Israel’s own version of zombie apocalypse is taking place right before our eyes. The old tycoon class, once thought to be all but dead and buried, has come back to life as a new generation of tycoons.
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Nochi Dankner, who once lorded over the IDB group, has been replaced by Eduardo Elsztain. Lev Leviev, of Africa Israel Investments, is due to be replaced by Moti Ben-Moshe, who has already taken over the Alon Blue Square group, once controlled by Shraga Biran. Naty Saidoff is looking to replace Shaul Elovitch as the controlling shareholder of the Bezeq group.
About the only ones left standing are Yitzhak Tshuva of Delek Group, Kobi Maimon of Equital and the Schneidman family of Zur Shamir Holdings – but even they are not the masters of the universe they once were. Today, they’re more likely to be selling businesses than accumulating them.
Still, the fact that there’s a tycoon apocalypse at all isn’t what anyone should have expected.
The last generation of tycoons largely brought about their own doom by taking on excessive debt to build their empires. New rules on bank lending for leveraged buyouts and the bitter experience of the banks themselves in writing off bad tycoon debt have deterred the shopping sprees that made the tycoons possible. Key monopolies, like cellular telephony, have been broken.
The 2013 Business Concentration Law was designed to make sure the tycoons as a group didn’t come back to life again. The law makes it much harder to build the kind of corporate pyramids the tycoons were so fond of – the ones that enable the tycoon at the top to control a far-flung business empire without risking much of his own capital.
Elovitch and his brother owned 100% of Eurocom, which in turn controlled 61.1% of Internet Gold, which controlled 69.8% of B Communications, which in turn controlled 26.3% of Bezeq. Thus Elovitch controlled a 15 billion shekel ($4.4 billion) company for a tiny fraction of the cost.
The law also forces anyone who owns a bank or an insurance company as well as a big non-financial company to choose between one or the other.
The price of having a tycoon like Elovitch in control is best illustrated by the Israel Securities Authority investigation last year of Bezeq’s purchase of Elovitch’s stake in the Yes satellite TV joint venture. If the accusations prove true, Elovitch inflated the price Bezeq paid for Yes by massaging the numbers and pressuring the Bezeq board to approve it. He got 100% over the overpayment profits and lost only 26.3% of the money frittered away by Bezeq in the deal, with Bezeq’s other shareholders absorbing the rest. Makes good business sense.
Still, the tycoon phenomenon has always been overrated as an economic malady. The tycoons weren’t the business wizards they imagined themselves to be in the years they were riding high, before the 2008 global financial meltdown, but were actually more the product than the cause of the Israeli economy’s problems.
Milking the situation
Excessive and poorly designed regulations, monopolies or near monopolies in key industries, a workforce that often lacks the skills needed for a modern economy, powerful public sector labor unions and the fact that Israel is a tiny and relatively isolated market – these are the real problems behind the country’s persistent problems of low productivity, high cost of living and unacceptable levels of poverty and income inequality. The tycoons just milked the situation for what it was worth.
The new tycoon class is in some ways of a different order than the old one. Rather than taking on debt to buy their empires, these people are bailing out their predecessors’ indebted businesses – albeit leaving creditors with giant haircuts along the way.
Nor can they quite build the pyramids of old because of the Business Concentration Law, even though they are taking advantage of the law’s loopholes every chance they get. Among other things, it exempts closely held businesses and foreign companies from being counted as a tier in a pyramid. Under the circumstances it’s no surprise that the new tycoons all made their fortunes overseas (Elsztain in Argentina, Ben-Moshe in Germany and Saidoff in the United States).
In an ideal world tycoons should no longer be a part of the Israeli business scene. Instead, big companies should be owned by the public through a dispersed shareholding in such a way that no one person or family owns General Electric or Siemens. Not that this would solve all the problems of conflict of interest, but it would resolve a lot of them.
The fact that a tycoon apocalypse is happening now is due to the fact that there are still big advantages in owning a company outright In Israel, and tycoon wannabes are willing to pay for it. So when an asset, distressed or otherwise, comes up for sale the “control premium” a buyer is willing to pay trumps the alternative of selling the shares to the public.
This suggests that for all the progress Israel has made in addressing the fundamental ills of its economy, there’s still a lot of work to be done. Tycoon types still see too many opportunities for profits that can be earned from uncompetitive markets and the ability to wield influence on lawmakers and regulators. Rather than trying to frustrate the tycoons with new rules, we would be better off addressing the reasons these people have come back to life.