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“He’s bought himself a new toy,” was how one broker who follows Emblaze (BLZ on the London Stock Exchange) described its CEO, Eli Reifman, to me. He was, of course, referring to this week’s acquisition by Emblaze of a 33% stake in Formula Systems (Nasdaq: FORTY). Let’s take a closer look at this story.

Formula is what is described on Wall Street as a “software powerhouse.” This is without doubt an appropriate description, considering what the Goldstein brothers have done on Main Street. The problem is that the brothers did not manage to leverage the company’s strength on Main Street for the benefit of their shareholders on Wall Street and in Tel Aviv. Formula is Israel’s largest software company, with sales in excess of $500 million, and it is now also profitable.

Gad and Dan Goldstein founded Formula in 1984. Since then, the company has grown through a series of mergers and acquisitions. Over the past 22 years, the Goldstein brothers have built up a serious business empire, in Israeli terms, based on software, IT services, and support for all telecommunications services, through the software that the company and its subsidiaries develop, produce, and sell. The Formula group currently has holdings in Magic Software Enterprises (Nasdaq: MGIC), Blue Phoenix Solutions Ltd. (Nasdaq: BPHX), Sapiens International NV (Nasdaq: SPNS), and Formula Vision Technologies (public in Tel Aviv), as well a string of holdings in private companies such as nextSource Inc..

Formula is actually run much like Elron Electronic Industries (Nasdaq: ELRN), except that it focuses on software. One could say that anyone interested in an Israeli software ETF should look at Formula.

I have followed Formula for a long time, mainly because of its successes on Main Street. I always felt that this company lacked something that would make the connection between Main and Wall Street. Even the acquisitions of Magic and Sapiens did not create this link; perhaps they even did the opposite.

The entry by Ishay Davidi’s First Israel Mezzanine Investors Fund [FIMI] as partner in Formula was the event that made me start to believe that something would yet develop. The introduction of Davidi, a man with the ability to sort the wheat from the chaff, could, I felt, shake up the current management, extract the right values from this drowsy company, and bring about a substantial rise in its stock price. The fact that the stock has continued to fall since Davidi joined has not shaken my belief that Formula has potential, since a company’s standing among investors, a job which Davidi is good at, takes quite a while, especially when the company concerned is a holding company which has difficulty from the outset getting high values on Wall Street or in Tel Aviv. Someone like David can quite definitely “awaken the dead,” something he has done many times in the past.

The fact that FIMI is now selling its controlling share in Formula has come as somewhat of a surprise to me. One thing that I am certain of, however, is that FIMI’s decision to join Formula was not based on profit calculations, and certainly not because of any camaraderie between Davidi and the Goldstein brothers. It may well be that a calculation of the IRR will show a fairly good profit for 18 months, but I am absolutely sure that FIMI is selling its stake in Formula for entirely different reasons.

Davidi’s sale indicates two things to me. One is that the man decided to sell because he had given up hope of turning around the current state of affairs at Formula, and as far as he was concerned Eli Reifman was the shining knight on the white horse who helped FIMI make the elegant exit that was so important to him. After all, Davidi, who until a few months ago strongly believed in Formula - he told me so himself - could have joined Reifman or acquired Dan Goldstein’s stake on his own. However, since Davidi is known for his reluctance to pay a premium on any asset, he apparently hitched a ride on Goldstein. All that now remains is to see whether Davidi’s exit from Formula really did stem from his disappointment with the company, or whether this is just another brilliant stunt by a man who has not only exploited a situation to make a profit on an investment that failed, but will even use the money to attempt a joint takeover, together with Dan Goldstein, of Formula Vision. This looks to me like the second and most logical signal.

Formula Vision, formerly Mashov Computers, is the more interesting part of the Formula Group. It is the one with the vast high-tech potential and actually, if Goldstein and Davidi move from the Formula group to the Formula Vision group, everyone will be happy. Davidi and Goldstein will get what they were looking for with the help of Reifman’s finance. Reifman will also get what he was looking for - a “curtain raiser” in the UK and the return of part of his investment by way of the acquisition of Formula Vision by FIMI and Goldstein.

What should shareholders do? This is a tougher and complicated question. All I can do is say what I am doing - sitting on the sidelines and devoting my time, until there are further developments on Main Street, to following Ness Technologies (Nasdaq: NSTC). Who knows, perhaps this is the real software ETF? Assuming that I am right, and that the end result of the Reifman-Goldstein affair is that Reifman gets Formula without Formula Vision, and assuming that are no big surprises in store (since it’s difficult to be accurate when Reifman is involved), what, in fact, will be left of the Formula Group? Besides Matrix IT Ltd. and BluePhoenix, which are both excellent companies, there are Magic and Sapiens, which are constantly struggling.

A lot of things need putting right at Formula, but you need a good manager to do it. My conclusion is that it would best to wait and see if the deal really does go through, how Formula will be managed and by whom, and what will happen to Formula Vision. While all this is going on, I will have my sights set firmly on Ness.

FORTY, NSTC 1-yr Chart

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