Thinking of Buying a Company? Wait, It May Soon Be Cheaper

Being a controlling shareholder has fewer advantages, which the means the premium they pay for ruling the roost is due to fall.

The premium over market value paid to acquire a controlling block of shares of publicly traded companies in Israel has averaged an exorbitant 27%.

But that margin is likely to contract substantially in the next two years, predicts the accounting and consulting firm BDO Ziv Haft as the benefits accruing to controlling shareholders become increasingly constricted.

The premiums can be expected to drop to a range of 10% to 15% or even lower, Yigal Toledano, a partner at the firm, said at a conference held by the Tel Aviv Stock Exchange on the effect of changes in the capital market on company valuation.

A survey conducted by BDO found that control premiums paid on transactions in Israel were similar to those paid in countries such as Venezuela and Colombia.

In contrast, premiums in advanced European countries tended to be in the range of 8% to 10% while averaging just 2% in the United States. And while Italy stood out with premiums averaging a whopping 37%, in Japan acquisition of control actually entailed a discount of 4% rather than payment of any premium.

Toledano attributed the odd situation in Japan to its culture, saying shareholders holding controlling stakes in companies there are intimidated by the responsibility this involves, and therefore price the privilege of wielding such power negatively.

In Israel, however, tycoons have until now anticipated the financial and business benefits that could be gained beyond those accruing to other shareholders.

Diminishing advantages

"There are controlling shareholders who are prepared to pay more to be able to appoint directors and key personnel who could steer the company in a direction that would provide them with financial benefits down the road," said Toledano, explaining the high control premiums paid for acquisitions in Israel.

"Their goal has been to blend their personal business and assets with those of the public company through interested party transactions, he said."

Some of the high-profile deals completed in recent years at high premiums include the merger between Melisron and British-American Investments, priced at 18% over their net asset value, the purchase of Scailex by Suny Electronics at a 10% premium, and the deal to buy Maariv, which included a hefty premium paid to the selling shareholders - since Discount Investment Corp., for reasons it has kept to itself, was prepared to pay NIS 140 million a year-and-a-half ago for a company with meager, if any, economic value.

"Until now the control premium in Israel has been quite high since those in control could perform many actions that enabled them to benefit from the company ahead of other shareholders," continued Toledano.

"But these techniques have become narrower and it's become more difficult," he said. "The possibility of extracting from companies under one's control excess benefits beyond those seen by other shareholders has become more complicated over time in Israel."

Toledano attributed the phenomenon to several possible factors, among them heavier regulation, close supervision by the economic court, and/or the enactment of amendment 16 to the Companies Law .The latter restricts the power of controlling shareholders in various ways, such as their right to pay excessive salaries to favored senior management.

There have been a number of examples of controlling shareholders in Israel taking advantage of their position at the expense of other shareholders.

Nochi Dankner, through his control of IDB Holding Corporation and its board of directors, brought the failing operations of his privately owned Israir into the public company, thereby freeing himself from the personal guarantees he had provided the airline.

Ilan Ben-Dov, with control over the company Tapuz People, pushed through dividend payment that enabled him to deal with creditors of the parent company Suny through a reduction of Tapuz's equity.

The Tapuz dividend was approved by the courts but was done at the expense of shareholders in Tapuz which, in its latest financial reports, showed a further deterioration in its business results.

A positive side to control

Shaul Elovitch also used control for his own purposes by successfully leading Bezeq into distributing a NIS 3 billion dividend - not from cumulative profits but by reducing capital - with his share of the proceeds allowing him to repay the personal debt he took on to acquire Bezeq in the first place.

But control premiums also have a positive side, claims Toledano.

"It allows for the efficient management of the company, with key decisions flowing efficiently without shareholder battles that could paralyze a company," he said. "It could often enable the controlling owner to generate synergies between different companies from which all shareholders could benefit."