For Whom HP Voted

HP didn't buy "an Israeli company", it bought, very specifically, Mercury Interactive. That's all

By 9:11 A.M., Finance Minister Avraham Hirchson had already declared it a triumph.

The Finance Ministry issued a press release: "Finance Minister Abraham Hirchson praises the Mercury deal and says it constitutes an expression of confidence in the Israeli economy."

Later in the afternoon, a second press release informed the media that Hirchson had already met with the CEO of HP, Mark Hurd, and had thanked him for the acquisition.

Hirchson's grab at an image boost is understandable. But HP didn't buy Mercury because the company is Israeli. It bought Mercury because it's Mercury. It is less a show of faith in Israel's economy than a show of faith in the company's capabilities.

Mercury was founded by a talented Israeli technology entrepreneur, Aryeh Finegold, who left the company in the competent hands of Amnon Landan. It became one of Israel's biggest technology success stories.

Finegold and Landan had an impressive vision of a new market that Mercury essentially invented: computer systems to check software. Their vision became a $600 million business.

But Mercury had a millstone around its neck, in the form of massive quantities of stock options. For years it took advantag eof loopholes and kept the cost out of its profit-and-loss balance.

Losing money

Notes to its financial statements indicated that while the company was reporting profits of tens of millions of dollars - net of the options, it was losing money hand over fist.

Nine months ago, the world learned that on top of granting massive amounts of options, Mercury had been backdating their grant dates. Landan, the central beneficiary of the fraud, had to resign.

Mercury stock plunged. It was tossed off the Nasdaq main market and became a toothsome takeover target.

Mercury began its life in Israel and moved to the U.S. Most of its employees are on the West Coast, headquartered in Mountain View, California.

Israel came to serve as its development center. When Landan went home, and was replaced by Tony Zingale, the company finally started to lose its Israeli identity.

No boon for the treasury

Landan had no Israeli heir, and the options scandal-battered directors and executives were no longer able to fight for independence. Mercury, like many Israeli companies before it, will no longer control its destiny: it becomes a division of an American giant.

For Mercury shareholders, today is a holiday: HP is paying a 33-percent premium over market for the shares. But there is no benefit for the Israeli economy from the deal.

Most of Mercury's shareholders are American institutionals. The deal will not generate substantial tax revenues, as did the sale of Iscar to Warren Buffett for $4 billion.

Secondly, most major global computer companies have big development teams in Israel, so there is no great innovation in this deal. HP itself bought out Israeli Indigo about five years ago, after that company failed to generate consistent profits on its own.

Thirdly, as opposed to other companies whose potential was only revealed when they were snapped up by an American giant - Mercury has been considered a success for many years. The business opportunity to buy it was just created.

There is no comparison between the Mercury and Iscar deals: When Warren Buffett bought privately-held Iscar, he expressed confidence in its Israeli management and declared decisively that the management would remain in place and that the company would continue to be headquartered in Israel.

Missiles on  Iscar

It is possible that had Warren Buffett known that just a week after he actually forked over the cash, the factory would turn into the repeated target of missile attacks, he would have thought twice about the deal.

Buffet isn't just the worlds greatest investor, he is also an investor who never came near Israel and his company has no particular know-how in the area in which Iscar operates - rendering the acquisition both surprising and unusual.

Deals like HP and Mercury, even if smaller in scope, have come and gone by the dozen. Intel bought DSPC; BMC bought New Dimension; and Computer Associates bought Memco, and all of them wanted to complete the range of products they offered and keep an R&D center in Israel.

HP is also a huge computer company that wants to integrate Mercury into its product line. All the decisions about Mercury's future will be made in Palo Alto.

As the fighting rages, it is tempting to call HP's acquisition of Mercury an "expression of confidence in the Israeli economy". But Mercury is not dependent on Israeli prosperity: the deal reflects only confidence in the company, not in the country that birthed the people who once led the company.