Buying Jake for a Quarter-billion

Remember that legend about shifting power? Well, it was a whole two months ago. Let's recap.

The legend about "shifting power" was propagated by the opponents of reform at the banks. The reform forced the banks to sell their asset management companies. According to the legend, which bankers and other haters of change bruited about - the reform "did nothing" but move the provident and mutual funds from the banks to the insurance companies. It did not reduce the concentration of power, merely moved it.

Capital market pros say that's arrant nonsense, but nobody wants to admit it. Private brokers would love to weaken the insurance companies that compete with them; the banks need to justify their fight against the reform; and the insurance companies were prohibited from saying a word about the issue.

What the pros know is that some of the assets the banks sold wound up being managed by insurance companies, but the main point is - the structure of the capital market changed drastically and irreversibly. The banks control those of their customers who don't work with any of the bodies on the capital market; the fact that 80% to 90% of the banks' customers invested in provident and mutual funds run by the same bank at which they had an account, shows the public had no real choices: it was urged by the banks' advisers to buy products of the bank itself.

The insurance companies, the private brokers and the foreign investors that bought the provident and mutual funds from the banks have no such power in the market. The only way they can attract customers is by presenting strong results and creating strong brand names.

Believing the bad press

It is the bad luck of the insurance companies that at some stage, they started to believe the lies told about them. They started to believe they really would reap sweet fruits from seizing that concentrated power from the banks. So they rushed to snap up the provident and mutual funds, paying whatever they had to.

In recent weeks the insurance companies and foreign investors that swallowed these funds grasped something they should have known all along: the structure of the capital market has changed beyond recognition. The customers they "bought" can wake up one morning, smell the coffee, withdraw every shekel and deposit it at a rival company.

Indeed, there has been a massive flight of investors from the provident and mutual funds that had been run by banks Hapoalim and Leumi, mere moments before ownership changes hands.

The whole sorry affair is best demonstrated by an insurance company that stood back from the big deals and, unhappily, trudged off to buy a privately held mutual funds management company from a successful big private brokerage.

Two months ago, Migdal announced it was buying Afikim, managed by the seasoned broker Jacob Weinstein, for NIS 165 million cash and NIS 88 million spread over five years, contingent on the company meeting goals.

Surprise in the box

That rather astonishing deal looked very normal as the insurance companies closed tremendous deals buying provident and mutual funds from the banks. Nobody took a time-out to wonder, and Migdal's management didn't either, apparently - to wonder what exactly they were buying.

The customers? No, they could get up and go at any time. In the new capital market, only performance can keep a customer in place.

Oh, then maybe they were buying a brand? Maybe, but that's rather far-fetched. Two years ago Afikim was a tiny unknown brokerage with NIS 300 million under management. It was a bit player. Afikim has much to grow before its brand name can be considered to stand out.

So what did its quarter-billion shekel get Migdal? Well, it got Afikim's expert management team, which had expanded Afikim's assets under management from NIS 300 million to NIS 3 billion in two years.

At this point people who know Afikim well, over time and not just over the last week or two, are starting to giggle.

Unlike some of the asset management companies, Afikim is a one-man show: Weinstein. He has a deputy and five clerks, that's about it.

If you know Afikim, then you know that compared with other successful brokerages, its rise was meteoric. It was the first to realize the potential of mutual funds specializing in bonds, and made a killing when interest rates dropped in 2003 and 2004. Interest slid at a dizzying pace, bond prices soared and bond funds celebrated, but it has to be said the chance of that happening again is infinitesimally small.

In short, if you know Weinstein, you know he's a remarkable talent, a crafty market animal, with plenty of ribbons on his chest and not a few gambles in his history; you know luck played madly into his hands in the last couple of years; and you know he did an incredible job of selling himself at the peak of his career to a distinguished, deadly serious insurance company for a quarter-billion shekels.

Your appreciation would be fitting. Because in the months since Migdal agreed to buy Afikim, no less than NIS 550 million has been withdrawn from it, or more than 15% of the assets went looking for a new home. The company's income will drop accordingly.

You probably wouldn't want to be in the shoes of the Migdal management, who bet hundreds of millions of shekels on Afikim and have to pray that Jake doesn't lose his touch, doesn't blink, doesn't make some horrible mistake. They may well be poring over the fine print of the acquisition contract as you read.

It would be a lot nicer to be in Weinstein's shows. After all the millions of transactions he has carried out for his customers in the last thirty years, some better and some worse, this one may prove to be the best deal he ever made: selling himself at the peak to a giant that manages other people's money.