There have certainly been happier times in the life of a tycoon than this past week.
Last Friday, Nochi Danker woke up to discover that his bondholders had put aside their differences and were ready to wrest control of his IDB group with a plan to convert the debt they hold into equity. He would be left with nothing – not Cellcom, not Clal Insurance, not Super-Sol – nothing except his private investment vehicle Ganden Holdings and all its debt.
On Sunday, Idan Ofer's Israel Corporation was forced to let Better Place, the electric-car refueling startup, file for bankruptcy. The company that was supposed to revolutionize the world of driving instead ran through some $800 million of his and other peoples' money with little to show for it.
Tuesday, the Knesset Finance Committee approved the so-called pyramid clauses of the Business Concentration Law. Even in their neutered form, they set a deadline for holding groups structured so that companies are stacked on top of each other with the tycoon at the top to be cut down to two tiers or fewer.
Neither the broader economy nor the financial markets are exactly reeling from these tremendous setbacks for the country's supposed economic leaders. The Tel Aviv Stock Exchange's benchmark index, the TA-25, was climbing higher as the tycoons were taking their blows in the first part of this week. Shares of Cellcom and Super-Sol rose 3.5% and 3.1%, respectively. The Israel Corporation actually rallied in the wake of the Better Place debacle.
The public has long lost any illusion that what's good for the tycoons is good for Israel. In fact, nowadays it's commonly believed that what's bad for the tycoons is actually good for the rest of us.
Let's start with Dankner. No one, not even his attorneys, is arguing that he could do a better job at managing the far-flung IDB empire than the bondholders who are aspiring to gain control of his assets. They aren't daring to suggest that Cellcom would be at a loss for how to cope with the rapidly changing mobile market or that Super-Sol would be clueless about how to see off the Rami Levy challenge without Dankner's wisdom, management skills or insights. Dankner and everyone else knows that until they sell off IDB's assets, the bondholders are perfectly capable of running IDB, because IDB's top managers had little to do besides collecting dividends from companies lower down in the pyramid and scheming to buy new businesses. Once they are independent, the group's companies will be perfectly able to manage their own affairs. Indeed, they may be better off without the conflicts of interest imposed on them by being in a pyramid.
Dankner's pyramid, like the others in Israel's Valley of the Kingpins, had no economic or business logic. The business pyramids are a relic from an era whenbusiness groups could more efficiently allocate scarce resources among their group companies, because management skills and capital were in short supply. If they have a raison d'etre today, it is allowing the tycoons at the top to mobilize the power of their groups to influence rules and regulations better than any one of their companies can alone. But that's hardly beneficial to the rest of the economy. For all these reasons, pyramids tend to be dominant in underdeveloped economies; as economies grow and mature, they tend to disappear.
But it would be a mistake to assume that without the tycoons and their pyramids Israel will become a paradise of thriving, dynamic businesses, serving their customers with ever-better, ever-cheaper products and services while bestowing perpetual increases in quarterly earnings on their shareholders. The sad end to Better Place is not just Ofer's misfortune, but an abject lesson in how the economic messianism that lurks behind the attacks on the tycoon economy is simplistic and misguided.
Except that it was backed by an archetypal tycoon– Idan Ofer is the scion of a wealthy family who earns his profits from cash cows like Israel Chemicals – Better Place was everything the tycoon-free Israeli economy is supposed to be. It was led by a self-made and visionary entrepreneur (Shai Agassi), employed cutting edge technology (its business wasn't simply installing and operating thousands of electrical outlets for cars or changing batteries but involved developing a highly sophisticated information technology system) and aspired to compete in a global market (Israel was just a testing ground). Moreover, Better Place was not just startup nation as it is, but startup nation as it is supposed to be. The company aimed not to develop a technology and quickly sell itself to a multinational for a few tens of millions but to stay in the game and become a global enterprise.
There is a lot of Monday morning quarterbacking going on now about how the company's constantly shifting business models and egotistical ambitions sunk it. They are to one extent or another true, but Better Place was entering a market where many talented entrepreneurs have tried and failed, otherwise a lot of us would be driving electric cars. Moreover, Better Place's business plan couldn't have been that barmy if it took in money from so many blue chip investors and convinced Renault to come in as a partner. To focus on the fact that Better Place failed miserably is to miss the point.
Yes, it's true that on balance, competition and innovation make for a more efficient economy, but they do that as much by destroying as by creating. Competition has losers as much as it does winners, which means companies close down, employees are fired and investments and savings disappear. While consumers have been celebrating lower cellphone rates and the tycoons have been bemoaning their sinking profits this past year because of Moshe Kahlon's reforms to the industry, the employees of the cell phone companies have been driven to unionize for the first time ever, because their pay and conditions are deteriorating.
Better Place's collapse likewise doesn't just inflict pain on Ofer, but on its employees and (because they made a long-term commitment by buying its cars) customers, too. Israel without its tycoons and their pyramids will be a better place but by no means a perfect one.
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