Since the deal, new Prime Minister Ehud Olmert and new Finance Minister Avraham Hirschson took time out of their first day in office to bask in the glory of the deal and claim that Buffett has blessed the Israeli economy and upgraded Israel to the major league of western economies. (Hirschson wryly added on Israel Radio that some people are lucky on their first day on the job). The Israeli stock market went nuts, rising almost 2% Sunday on the news of the Buffett deal.
The Marker, one of Israel's top financial papers and web sites, reported that Buffett was eagerly looking for more Israeli companies. Things have gotten so out of hand that there are now even mentions in the press of Buffett buying Teva (NYSE:TEVA), Israel's flagship company.
The $4 billion deal was a landmark one for Israel in many respects including: deal size, Buffet's mythological notoriety and company picking ability, and the Wertheimer family's local fame and reputation.
While I firmly believe that this is an important deal for Israel, I think the messianic fervor surrounding this deal is entirely out of proportion and may leave some Tel Aviv Stock Exchange investors holding the bag.
Iscar is a one-of-a-kind company in this country. First of all, it is a family owned business (which is one of the reasons it sold out before the 3rd generation came along) and a private one at that. Iscar reportedly boasts very high net margins (in the region of 25%) on its semi high-tech manufacturing business. It is an amazingly automated business that I believe is unmatched in this region -- when I went to visit, I was blown away by the level of robotic activity. Finally, it is a business that reportedly did around $500,000,000 in business per year.
There are not many businesses in Israel that meet even half of these criteria, and I am not aware of any such companies on the Tel Aviv Stock Exchange. Iscar is an amazing business run by a visionary family that attracted Buffett as much for its management skills as for its existing business. While I hope Israel aspires to and attains such a level across the industry, we are still a distance away from those kind of across-the-board management skills.
The Oracle is no messiah for Israeli business or the Tel Aviv Stock Exchange. What he does indicate is that if we continue to build great businesses in Israel, there will be more potential buyers or exit routes for our companies. And on that front I think the press has missed the two most important points of the acquisition:
1. The Wertheheimers mentioned that they talked to hedge funds and LBO funds before deciding on Buffett. This is significant. There is now interest from hedge funds and LBO funds in Israeli private equity. This presents another exit opportunity for private non-technology and tech companies alike. The big winner on this front is the Markstone Group, the largest Private Equity firm in Israel.
2. An interview with the Israeli Tax Commissioner Jackie Matza revealed that one of the attractions for Buffet was the 10 year tax holiday he can receive as a foreign investor. This is significant for public market investors and for tech companies as well. Here is why: Israel has given tax breaks to tech companies and other companies for years. However, Wall Street has always discounted earnings from Israeli companies and applied a tax rate to them because the assumption was that the tax breaks were insufficiently long term.
If Buffet does anything, giving the Good Housekeeping Seal of Stock Market Approval to the tax break will be significant to the company valuations Wall Street gives Israeli companies. Netting out the applied tax rate could give valuations a 10%-20% boost.