed economies.

The most obvious reason for this is the improving state of the domestic economy and what Mr Fischer is seeing which is rising asset prices (equities, bonds and real estate). It's clear that he does not want to squander the advantage created for Israel by avoiding the meltdown that has become so prevalent in other economies, and protect Israel from future asset bubbles.

All of this sounds like good news, and indeed reflects a generally positive outlook for the Israel economy etc.

There are of course some downsides to this. The main effect of increasing interest rates will inevitably be a further strengthening of the shekel against the dollar and probably also Sterling and the Euro. At a time when the exporters (predominantly technology based companies) are trying to restore growth into overseas markets this will come as a blow, increasing relative cost of the workforce at home, and reducing competitiveness abroad.

This is the reality of life and my advice to managers within our portfolio and others that we speak to is to adjust, as we do not see a weaker shekel over the near or medium term.

This means bringing productivity in line with the prevailing power of the shekel to protect Israel's competitiveness as an exporter.

Whilst the unions and some industrialists may complain and call for government intervention (In other words money and subsidies) this is a nice problem to have and we should be thankful that we are not caught in the trap of zero interest rates, with little or no prospect of real economic growth.

Valuation Fundamentals

I have had the feeling for quite some time that there has been over-shooting in the equity markets over the last several months, and in particular the US markets, given the fragility of the recovery.

It is very hard to see in the financial press many people that are worried about this, which is why I was happy to see the piece by Lex in the Financial Times.

If you have seen thoughtful articles on this issue I would love to know about them.

Intuit Sells Division to Private Equity for $128m

I note that Intuit has decided to sell off a small division (2% of group turnover) with fairly low operating margins compared to the rest of the business. I think that they have received a good price for this asset, at >30x operating profit, and 1.7 x revenues.

I am sure that this signals a trend that we will see as the larger tech players continue to react to the changing macro environment and give more focus to the core and successful parts of the business.

It also sends an important message to the rest of the group divisions - "start making the grade from a operating point of view, or you may find yourself with new owners." I think that this is a great way to motivate people to the key parameters that drive their business, whether that be revenue growth or focus on the bottom line (or indeed both).

To the best of my knowledge Sage has acquired well over 100 companies but has never divested anything of size.

I wonder if there are hiddne pieces of the business that could be considered as non-core, either from the perspective of operating metrics and margins, or indeed products that are not contributing to growth. The other area that could be interesting to look at for divesting might be operating divisions in non-core geographies.

Until Sage takes the decision to divest something, everyone at Sage will continue to live under the impression that being acquired by Sage means you are getting into a family that you can stay with until you retire. Maybe its time to look at that again. This does not mean that Sage is anything but a well run company, nor does it mean that they can't continue with the traditional acquisition model. I would see this as a sign of strength and maturity rather than perceived weakness!

Given the pricing that Intuit has received in this deal it would be interesting to see whether Sage could increase shareholder value by identifying and then divesting some non-core assets out of the business.

Can this team fix the problems?

When the US (and the world) is faced with arguably unprecedented economic challenges, who better to fix the problem - public sector government officials or people with extensive private sector business experience? Check out this chart below:

It examines the prior private sector experience of the cabinet officials since 1900 that one might expect a president to turn to in seeking advice about helping the economy. It includes secretaries of State, Commerce, Treasury, Agriculture, Interior, Labor, Transportation, Energy, and Housing & Urban Development, and excludes Postmaster General, Navy, War, Health, Education & Welfare, Veterans Affairs, and Homeland Security—432 cabinet members in all.

Analyze the successful economic presidents from the US past. And look at the remarkable contrast with Obama's cabinet makeup. Is he headed for success or doomed to failure?

Thoughts?

More exits for the PE industry in Israel: 2 big and 2 small

IBM bought Guardium for $225m. Guardium raised more than $20m from a few of the smaller Israeli VCs (Ascent, Veritas, Cedar, StageOne)

Broadcom acquired Dune Networks for $180m. Dune raised about $50m from larger VCs (Pitango, Evergreen, JVP, USVP, Alta Berkeley, Aurum SBC)

NICE acquired Orsus for $22m. Orsus raised more than $70m in VC funding, mostly prior to 2001.

CA is rumored to be acquiring Oblicore for $20m. Oblicore raised over $20m, mostly from JVP and Concord VC.

HP buys 3COM...

HP recently announced that it has agreed to buy 3Com for $7.90 per share, or approximately $2.7 billion cash. In 2007, 3Com agreed to sell itself for just $5.30 per share, or $2.2 billion, to Bain Capital Partners and China’s Huawei Technologies. That transaction got held up and subsequently stopped because of U.S. government concerns about Huawei’s involvement. This is a 22% appreciation during one of the worst economic periods in modern times. Not bad.

3com's stock has steadily improved over the pat few years. It is not because of the company's growth numbers. But I believe it is based on its improvement on its gross margins - based largely on moving production and logistics to China.

The graph to the left compares the gross margins of 3Com, HP and Cisco. With 3Com's significant improvement from 40% to 57% in four years, it seems that HP now has its sights on Cisco's core offering of network switches, routers, wireless access points and controllers, IP voice systems, and intrusion prevention systems for enterprise and small-medium businesses.

HP has 100 times more revenue than 3Com and only 50 times the market cap. This again is probably based on gross margins. Therefore, this transaction will have 2 major affects on HP:

1) It will be nicely accretive

2) It will enable HP's world class sales network to have a complementary new portfolio of products to its core customer base. Enterprises and SMEs will be able to enjoy a broader HP offering and pass on paying Cisco's premiums.

When looking at Israel, HP has a large presence here. It has been based largely on acquisitions - including Indigo, Scitex, Nur, and Mercury. This 3Com acquisition will open many further complementary acquisition targets in Israel.

I believe networking companies that have historically been built to be acquired by Cisco (or bust) should be thinking more about HP now.

So what is Cisco up to? Well, it seems that Cisco has been aggressively looking into the more consumer markets. It acquired Pure Digital and there are rumors that they are looking at Jajah. I guess it is hard to match Cisco's expectations for growth and margins in the markets that they are already active in.

In short, I believe this could be a very good thing for Israel and I would predict that HP will be 2x its size in Israel within 5 years.

Congrats to IDIT and PNMsoft in the FAST 50

Wanted to congratulate IDIT and PNMsoft on being included once again into Deloitte's Fast 50 awards.

For those that do not know: IDIT is a leading vendor of enterprise software systems to the global insurance industry and is lead by its CEO Yoel Amir, and PNMsoft is a leading vendor of Microsoft based BPM solutions, and is lead by its founder and CEO Gal Horvitz.

In particular I wanted to thank all of the employees and management of both companies for their continued hard work. You continue to make us at Goldrock proud of your achievements!

Looking forward to another year of growth!

Solel brings Success to Bet Shemesh!

I don't have a great deal of knowledge when it comes to solar power, or cleantech in general. Nevertheless I wanted to blog about this $418 million acquisition because of the story and location of the business.

Solel is a major employer in our region and the main excitement is that Bet Shemesh (where I live and work) is in the news for all the right reasons.

Solel and its founder Avi Brenmiller have been developing their technologies and growing this business over a decade and a half and have managed to successfully build a business today turning over more than $100 million. This is a fantastic achievement which has now been recognised by the worlds leading renewables engineering company, Siemens.

This blog is to take the opportunity of congratulating Avi and his team on this achievement, and for bringing this success to the neighbourhood!

The Next Bubble?

Several years ago you may recall that following the last bust (the dotcom variety) there was a period of very low interest rates (thanks to Mr Greenspan) and as a result it was somewhat difficult to find investments that would generate a reasonable return.

Fortunately I had money to invest at the time, and thus myself and my partner went hunting assets classes that might provide such a return, and if possible in a non-correlated manner.

One of the areas we looked at was Viaticals. This is the general term for buying second hand life policies, typically from old people. The main reason why this business exists is to allow people to enjoy the benefits of the policy before they die, typically using it for health or residential care.

Due to the nature of the discount offered on the purchase, if managed correctly they can potentially offer above average returns over time, as the people pass on thus releasing the full value of the policy.

Of course the general rules apply:

• their are no free lunches (risk/reward)
  
• if it is too good to be true, then it probably is (this seems easy!)
• read the small print (and then the REALLY small print)

In the end we passed on the idea, partly as we felt uncomfortable with the seedier end of this business which has a poor reputation, and also because the actual mechanism for making money is not as easy as it first appears. Risks include (but are not limited to):

• the original policy holders living too long, during which time you have to keep paying the premium, hence eating away at your potential return, and of course an increased holding time also reduces the IRR;
• ultimate beneficiaries suing the secondary purchaser when the original holder dies.

I read with interest an article in the NY Times about bankers sitting around figuring out the next way they can make money from securitizations (as if we have not had enough) and lo and behold they are talking about the securitization of life insurance policies, to be packaged and sold off to the unsuspecting investing community.

When they come knocking on the door to offer this, remember that you read my blog in September 2009. I am not suggesting that you should not buy, just make sure that you do not fall again into the trap that caught us out last time with CDO's CLO's etc.

They will undoubtedly tell you that the product:

• is backed by a major financial institution
• has a AAA credit rating, perhaps backed by a different equally solid financial institution (like AIG or Lehman Bros)
• Historic defaults show that there is little or no real risk to the equity

And I could probably go on!

Happy hunting!

5 Notes about Lev Leviev

1. All the press in Israel were "shocked and surprised" by the news that Leviev-controlled Africa Israel has admitted that it cannot see its way to paying off all of its debt and will need to restructure. The only real surprise is how long it has taken for them to admit it!
2. Of the debt mountain that Africa Israel has built up, the vast majority has been to the institutions who have blindly subscribed for its bonds during the bubble years, without worrying too much about the underlying ability of the company to repay.
3. The banks have a relatively minor exposure, thus there is no dramatic impact on the stability of the financial system. Within this amount, it is worthwhile noting that Bank Hapoalim has a significantly larger exposure than Bank Leumi - is this bad luck, or bad risk management? Given the events of the last 18 months, it would look more like the latter than the former.
4. It is crucial that the bond holders act firmly with Leviev, otherwise the genuine ranking of bonds in "tycoon" controlled companies - like Leviev, Tshuva, Fishman etc will be called into question, hence undermining future confidence in the corporate bond market.
5. How comforting to know that the Israeli market can withstand problems at one of its biggest companies and bond issuers without overall market panic setting it. This is a crucial period for the markets, during which it is important that moral hazard is not created by weak treatment of failing management teams.

I have a great deal of admiration for all of the "big guns" of the Israeli capital markets. They are not afraid to travel far and wide to seek out investment opportunities. This does not mean that our pension fund investors blindly follow them everywhere they go, without creating the crucial distinction between risk levels at different companies.

Finally on a personal note. Those of you that know me well, know that one of my hobby horses is conflict of interest. Whilst entrepreneurs like Leviev and Tshuva have both public and private entities doing substantially the same thing, the public's money should not be used to fund their public entities, as there is no real protection against what is an obvious and in-built conflict of interest. Our financial institutions must protect the public from this situation if the Tel Aviv capital markets seek to continue its maturing process whilst trying to attract the best investors from around the world.

Krugman vs Ferguson

I was reading about the "Great Debate" between Nobel prize winner Paul Krugman, and Harvard Professor Nial Ferguson about the how the future looks and what the right course of action is for governments in order to secure a stable economic future for the world. This is just one example, I could of course have picked, Buffet, Soros, Rubini, Bill Gross and many others to describe the debate.

Those of you who know me, know well enough that I am no economist - indeed I have very little academic claim to fame. It will be no surprise to you to discover that I am not going to weigh in on this particular debate.

Then why, you my ask, I am writing about this at all!

The answer is simple.

At Goldrock we are in the business of backing management teams to execute on their growth plans. Management in a era of uncertainty is certainly more challenging than in "normal" times.

During my short military career as a humble tank driver in the Israeli army we were taught a very important lesson in risk management. Loosely translated "when you are in doubt, then have no doubt."

This is broadly helpful when only risk is to be considered as it will keep you away from making some risky blunders, neutralizing the uncertainty, which is such an important element in risk.

However, this is not so helpful when managers and entrepreneurs are being asked to make decisions in the current uncertain environment that could have a long-term affect on their future growth prospects, which is, after all, why they are in business.

My take, for what its worth: Whilst Krugman and Ferguson are so far apart in their analysis and economic conclusions, it is probably too early to simply ignore the risk which still abounds in markets around the world, and that risk management will be a tool whose importance will be over-weighted for some time to come.

We have seen some improvement in the trading environments for our portfolio companies, but I think that the reality of this is not as rosy as the reaction of the world's stock markets.

As a result we ask managers out there to have a little more patience. We have seen some of the fog that has shrouded growth prospects lift in recent months, but we think only far enough as to see a few paces ahead. We will need some more robust indicators of economic improvement before feeling confident about the return of serious growth prospects to the economies of the world.

As a manager of money, rather than a manager of businesses I have the luxury to be able to sit on the sidelines for a while, and whilst we have seen the investing environment improve, we still retain a cautious stance.

Micro Focus "Migration" Challenge

I am a keen reader of TechMarketView and have been a fan of the Holway view of the world for many years.

Philip Carnelley made an interesting comment yesterday on the integration challenge ahead for Micro Focus having made recent acquisitions that increase turnover by 55%, just over Holway's rule of thumb which holds that companies acquiring businesses over 50% of their size tend to be high risk acquisitions.

The thought that occurred to me was that the "migration" issue that Philip referred to is the post merger integration of the two acquisitions, whereas ir could just as easily be the focus on the Borland and Compuware deals will take the focus away from their legacy migration business, and whether this is a strategic decision to diversify, or whether these skills compliment this part of the business.

Migration and modernisation have long been seen as the plumbing and rather dirty end of the IT business. In the current environment, and indeed as we go forward with the backdrop of weak economic growth the old Yorkshire adage of "where there's muck there's brass" might apply to this segment of the business.

Sage Twitters it Right!

You may remember some time ago I blogged (Be Smart Not Right!) on the handling of the Kashflow PR attacks on Sage, and that I felt that perhaps the Sage guys were missing a trick in getting too "formal" with Duane.

Well, I take my hat off to them and in particular to Paul Stobart, UK MD of Sage, by cutting through the BS and communicating directly and in real time with their channel partners and customers through Twitter yesterday.

There are those that might claim that Sage's partner base is too large, and indeed there may be even those over the years that might have wanted to take the knife to cut it down to a more manageable size. Right or wrong, this sort of initiative allows the company to directly interact with the more active and lively parts of the channel, which is what Sage clearly needs to do in order to stay at the forefront as a lead vendor in the SME market.

REAL US Unemployment

I am sure many of you have seen and/or heard analyses that argue that the US unemployment rate is really higher than reported, due to a number of factors. Here are a few bullets that use facts (that I got from WSJ) to put things in perspective:

Where are we today:

• Current rate = 9.5% unemployment
• 7.2 million jobs lost since the start of the recession
• The cumulative job losses over the last six months have been greater than for any other half year period since World War II
• The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion

That is bad. but it may be worse than it sounds. Now, let's increase the 9.5% to a more "real" number:

• 1.4 million people wanted or were available for work in the last 12 months but were not counted, since they may not have sent out a resume in the past 4 weeks - this adds about 0.8%.
• The number of workers taking part-time jobs instead of their sought after full time jobs has doubled to about nine million, or 5.8% of the work force. Taking 50% of this, adds 2.9%.
• The average work week in the private sector (~80% of the work force) is now 33 hours. Almost one hour less than prior to the recession. (This is driven by things like production capacity in the US is dropped to an average of 65%.) This is tantemount to 3.3 million fewer employees - an additional (quasi) 2.2% for unemployment.
• Alltogether, one could conceptually add about 6% to the 9.5% number - bringing it to well over 15%!!

So are there signs of improvement? Not looking good. And this is based on the uniqueness of this recession.

• First of all, the average length of official unemployment increased to 24.5 weeks, the longest since government began tracking this data in 1948.
• Second, the number of long-term unemployed (i.e., for 27 weeks or more) has now jumped to 4.4 million, an all-time high.
• Third, unemployment has doubled to 9.5% from 4.8% in only 16 months; very fast.

Why has all this happened? What is so unique?

I believe that in this recession, the employee cutbacks are not simply cutbacks. Normally, companies do cutbacks, and then rehire once the economy improves. The fire based on decisions taken earlier in the business cycle - to ensure earnings targets, etc.

But (if and) when economic activity picks up, (as quoted from the WSJ - ) "many unemployed workers looking for jobs once the recovery begins will discover that jobs as good as the ones they lost are almost impossible to find because many layoffs have been permanent. Instead of shrinking operations, companies have shut down whole business units or made sweeping structural changes in the way they conduct business."

Just look at two huge sectors and employers in the US - the auto sector and the financial sector. The US auto market is forever slashed across the sector's value chain, while the financial services companies have exited many parts of the world of finance - never to return.

So it seems that Americans and many other parts of the world have to rethink how to rebuild.

China - What are they saving up for?

I remember when I was a kid, I used to get a weekly allowance. I used to spend it as I wished. But when there was a specific reason, I would save my money towards the larger purchase. Like Nike Air Jordans, roller blades, etc.

So my question is simple. What is China saving up for? I fear the answer...

Twitter's moment? - cont

Richard Stacey has an interesting post titled Twitter is making and destroying history.

Twitter's moment?

I joined Twitter 6 weeks ago and, frankly, could not see the genius. My tweets were of the "sunny day, got bad heartburn" kind. The people I tracked provided nothing interesting. And so, I quickly gave up.

The aftermath of the Iranian election may end up being a watershed event, not only for Iranians but for the rest of the world too (emphasis on the "may"). This thing is unfolding hour by hour. And it turns out that the very best way to follow the event is on Twitter. So suddenly I am now finding myself checking Twitter every few hours and using it as a source of serious, real time information about a critical current event.

The 1991 Gulf War made CNN into the world's most important news source. Could the Iranian revolution (yes, please) of 2009 do the same for Twitter?

Salute to Stanley Fischer!

The Exception to the "Golden Rule" - He with the Gold Rules!

For the un-initiated there has been somewhat of a saga surrounding the position of Chairman of Bank Hapoalim, previously Israel's biggest bank.

The saga has seen a very public spat between the controlling shareholder of the Bank, Sheri Arison, and Stanley Fischer, Governor of the Bank of Israel.

The core of the argument has been about the suitability of its soon to be replaced Chairman; the direction that the bank has taken; and the governance employed to make those decisions during the last couple of years.

I am not a banking analyst, not an expert in bank regulation etc, but this is not the key.

Stanley Fischer has brought an enormous amount of credibility to the Israeli economy since being appointed in 2005, and is helping to steer Israel through the stormy waters of the global economic crisis.

Sheri Arison, about whom I have nothing particularly good or bad to say on a personal level, has clearly had a very strong difference of opinion with Fischer. She is part of the economic elite of Israel, which is popularly perceived as having too much economics way, in a way that creates significant imbalanaces within the economy to their advantage, and the great disadvantage of the rest of us.

During the campaign Arison went pretty low in her tactics, accusing Fisher and the Bank of Israel of McCarthyism and other conspiracies. In addition she went on to accuse him of corruption and lodge a complaint with the State Comptroller.

This was serious a error of judgment on Arison's part as the clear consensus (other than within the 10 richest families in Israel) is that Stanley is the straightest guy in town, who has done more than most to help navigate the country through the crisis.

Most importantly for Israel was Fischer's ability to stand firm against this onslaught. Had he not done so then it would surely have become open season on sensible independent regulators in the face of our business tycoons as they seek to apply the "Golden Rule" - he with the gold rules!

When I look at this in the context of Israel's overall position in the light of the global crisis, it gives me a high level of comfort that we are better placed than most developed (and many undeveloped economies) in that we are still have an independent, but strongly regulated banking industry that has not gone into meltdown during the last 18 months.

If the global crisis eases during the next few months, Israel is very well placed to take a strong advantage of the coming upturn.

ZenithSolar Goes Live!!

In addition to my role with Goldrock Capital, since March 2007 I have been the finance & strategy advisor to an early stage solar energy company called ZenithSolar. ZenithSolar has developed a very unique concentrated photovoltaic CPV system that provides both electricity and thermal energy at a combined system efficiency about 75%. Truly groundbreaking.

On Sunday, ZenithSolar launched its first commercial pilot at kibbutz Yavne. Shimon Peres - the president of Israel - spoke and had the honor of cutting the ribbon together with the children of some of ZenithSolar's key management. There were a number of other government officials there as well - including the ambassador of Australia (since the Co-Founder and CTO of ZenithSolar is Bob Whelan, hailing from Australia). 

The pilot consists of 32 - 11 sq. meter non-parabolic dishes that are each covered with more than 1,200 small mirror facets that each focus the sun's energy at on 10 centimeter squared high efficiency gallium arsenide (GaAs) solar cell module. Due to the extreme heat caused by the high concentration of the sun's energy onto the single module, the module is cooled with a closed loop water system that heats a hot water tank- consequently creating valuable hot water for various uses - which include domestic needs, washing, industrial processes, etc. 2 dishes together sit on top of a highly accurate 2-axis tracking system. This pilot is expected to generate between $75,000 and $100,000 of energy savings (both electricity and thermal) per year. This is thanks in part to the inflated rate of 2 shekels per kWh (about $0.50) that the Israel electric company must pay for each kWh that will be fed to the electricity grid. 

This is ground breaking on many levels. 

1) No other solar PV system in the world claims efficiencies beyond about 20% (claimed and delivered by SunPower). ZenithSolar is providing 75% - due to the system harnessing and utilizing the residual heat.

2) As an application - providing cogeneration (CHP) 100% clean energy to a residential gated community is probably the first of its kind on a global scale. 

3) This is the largest grid connected solar installation in Israel. 

4) Specifically in the CPV space, CPV has only had utility scale pilots in Arizona and Spain. This is possibly the first CPV pilot deployment to a REAL customer in the world. 

5) The corporate achievements reached by ZenithSolar - with the resources and manpower that has been available to them since its founding in 2006 - is truly astounding and I congratulate Roy Segev - the CEO, and the entire team on a job well done!

The future is very bright for ZenithSolar!

The video below is the introduction speech for ZenithSolar and President Shimon Peres (in Hebrew) by Prof. Ezri Tarazi. Ezri is leading product design and strategy at ZenithSolar. He is also the head of the industrial design Masters program at the elite Betzalel Institute in Jerusalem. He has been with the company since the founding and has been integral to its success. At 1:45 in the video, you can get a good look at the solar field. It looks fantastic!

The BIG News: Oracle (not IBM) Buys Sun!

Apropos to a previous post about the potential IBM / Sun transaction, instead Oracle was able to scoop up Sun following the breakdown of talks between Sun and IBM. So why did Oracle succeed and not IBM? What are the synergies? How will this affect the start-up / VC / PE world?

Rumors were that IBM could not complete the deal, since Sun wanted a hirer price. Price per share numbers that were mentioned ranged between $9-11 per share - about 100% premium at the time of the negotiations. Not too bad! But was it really price problems?

Oracle is paying $9.50 - within that range. So price could not have been the reason for the break down with IBM. So what happened? Here is my theory:

It seems that one of the main differences between Oracle and IBM (as an acquirer of Sun) is that IBM competes quite a bit more with Sun than Oracle. Oracle primarily deals with databases and software, while Sun is largely on the hardware and server infrastructure. IBM does both. When competitors combine - there is a lot more consolidation...and therefore more divisions shut down, more firing, etc.

With the Oracle / Sun combination - this can be a major change in the market - and create a real mammoth in the IT world. Oracle is buying new markets, products, customers, etc. Some may complement, some may not. This may enable Oracle to occupy a huge part of the IT infrastructure market, which may trickle into software sales for them as well.

In addition, with Oracle's history of successful large acquisitions (PeopleSoft, Siebel, BEA, etc.) and their subsequent integration processes, and IBM's history of smaller acquisitions - perhaps Sun chose the acquirer that would create more value to Sun - rather than just a higher price.

So I believe that Sun chose Oracle over IBM, not because of price, but because of the plans of the acquirer the day after the acquisition.

Is Mr Obama cramping your style?

Two examples from this week of the brave new world we live in:
1. A friend of mine here in Israel is looking to buy a new car. He told me "the best alternatives for me are a Crysler or a GM, but I'm not willing to buy either. Who knows if there will be parts or service for them in the future?"
2. My brother is a manager at a company selling medical software in the US (www.surgimate.com). The talk in his market is dominated by one question: "what products will meet the criteria for the Obama Administration's $19 billion e-medical records initiative?" Or in other words how do you get a slice of the $19 billion pie.

The control that the US Government now exerts over the economy is palpable. Not only in the pages of the financial press, but in the everyday decisions of consumers and managers.

But here's the rub.

The reason that the United States has been the engine of growth for the world economy over the last 60 years is that they have been the most entrepeneurial, most creative and most market driven of the large world economies. But when vast parts of the world economy makes decisions based not on whether a product is good or bad, or whether there is real demand for a product or service, but based on what a bureaucrat, howefver skilled, decides, then markets are warped. The tangled net now being cast by Washington over business is about to cramp the very entrepeneurial spirit which is the only way out of this economic mess for the US and the world.

TARP for Dummies

Quick post:
Very funny TARP for dummies from PEhub http://tinyurl.com/cj7rmv

IBM buying Sun - good or bad for business?

There is an interesting article in the WSJ about the potential acquisition of Sun Microsystems by IBM. There are a few issues that the WSJ did not address that are direct affects of this transaction to the venture capital and IT oriented private equity markets.

1) One less acquirer -

There is only a handful of large tech oriented companies in the world that are active acquirers of tech businesses and pure innovation. Sun Microsystems is one of them. They did more than 20 transactions in the 1990s and more than 20 in this decade. Sun has not been such an active acquirer of Israeli tech (like IBM), but they acquired Aduva and they have a nice sized R&D center in Herzeliya. The VC / PE model is based on M&A exits to provide financial returns. More than 80% of exits are M&A. The M&A market will shrink after this acquisition. This handful of companies in the world understand that in order to sustain market leadership and in order to grow shareholder value is through organic AND inorganic / strategic growth.

Parenthetically, most large Israeli companies do not realize that acquisitions are necessary for value creation. Case in point, lets quickly explore arguably the star of the Israeli tech scent - Check Point. They are the founder of firewalls. Great internal innovation. Selling software at close to 100% gross margins and 40%+ net margins consistently. Sitting on a huge bag of cash. And only making small or distressed acquisitions - not strategic acquisitions. Growth is hurting and shareholder value is relatively low, compared to other active acquirers in the security software space - companies with less cash and worse operating performance (see MFE, SYMC, etc). But value is forward thinking. Forward thinking = longer term and strategic thinking, not just tactical. Therefore, acqusitions are key for large tech companies to grow.

2) Sun has more than 30,000 employees

"Consolidation" and "efficiencies" are code words for firing and shutting down units. This has good and bad implications. Mostly good for our industry, since it forces good people to enter the work force - where many will enter in start up world. This generates the recycling model, allowing for sound investment opportunities. This is true for Israel as well, where IBM has been and will be an active acquirer of Israeli tech. They have subsequently created R&D divisions across the country - Jerusalem (iPhrase, Unicorn, etc), Haifa (historical applied research center), and Tel Aviv (XIV, Diligent, etc).

3) BPM

Lastly, a bit more closer to home, within some period of time after the acquisition, there will be one less BPM player competing in the market (disclosure: Goldrock Capital is an investor in PNMsoft). Sun acquired SeeBeyond and is now called Sun Java Composite Application Platform Suite. And IBM made BPM acquisitions with FileNet and ILOG. It will also take some integration time for IBM and Sun, and may set them back in the market a bit. We shall see!

No more need for leverage in the Private Equity business?

Is seems that for the past year, a trend has been developing in private equity. Non leveraged buyouts. deals are harder to find. credit is harder to secure. LPs are 'unsure' if they want funds to call capital. So the funds are getting creative to be able to continue to invest. The funds must pay much cheaper pricing and have a story that can convince LPs that the upside is huge. Risk, or course, is higher, since the funds have to deploy much more capital per investment, and the value of the asset must significantly increase to exit with a profit. In the old days, LBOs could make serious returns without creating too much value - since profitable businesses would be paying off the debt, paying less corporate tax and within a short period of time - paying off the debt while the fund owned the company. The funds could do 2-3x without creating any value!

Will LBOs continue to exist, or will only a handful of EBO value generators take over - leaving behind the days of financial engineering?

A few big LBOs have been seen trying to move to the EBO model - like Advent, Hellman & Friedman, and others.

Here, at Goldrock, we are pure equity players - and we strive to assist our companies to grow and create REAL shareholder value. Will see if the rest will follow...

The climate is Right for innovation

I would like to draw your attention to an interesting blog posted today by PNMsoft on innovation. I liked their realism, connected to a desire not to give up on innovation as a culture. Since I know the guys over there pretty well, you can assume that they have their feet on the ground and use innovation as a driver for furthering their business in a way to give benefit to their customers, rather than for its own sake. This helps them to keep the right balance and perspective during these uncertain times - happy reading!

Gartner's Kathy Harris is pushing the innovation agenda in her latest blog. "The climate is right for innovation and organizations that don’t change may lose their edge or even disappear. You can’t not innovate"

Kathy's innovation strategy is a bit ahead of its time.

Most companies are in the midst of the credit crunch. Their focus is on survival. Some will cut projects, some will cut staff. Long term planning usually gets chucked out the window in times like these. Innovation budgets are slashed. It takes real guts to be able to sit down calmly and think of innovation.

But when the panic dies down, and company execs realize that the new circumstances requires rethinking - they will find Kathy's strategy "spot-on". Companies will need to innovate in order to remain competitive. Most current business models are no longer sustainable.

"Innovation is the ability to see change as an opportunity - not a threat."

The current crisis (burning platform) is a great driver for innovation...

Click here to read more

Leadership as a Management Tool – or How to ask for a Cup of Tea

I have the great privilege of seeing many mangers at work (and some at play). In many cases our interaction with management is during a process by which we are checking their company out as a potential investment. This naturally means that they are in "sell" mode.

As a potential investor I have to try and find ways of getting behind this and discover what the manager is like in "real life" situations.

I have learnt that sometimes the really small things are the ones to watch for. How a CEO asks for a cup of tea from a secretary or colleague. How other employees talk to him during a tour of the office, or just as he is walking down the corridor. How management refers to one and other in meetings, and indeed what view they take of the contribution made by others in the organisation.

Why do I apply importance to these matters?

For me one of the most difficult intangibles when looking at a potential investment is the leadership skills or style of the management of the company. This typically starts at the top and is usually reflected all the way through the organisation.

In order for a small company to grow there needs to be strong leadership from the front. This leadership needs to encompass all of the employees and in many cases partners and shareholders of the company too.

Authoritarian style alone cannot achieve this, in order to the maximum from the company everyone must feel that they are making a contribution, and that this contribution is valued by the company's management. This in itself engenders out-performance by employees at every level as they strive to improve the company that they now identify with.

Managers can and must be pro-active in this area, and this style must be prevalent at all levels of the company:

• Lines of communication must be open and transparent: Employees, Management, Investors, Board, Partners etc
• No idea is a stupid idea
  
• Make sure that you interact with as many employees as possible on a regular basis
• Don't just talk about immediate goals
• Use the time to understand what employees and partners would do if they were CEO for the day
• Lead by example
• Be accessible
• Earn the respect of the company, don't demand it!
• Recognise the strengths and weaknesses of those around you

These are just a few ideas about how to lead the company that you are trying to grow, in adverse markets you need better than average performance from the entire company in order to continue to grow. It is your job as a manager to achieve this, and it can only be done if you succeed in inspiring rather than demanding.

Management who either have this or learn it will be the ones to come out of the downturn, not just in survival mode, but also stronger.

Good luck!

Is Mark-to-Market a Good or a Bad Rule?

For those of you who aren’t familiar with mark to market, the term refers to the present day value of an investment, regardless of how much was originally invested. It was put in place as a part of US GAAP in the early 1990s, and the use has increased steadily over the past decade, primarily in response to investor demand for relevant and timely financial statements that will aid in making better informed decisions (according to Wikipedia J).

A good example of mark-to-market is people’s homes. Let’s say you bought your 2 bedroom apartment in Miami Beach for $300k two years ago. Taking into account the current real estate market, if you were to mark-to-market the current value of the apartment it would probably be closer to $200k.

Companies like GE, Citigroup, Bank of America, Wells Fargo, and many other financial institutions would benefit greatly if mark to market accounting were suspended.

The largest example is probably AIG. Currently, AIG is a $1b company, give or take. The stock is teetering at around 50 cents! Compare that to Bank Hapoalim – Israel’s largest bank – which has a $2.2b market cap – with a tenth of the assets! AIG became insolvent and was subsequently bailed out by the US TARP, due to mark-to-market accounting standards. Without mark-to-market, it would have survived. But would this been a good thing, or a perpetuation of the financial facade?

But more importantly – to save the global economy - the question is would suspending mark-to-market be a good idea or a bad idea to stimulate or save the economic meltdown? Two options:

1) Bad: Suspending mark-to-market accounting could completely destroy the financial system, since banks would be able restore assets to their original value and investors would have a much tougher time understanding the true value of these companies.
2) Good: On the other hand, on paper the banks would look more attractive and the investment dollars would return to these institutions. Subsequently, lending / borrowing would be restored quickly, and perhaps the underlying values would slowly catch up to the paper value.

I am not an economist, so thoughts?

Sport and Politics

Sadly over the last few couple of weeks we have been witness to several occurences where sport has been badly overshadowed by politics or terrorism.

As a lover of sport I have always found it remarkable that it is often used to as a way of creating leverage through the influence politics has on these situations.

The three most recent incidents are:

• the visa row in Dubai, when two Israeli tennis players were denied entry because of where they came from. In this case, due to some fairly heavy international pressure and fairly obvious financial threatening, the Dubai authorities relented allowing the second of the two banned players to enter.
• The second tennis incident is the David Cup match in Malmo that was played behind closed doors,without any spectators from either side (Sweden or Israel), under the guise of security considerations. In the background to this decision there seems to have been some political influence, rather than pure security based concerns. In this case it does not seem to have worked out for the Swedes as they lost the tie.
• Finally and far more seriously was the terrorist attack in Pakistan on the Sri Lankan cricket team. This is an outrageous crime, which will create potential long term damage to cricket in general and Pakistan in particular.

We are living in very unstable times, and there is increasing tension around the globe as uncertainty on both political and economic problems blend to form a potentially toxic blend of unrest.

Perhaps it is naive to believe that we can keep sport and international politics separate, but we must hope that this remains the case. otherwise it will be a signal that there is very little left in our lives not tainted by the wider political environment.