1. The question of El Al
Nine years after buying El Al Israel Airlines from the state, the Borovich group sold it last week to Ishay Davidi's investments fund FIMI. Tami Mozes-Borovich and David "Dedi" Borovich had bought the airline according to a company value of $55 million. While they managed to wrest a 35% premium over its market value from FIMI, they have still lost a packet on the carrier.
During the last 10 years, FIMI – First Israel Mezzanine Investors – has bought and sold dozens of companies. In fact, it's become the biggest such fund in the country. In these sobering days, when Israel's tycoons are falling like ninepins, Davidi stands out for his superiority as the manager of an investments company that also manages its portfolio companies.
Davidi has created double-digit returns for his investors, even as investors in the tycoons' companies lost their pants – as much as 90% of their investment in the tycoons' bonds and shares.
His superiority can be attributed to a number of obvious factors, and one hidden one. He doesn't measure success by size, power or a collection of pet politicians. He measures success by internal rate of return. Namely, how much money he makes for his investors.
There's another reason. Davidi invests mainly in competitive companies – companies for which success or failure depends on good management, productivity, efficiency, strategy, determination and commitment. The tycoons, on the other hand, base their business models on sheer clout, influence over the government, monopolization and cheap money they can scoop up from the Israeli finance-industry clique – a strategy known in economic argot as "rent seeking."
Three possible scenarios come to mind with regard to the El Al deal. One is that Davidi makes some improvements, such as cutting manpower, improving income management and reducing financing costs. After two or three years he sells his shares at some profit, and the airline will be in much the same position as it has been.
In the second scenario, Davidi does all the same things, but at the same time, he transforms from a talented investments manager into a tycoon. That is to say, he uses his financial clout and status in the economy to campaign against the government plan to allow more competition into the aviation market, thus preserving El Al's special privileges.
Davidi almost fell into a similar swamp four years ago when he was considering whether to buy the mobile operator Partner Communications. If he'd bought Partner instead of leaving it to Ilan Ben-Dov, he would have been forced into becoming a tycoon, preoccupied mainly with a no-holds barred effort to persuade the communications minister not to open the market to competition.
The third scenario is the most intriguing: Under this scenario, the government does open Israel's aviation market to unfettered competition, thus threatening El Al's survival. But at the same time, Davidi revolutionizes the management of the company, dramatically improving El Al's efficiency in income and spending. He declares he has no intention of becoming the type of tycoon who buys politicians, regulators and journalists. Instead, he focuses his efforts on making the company more efficient and persuading its employees that they'd be better off working for a flexible, effective company than for a fossilized, dirty one. In five years, El Al triples or quadruples in value.
The chances of this scenario coming to fruition aren't great. But it is the most interesting possible course of events because of the horizontal ripple effect it could have throughout the economy.
Most of the privatizations over the last 20 years have been a disaster. The brains behind the privatization policy didn't realize that the goal of transferring government ownership to private hands should have been secondary; the primary goal was to introduce competition into the relevant sector.
The consequences are painfully evident, for instance, in the banking system. The privatization of Bank Hapoalim and Discount Bank did almost nothing to improve the pathetic inefficiency of the banks. It did not overhaul the system with regard to manpower, innovation or technology. The banks still have unnecessary costs estimated as high as NIS 7 billion to NIS 10 billion a year.
What happened with the privatization of the banks – and in other sectors as well – during the last decade is actually an unwritten deal between the government, Big Business and the workers: The government would agree to ignore the lack of competition and the practice of robbing the public; the companies would make their monopolistic fortunes; and the loot from all this rent seeking would be shared among the executives, the workers and the controlling shareholders.
At El Al, it turns out, that deal isn't sustainable. The monopolistic rent was too small to begin with, and it all got eaten up by the surplus manpower and company inefficiency. The company's own management estimates that surplus costs are NIS 300-400 million a year at least.
In other words, the cost of the company's inefficiency since its privatization in 2003 has reached about NIS 3 billion. At least.
In practice, El Al never was privatized, insofar as that implies becoming leaner and more advanced. It is much like taking shelter under the government's wing. The company's organizational structure is that of a monopoly that can't fall, as not only many managers but also its workers admit.
The problem is that the company is heading for a financial crash, with giant debts weighing it down. But that is an opportunity to persuade management and workers alike to accept an overhaul, because the government won't save it.
Can Davidi fire those who are weighing El Al down and fly it to safety in a suddenly competitive environment?
In other words, can Israel have both an open-skies revolution that lowers flying costs for everyone and boosts tourism, and a better El Al as well?
It is a critical question, because it has implications for a long list of sectors and companies, first and foremost the banks. But mainly, it has implications for the public sector, which is for the most part just like El Al – wasteful and inefficient with zero capacity among its managers to spearhead revolutions in service and innovation.
If Davidi can lead a cultural and managerial revolution at El Al together with its workers, without engineering regulation against the public and passengers, it would be one of the first cases – if not the first – in which a giant government company or monopoly becomes one that creates value not mainly for its workers but for the public at large. It could give us hope that revolution is possible in the economy as a whole and in the public sector in particular.
2. Clubmarket's mistake
El Al is the third company that the Mozes-Borovich group lost in the space of seven years. It was preceded by the sale of the Granite Carmel-Sonol group, which was predated by the collapse of Clubmarket, a retail chain that the court sold to Super-Sol.
Everyone in Israeli business circles knows the story of Clubmarket's fall, or so they think. Recent events in the capital market at large and among the tycoons specifically, beg another look at the events in 2005.
To recap, Clubmarket imploded when the banks pulled the rug out from under its feet. Mozes-Borovich placed it in receivership and it was sold to Super-Sol for NIS 751 million, which went to pay Clubmarket's suppliers. In the buildup to the end, the Boroviches were tarred and feathered in the press for months, with suppliers and businesspeople vying to smear its management the most.
Not only did the Boroviches take the beating and eat the rotten fish, they were hounded out of Clubmarket. The court process left them with no shares in the company. At the time, it all seemed straightforward: They failed in business and so had to clear out for their betters – for instance, Nochi Dankner, who bought Clubmarket from them through Super-Sol.
Seven years later, the story looks quite different. It turns out that the Boroviches' main mistake was not to finance Clubmarket and expand it using our pension savings. The Boroviches didn't borrow money from the public by issuing bonds. Maybe, in addition, their relationships with the bankers and tycoons just weren't close enough.
If the Mozes-Borovich group had borrowed money from the public by issuing bonds, all it would have to do when Clubmarket ran into a liquidity crunch is announce a debt arrangement through pet journalists. A debt arrangement is a euphemism for "you lose a third or half of your money," in exchange for which the group would promise to possibly invest more money in the company in the future.
Unlike Clubmarket's giant suppliers like Dan Propper from Osem, who slapped on quite a bit of tar, the general public is weak, ignorant and unorganized. When they're screwed – for instance, when someone is stiffed on a debt – they are at worst bereft, but in most cases they don't even understand what happened to them.
If characters like Propper or Muzi Wertheim from Coca Cola Israel were the creditors who were owed money from the tycoons' great business pyramids, which are crumbling as you read, then the whole economic structure would look completely different. Instead of debt arrangements and haircuts amounting to billions and billions, big companies that fall would be liquidated. The tycoons would lose their shares. New investors would come in, as would new managers and new creditors.
We would receive a more diversified economy, more competitive and less concentrated, in which the market functions better.
To the relief of the robber barons of 2013 whose businesses are in the toilet, they didn't borrow from the likes of Propper or Wertheim, but from Yossi Public, whose money is managed by the likes of Yair Hamburger, Zehavit Cohen, Yitzhak Tshuva, Shlomo Eliahu, Rakefet Russak-Aminoach and Zion Kenan. They're members of the same social and business club that the tycoons belong to. It wouldn't occur to them to take the collapsing pyramids to court, to rip away the tycoons' personal assets like they'd do to some young couple behind on mortgage payments, or to do everything in their considerable power to get back the money they lent – out of your pension savings.
As long as the people managing our pensions are a small clique of people tied tightly to the people who borrow the money from us, who control the monopolies, then the only ones who can put a stop to all this are the regulators. For instance, the capital markets commissioner at the Finance Ministry. But the commissioner, who in the past stated his opposition to separating finance and non-finance holdings, sits back and watches the robbery in broad daylight of our pension savings, and hums little ditties about market efficiency, risk premiums and the hidden hand.
We can only hope that the new Yesh Atid party allies with Zahava Gal-On of Meretz and Naftali Bennett of Habayit Hayehudi, who have stated that the recommendations of the economic concentration committee didn't go far enough. We can only hope that the new Knesset starts tearing down the clubhouse of those people who would rob us blind while playing Lord Bountiful for the rest of their lives.
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