Iscar Was Sold Cheap

OMAHA, Nebraska ? Yesterday the front page of a local paper ran a big box with two columns of text. One column listed things that Warren Buffett is bullish about. The other described things that he is bearish about.

Bullish: Investments in China and Brazil, Israel's Iscar Metalworking, and Procter and Gamble. Bearish: Real estate, Russia, investment in ethanol as a fuel.

And guess what else he's evidently bullish about. That explains how the gigantic Iscar takeover will most affect the Israeli economy - the most quoted investor in the world has clearly stated that Israel is a good place in which to invest.

Or, at least, Buffett essentially declared - Israel has one company that, out of all the investment opportunities in the world, was the most attractive at this point.

Meanwhile, all the trendy investment areas in the world right now - Russia, real estate and energy such as ethanol ? leave him clammy.

Once the cheering for the $4 billion deal was over, everybody naturally hastened to pick it apart. Everything has downsides and here, one complaint making the rounds is that this gem of Israeli industry, Iscar, is no longer in Israeli hands, hence its profits will stream straight to the Berkshire Hathaway shareholders.

But that is far from accurate, nor does it matter. First of all, the Wertheimer family is getting $4 billion in cash for 80% of the company. Right off the bat a billion dollars are going straight to Israel's treasury, in the form of tax. The other three billion will be used for investments in Israel, in industry and other things.

A moment of proportion and Teva

Second of all, that $4 billion stand for the cash flow that Iscar is expected to generate in the years to come. It could be equivalent to profit over seven years or ten years, depending on how fast Iscar grows. But Israel is getting the cash today.

Iscar's big sister, Teva Pharmaceuticals (TASE, Nasdaq: TEVA), belongs mostly to American investors. The absolute majority of its profits stream straight to American investors.

The difference between Iscar and Teva is that at Teva, the gigantic gains over the last decade went mostly to American investors, while Iscar's gains stayed mostly with the company's Israeli founders.

The true added value of the deal doesn't lie in capital gains, but in the fact that Iscar will remain an Israeli company employing thousands of people in Israel.

A little matter of price

Buffett's investment in Iscar will make the company known to hundreds of thousands of investors, managers and analysts the world wide. It will also upgrade the profile of Israel's economy. Warren Buffett is the most quoted investor in the world and a $4 billion investment in a remote country, the first time Berkshire Hathaway has ever done such a thing, is terrific PR for Israel's business scene.

The two most intriguing questions now are why the Wertheimers sold their family firm, and whether the price they got was a good one.

As for the first, that's anybody's guess. Probably Wertheimers (as they said) wanted to advance the company to the next level, for which they needed somebody with muscle, like Buffett; and the family's desire to prepare for the next generation.

The second question is easier: the Wertheimers sold Iscar cheap.

How do we know? Because Warren Buffett and his partner Charlie Munger will only pay less than others will. If the two were prepared to buy Iscar at a company value of $5 billion, apparently leveraged buyout funds or private-equity funds would have been prepared to pay a lot more.

So why did the Wertheimers choose Buffett? Because they wanted to preserve the company's corporate culture, to continue to manage it as they see fit, not to be tossed about by the financial markets or subjected to short-sighted financial investors.

A keen appreciation of silence

Accepting the Berkshire Hathaway offer means that Iscar will be managed the same way it always has been. It can maintain its trademark secrecy regarding its financial results, which is probably one of the things that Buffett liked about it.

By the bye, this deal comes with Buffett not at his best. Berkshire Hathaway has been presenting feeble results for years now, compared with its prior performance, that is. Its share price beat the benchmark Wall Street index by just 3%. Until five years ago, Warren Buffett did much better but in the last year the company has lagged behind the indexes.

On the morning the Iscar deal was announced, the Wall Street Journal ran an unflattering piece about the great investor, postulating that he had lost his touch. Some analysts claim he's too conservative and has lost touch with this era's sophisticated financial world.

Buffett, unmoved by the criticism, continues to run Berkshire Hathaway the same way he has for the last 40 years. In that, he's just like the Wertheimers.