Why the Frutarom Deal Is Good, Bad and Ugly All at Once

Israel can take pride in building a $7 billion company, but we should be ruing the fact that Israel can’t keep its best businesses at home

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File photo: Frutarom plant, New Jersey, U.S.
File photo: Frutarom plant, New Jersey, U.S.Credit: Mike Derer/AP

It’s an 85-year-old company with more than 5,000 employees that is in the decidedly low-tech business of making flavors and fragrances for food. But the sale of Frutarom to the U.S. company International Flavors & Fragrances announced on Monday in many other ways looks like another high-tech exit, albeit writ large. For all the excited headlines, that’s not a good thing for Israel.

Startup Nation takes pride in the exits its tech companies pull off on a regular basis. More than two decades into the startup phenomenon, it remains a marvel that some tiny company -- with so few employees that they can easily fit into the photograph that invariably accompanies the announcement -- can be valued by the tech giants at tens, hundreds of millions or even billions of dollars.

The exit phenomenon is proof of the Israeli genius for innovation. But it is also proof that Israelis can’t run big businesses.

When it comes to creating enterprises that don’t just innovate, but manufacture, market, engage in complicated logistics, control costs and manage their future strategically, Israelis simply don’t have the skills, experience and discipline to pull it off. They take their achievements and sell them to the highest bidder rather than building on them, or if they build on them it’s by starting up another company and exiting a few years later again.

As much of an old-line company as Frutarom is, Ori Yehudai, its CEO, in many ways acted like a startup entrepreneur. He took a business with sales of just $80 million in the year 2000 and built it into one of the biggest players in its industry with revenues of $1.4 billion in 2017.

He did that in the tradition of the best startup entrepreneur: by identifying an emerging market trend that his bigger rivals, including IFF, were missing – namely that  the world’s consumers increasingly prefer natural ingredients in the foods. In that vein, Yehudai even tapped into Startup Nation by acquiring Enzymotec, an Israeli company that develops nutritional ingredients and medical foods using cutting-edge technologies.

Today, three quarters of what Frutarom produces falls into the natural food category.  An impressive15% of Frutarom’s employees work in research and development.

The who-next phenomenon

In another, critical way, however, Yehudai is an old-time corporate chieftain in the tradition of Teva Pharmaceuticals’ Eli Hurvitz or Iscar’s Stef Wertheimer. They made their companies big multinational enterprises that extended their reach far beyond Israel, in the process making their companies less and less Israeli.

In Frutarom’s case, the company grew because it bought no less 44 companies in just about everywhere in the world. As of the end of last year, Israelis accounted for just 254 of the company’s 5,223 employees and less than 8% of its manufacturing was done in Israel.

Frutarom is a far-flung enterprise of 70,000 products, 74 production sites, 93 R&D labs and sales offices all over the world, just the kind of organization that Israeli managers would be hard-put to run effectively. You can’t help but imagine that John Farber, Frutarom’s controlling shareholder, feared that without Yehudai, who is 64 and has been with the company 33 years, the company would stumble as Teva did after Hurwitz departed. 

In Israel, the number of people who can lead big companies is few and far between. Thus Frutarom joins a long line of big Israeli exits that include Orbotech, Keter Plastics, Mobileye, Agis and M Systems.

The issue isn’t that selling Israel’s best businesses to foreigners is unpatriotic, nor should Israel enact legislation that deters cross-border acquisitions. But it does point to a severe problem for the Israeli economy, which can’t rely solely on startups to generate economic growth and jobs.

Startups not only create relatively few jobs: they employ a very narrow range of professions, almost all of them for people with degrees in science or engineering.

As boring as they are, old-line companies create more and more varied jobs, and the difference is starkly illustrated by the $7.1 billion IFF is paying for Frutarom versus the $15.3 billion Intel paid last year for the tech company Mobileye.  Frutarom is worth less than half of Mobileye but it employed more than 5,200, while Mobileye’s payroll was less than 600.

Admittedly only a fraction of Frutarom’s workers are in Israel, but that points up the second big problem of Israeli business, which is a business environment that isn’t competitive globally. Costs are high, regulations onerous and Israeli workers are less well-trained than their peers in other developed countries. Labor productivity is low.

Under the deal, IFF will “maintain a presence in Israel” and dual-list on the Tel Aviv Stock Exchange, two promises evidently designed to comfort Israelis who worry that one of the country’s biggest companies is destined to pack up and leave.

But there’s a good chance that will happen. IFF’s management has no reason to operate in Israel if there isn’t a good business case for doing it. Under Israeli ownership and management, things would be different, as had been the case with Teva, whose Israeli management and board insisted on keeping local factories open until the company’s financial troubles no longer allowed for that kind of luxury.

Whatever pride Israelis feel over Frutarom will be fleeting. The loss to the economy will be many times that.