Amdocs, Comverse and Check Point Software Technologies, besides being Israeli high-tech companies that have attained worldwide success, also have something else in common: None are listed on the Tel Aviv Stock Exchange, but rather on Nasdaq. They aren't even dual-listed. Just Nasdaq.
Israel has made a name for itself as a high-tech powerhouse, but these companies and others like them actually contribute surprisingly little to the country’s investment climate. If they were to dual-list in Tel Aviv, the exchange’s daily turnover could be boosted by over 50% − but they have no reason to do so. The very idea that Check Point, trading at a value of $9.7 billion, would dual-list itself in Israel sounds like a joke.
The industry claims the main reason Israeli high-techs ignore Tel Aviv for raising initial capital is that Israel’s institutional investors consistently avoid investing in the sector.
The numbers bear this out: Although technology stocks topped all other sectors in 2011 and 2012 − with the TA Technology index returning 30% in 2011 and 19% in 2012 − the institutionals continue pouring 83% of the funds under their management into traditional channels like government bonds and concerns controlled by the tycoons. Any Israeli high-tech traded in Tel Aviv gets less than 1% of the pie.
There are 33 high-tech companies and venture capital firms currently trading on the TASE, with 22 also traded abroad. Their stocks, comprising the TA Technology index, are worth about NIS 47 billion overall. Four of the companies − Mellanox Technologies, Nice Systems, Elbit Systems, and EZchip Semiconductor, are also included in the TA-25 index where they make up 5.8% of its cumulative value − NIS 25 billion. But despite their impressive presence on the TA-25, the institutionals aren’t biting.
Investment managers at the institutionals explain their reluctance as stemming mainly from the trauma experienced from the dot-com bubble meltdown just over a decade ago, and to the fact that many of the companies don’t generate revenue at the development stage − making it hard to justify performance to their investment committees.
But the high-tech companies offer another explanation: The institutional investors simply don’t understand the field of technology. Few investment house research departments officially survey Israeli technology companies. In fact, except for Oppenheimer and Harel Finance where analysts provide regular coverage of most Israeli large tech firms, research departments completely ignore them.
“I don’t understand what EZchip does and therefore I don’t buy it for my clients,” an investment manager admitted to TheMarker Magazine. EZchip registered a phenomenal 180% return in the last three years and boasts market value of NIS 3.7 billion, but not even one Israeli institutional holds the stock.
Cooperation is needed between three sides to attract high-tech companies to the exchange: The TASE, which supplies the infrastructure; the institutionals, who bring the money; and the technology firms responsible for delivering the goods.
Since setting itself a goal in 2010 of becoming a magnet for world-class high-tech companies, the TASE has organized conferences to bring together technology executives and senior brass from the institutional investors. It also organized, together with Tel Aviv University, a training course for life sciences analysts to increase coverage of the pharmaceutical industry. The results, however, remain unimpressive: Since 2010 only four technology companies have listed in Tel Aviv, much fewer than expected by the TASE.
But the TASE hasn’t given up. “We now intend to reach out to companies with around $300 million in sales and in need of funding,” says CEO Ester Levanon. “Our goal is to find companies still before the stage of their big capital raising abroad, meaning those on the right track but not yet large enough to raise funds in the U.S. Based on our experience, a company born in the TASE won’t delist itself afterwards.”
Levanon rejects the claim that institutions don’t understand the field of technology, saying the real barrier is difficulty pricing the companies due to a shortage of information. “Analysis is lacking on technology companies and this, without a doubt, holds up the market,” she explains. “Right now we are trying to find a company to provide paid analysis for companies. We’ve talked with technology companies and they are very eager. They feel they’re losing investment.”
But before the TASE finds such a company it will need to change regulations barring companies from publishing analysis written on their behalf. The Israel Securities Authority doesn’t allow this due to concern that consulting firms might slant their findings in favor of the companies hiring them, although technology and biomed companies in the United States do pay for detailed analyses of their operations themselves.
Last summer ISA chairman Shmuel Hauser set up a committee to promote investment in public companies active in research and development. “The committee was established after many discussions on regulatory breaks for high-tech companies,” says Levanon.
Guy Preminger, head of the technology area at PwC Israel, says his firm is now preparing prospectuses for several high-tech companies preparing to issue stock in Tel Aviv but won’t reveal their names. “There are about 200 Israeli companies stuck today in terms of raising capital, but they still aren’t ripe for Wall Street,” he claims. “These companies would be happy to make a public offering in Israel because it would be hard for them to raise any significant amount of capital abroad.”
Two of the three sides needed to open up the investment market to the high-tech sector already seem to be pulling together. The TASE and securities authority are expected to submit a program next month for making it easier on R&D companies to list in Tel Aviv. All that’s needed now is for the institutionals to recognize the enormous potential of technology companies so that more of these companies can join the exchange and generate more value for pension savings.
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