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.