Due Diligence

As New Israeli Economy Arises, IDB Must Fall

A court ruling may do more to change Israeli society than did all the protest tents in Tel Aviv.

A battle between the waning Old Israeli Economy and the emergent New Israeli Economy is shaping up inside a Tel Aviv courtroom.

We're not talking about Ashdod dockworkers throwing chairs at long-haired, tattooed Tel Aviv startup entrepreneurs. Rather, the fight is over the fate of Nochi Dankner's IDB Group conglomerate, which Judge Eitan Orenstin will (we can only hope) finally rule on October 20. That is the deadline for Dankner and anyone else who cares to submit a rescue plan for the beleaguered conglomerate.

On the face of it, it might be hard to distinguish which of the opposing sides represents the forces of the New and which of the Old.

Orenstin says he would be happy to entertain other offers should they emerge over the next two months, but for now there are only two potential buyers for IDB. The first is Dankner himself, allied with his new white knight, the Ukrainian businessman Alexander Granovsky. The second is the IDB Development Corporation's bondholders, now aligned with Dankner's old white knight, the Argentine Eduardo Elsztain. Both sides have a lot in common: They both involve ultra-Orthodox tycoons from overseas and they both would leave bondholders holding half or a little less of IDB Development Corporation, the linchpin in the Dankner empire. Dankner himself is left on the sidelines.

In other words we have a pair of tycoons duking it out, with a lot of suits (the bondholders) cheering them on as they await their share of the prize money. Worse still, the tycoons we're talking about are not Warren Buffett – a savvy investor who knows how to identify undervalued companies and make them succeed in competitive markets – but ambassadors of the kind of crony capitalism economies that we in Israel are trying to avoid. In the end, the new IDB could end up looking much like the old IDB – a pyramid of companies stacked one atop the other with a kingpin perched on the top.

Or not. Neither Granovsky nor Elsztain has said much about what they would do with IDB if they ever gain control of it, but the bondholders certainly have no interest in being minority shareholders in a sprawling conglomerate. They want their money back as soon as possible, and the most obvious way to do that is to divest the IDB group of its operating companies. The process has started even now with Dankner's desperate effort to find a buyer for Clal Insurance, but there's no reason why IDB's new owners shouldn't cash out on its holdings in the mobile operator Cellcom Israel, supermarket chain Super-Sol or Property & Building. The combined market valuation for these three, even in today's lackluster market, is more than NIS 8 billion. And then there's pesticides maker Makhteshim-Agan, Given Imaging, maker of the micro-video endoscope, IDB's stake in the Credit Suisse stake and a clutch of other smaller holdings.

There is a risk that Granovsky and Elsztain want IDB because they harbor dreams of joining the local tycoon scene, but economic and political logic should wake them up. That is not only because breaking up IDB would not only be the best way to unlock its value - but because it is inevitable. Also, the Business Concentration Law and other new legislation are also making the life of a pyramid-owning tycoon harder. Those days aren't quite over but their end is rapidly approaching.

Good riddance

We can only cheer this process on. The big holding companies, of which IDB is the biggest, are a weight on the economy and should have disappeared a long time ago. They make their money by controlling companies operating in markets where competition is thin and where regulation – and the ability to influence it – is paramount. You rarely see a holding company that starts a new business or invests outside its home market, where it knows the rules of the game. If it does, the odds have been it won't succeed (Israel Corporation's Better Place, Nochi Dankner's forays into Las Vegas and Credit Suisse, and the real estate tycoons' adventures in Eastern Europe all come to mind) because it requires the kinds of talents that holding company tycoons aren’t noted for – innovation, competitiveness and an eye for costs.

The process of creating the New Israeli Economy doesn't end with the breakup of IDB and the other holding groups. The other half is seeing more competition develop in individual industries, and that has begun as well. In food retailing, Rami Levy and other upstarts have taken on the old, established supermarket chains and changed the culture of food shopping. In telecommunications, Michael Golan and other low-cost newcomers have taken advantage of new regulations to give the veteran big three companies, among them Cellcom, a run for their money. This week, the antitrust commissioner ordered the credit card issuers to change the rules they operate by to make it easier for new contenders to join the market. The government's Open Skies policy, adopted this year, promises to shake up air travel.

There are sectors still fighting the new competitive era, like the ports and electric power, but the winds are blowing against them.

The irony of IDB's demise is that those responsible for this element of the New Israeli Economy never erected a tent on Rothschild Boulevard or started up a high-tech company. Far from it; the battling tycoons are exemplars of the old-style economy. But they can't find the big economic trends any more than the medieval King Canute could order the tides to go back. "Let all men know how empty and worthless is the power of kings," he concluded after getting his feet wet by the rising sea. Let Granovsky and Elsztain know it, too.
 

Moti Milrod