Taking Stock / Barinboim the Gekko

Two weeks ago, he took the capital market by shock. The wunderkind who first popped up five years ago announced that he is buying the controlling interest in a household-name Israeli company, the textile and clothing maker Polgat, for $34 million.

Not a week later, the young man proved he can squeeze blood from a stone.

Polgat had never managed to sustain robust profit over time. Yet it will be paying a $34 million dividend to help its leveraged buyer return more than two-thirds of the loan he took to buy the company.

Like Gordon Gekko, the fictional corporate raider played by Michael Douglas in the movie "Wall Street," Zvi Barinboim is teaching the market mavens a thing or two about leveraged buyouts. Alongside him is Polgat's chief executive, Ofer Gilboa, who is joining the controlling group.

Greed is good, Gekko explained to the thunderstruck shareholders of Teldar Paper, a company he'd snapped up. "Greed is right. Greed works," Gekko compellingly orated. "Greed clarifies, cuts through, and captures the essence of the evolutionary spirit ... and greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the U.S.A."

Logic would indicate that the buyer's greed would make bloated, inefficient companies easy prey for hostile takeovers. The buyer would then force the company to slim down and become efficient, or liquidate it and sell off assets for the benefit of the shareholders.

The rewards and the risks

Fifteen years after the movie "Wall Street" hit the cinemas, one does not need to explain why shareholders' greed and their demand that companies create value is an integral part of the free market.

But the risks still bear some clarification, as Barinboim's first move shows.

Thing is, Polgat has no reserves from which to withdraw the dividend. For Barinboim to quickly repay a large part of the loan he took to buy the company's controlling interest, he has to reduce its equity, contingent on the approval of the court.

Economists working for Zinger-Even-Giza hastened to give him their imprimatur, explaining why extracting $34 million from the company's wallet and reducing its equity to zero won't detract from its ability to repay its own loans.

Maybe they are right. But if you know anything about Polgat's past and present, then you know two things: one, its business is volatile and during the hard times, it has lost tremendous amounts of money; and two, the company has more than 2,000 employees. If hard times hit and it has to lay off massively, the entire town of Kiryat Gat will face ruin.

Ofer Gilboa, the company's CEO, and Zvika Barinboim, the controlling shareholder, both know the risks and must have a plan how to render the company profitable and efficient.

But they chose first of all to ease their personal financial burdens. They decided to wring every available cent from Polgat and use it to repay their personal loans taken to buy the company.

But what if it doesn't work

The question is, how much of a safety net do Polgat and its thousands of workers have left if the business plan doesn't pan out as planned. And mainly, if Barinboim is mentally prepared for the day he has to fulfill another melodramatic Gekko-style role: to stand before hundreds of appalled people with pink slips in hand, and explain that "the market has changed" and "hard things have to be done" to save the work place for the workers that remain.

Barinboim must hope he will never see that day, and that Polgat will go from good to better under its new young management. If it does not, everybody will remember that first financial move of his: how he used up all the company's reserves to pay his own debt. And then it will be hard to sell that story about greed being absolutely lovely and how people like Gordon Gekko and Zvika Barinboim just make our economic world better and better.