Let the pyramids of Israel fall
A lot has been written on the baleful influence of the holding groups on Israel's economy, and indeed, the bottom line is that holding groups have no purpose at all.
It would certainly be premature to announce the death of Nochi Dankner’s IDB group, but if the time does arrive, there will be no reason to mourn it. Nor would there be any reason to be saddened by the loss of Delek, Africa Israel or any of the other big holding groups.
Even when they were winning businessman-of-the year-awards and buying up glitzy properties in New York, London and Moscow, Dankner and his fellow tycoons were never beloved of the media or the public. Now that the big shots are compelled to endure tongue-lashings from bondholders and the press and sell some of their most treasured assets -- from marquee real estate, to cash cow businesses, to private jets -- they are going to be hard-pressed to find any sympathy.
But it’s not just those hostile to capitalism that can sit back and enjoy the show. Indeed, it’s the friends of capitalism and the free market that should be applauding the demise of a phenomenon – the pyramids of Israel – whose time has long passed, just like their more famous and certainly more awe-inspiring counterparts in Egypt.
The Israeli economy has undergone a revolution over the last three decades. It’s several times larger and wealthier, and more connected to the global economy. Its financial markets have grown more sophisticated and liquid. If Israel is far from a free-enterprise paradise, the government is no longer the Hobbesian Leviathan that once dominated business and finance.
Yet through all of these changes the holding companies endured. Ownership changed hands. Bits and pieces of them were bought and sold, and old ones (like the Koor and Clal groups) faded while new ones (like Delek and Africa Israel) emerged. But the pyramids themselves have proven as durable as the ones in Giza.
Figures compiled by the government committee investigating economic concentration illustrate the preponderance of pyramids. Not counting Teva Pharmaceutical Industries, more than two thirds of publicly traded companies on the Tel Aviv Stock Exchange, as measured by their market capitalization, were in the hands of a business group. Of those, 80% belonged to a pyramid, meaning that they were in at least two levels of publicly traded companies in the group.
Friends in the right places
This is highly unusual for a developed economy like Israel’s. Pyramidal holding groups are usually found in developing countries, where access to capital and management talent is limited and – to put it nicely – having friends in places of power is a more important factor in business than market forces.
A lot has been written on the baleful influence of the holding groups on the economy – how they foil competition, operate companies for their own benefit at the expense of the rest of the shareholders, and take on excessive risk. All is true, if somewhat exaggerated. The bottom line is that holding groups have no purpose at all as far as the public and the economy are concerned. . ".
They could have conceivably justified themselves by imitating Warren Buffett‘s Berkshire Hathaway or (dare we say) a private equity fund like Mitt Romney’s Bain Capital. They are the kind of tycoons who have one or another talent for starting and growing new businesses, identifying and investing in older ones with unrealized potential and/or staking out new markets at home and abroad. But our tycoons never did much of this, and when they tried it has been more often than not a stunning disaster. The tycoons went abroad to invest, as they did over the least decade, running up debts along the way. But it wasn’t because they had better insights into, say, foreign real estate (which in retrospect they most certainly did not). It was because they were running out of monopolies to invest in at home.
Take Nochi Dankner's IDB group, since it is the one getting the knocks these days. Nearly all of its holdings are domestic businesses that have a dominant position in whatever local market they are serving, like Cellcom in cellular telephony and Super-Sol in food retailing. These companies neither need the capital, the vision or the management abilities coming from IDB headquarters. Quite the contrary, headquarters – and the tycoon who sits in the corner office -- collect rent on these businesses, which benefit from their long-established market position. Here and there are some young technology companies and other ventures the tycoons had a small hand in starting. There are a few, like The Israel Corporation’s Israel Chemicals and IDB’s Makhteshim Agan, that are biggish multinationals competing for real in global markets. But they are the exception to the rule, and could do fine without a tycoon sitting on the top of a pyramid collecting dividends.
The stock market has never been fooled by this. Investors typically value holding companies at less than the combined value of their assets while on the other side of the coin tycoons pay unusually large premiums to the market price to gain control of companies, meaning they see a lot of value in owning and exploiting them, rather than just investing in them. The fact is, Israel’s best companies, the ones that have established truly multinational and growing businesses -- Teva, Iscar, Amdocs, Elbit System, Strauss, to name a few – are outside the ambit of the pyramids. They know their business better than any tycoon does.
While there are less painless ways to deconstruct a pyramid than having creditors take control and sell off its parts, it may be that it is the only way that it can ever happen. The price will be a few-dozen headquarters staff losing their jobs, some very nice office suites and conference rooms available for rent with fewer tycoons available to occupy them and a likely haircut for bondholders. But for capitalism, that‘s all in a day’s work.