Taking Stock / How Much Is a Word Worth?

How much is Ehud Olmert's word worth?. Usually not a whole lot. It's nothing personal - Communications Minister Ehud Olmert is a politician and when it comes to words, promises and political declarations, politician's words are not worth much.

Olmert's good buddy Tommy Lapid proved that beyond any doubt this week when his lust for power overcame the central principle he had supported - refusal to join a coalition that included the ultra-Orthodox - and he threw that banner straight out the window.

But this week Olmert proved there are words that are worth something, quite a lot in fact, particularly when the stock exchange is asked to assign a value to them.

On Thursday, Olmert announced that he will adopt the conclusions of the consulting firm Analysis and order a 67 percent cut in the Israeli cellular providers' network-to-network call charges, known as interconnectivity rates.

The impact of the rate cut on the cellular companies is dramatic. Surprisingly, however, cell companies and their major shareholders traded on the Tel Aviv Stock Exchange barely budged Thursday afternoon after the decision.

Apparently traders didn't initially believe the decision was final, instead considering the announcement a bargaining position or some sort of deal between the minister - known for his affection for Israel's business community and the wealthy - and the companies.

But Sunday, when the cellular providers began bemoaning their fate and threatening to raise outgoing call rates, the shoe began to drop for the market, and with it, the entire cell-phone sector.

Partner Communications - the second highest valued cell-phone company - lost 10 percent in three days, $135 million. Bezeq and Discount Investment Corporation, which hold Pelephone and Cellcom, also lost altitude although much less, as in both cases their cellular holdings are only one-fourth to one-third of their market value.

If we assume that Partner's colleagues lost something in the same ballpark, then Olmert's word cost the cellular sector NIS 1.5 billion in just three days. Not bad for an Israeli politician.

And that is what is both beautiful and frightening in the market mechanism - it's a short cut. It immediately, today, in the present, shows the results of long-term processes expected to impact companies over an extended period of time.

The NIS 1.5 billion slashed from the cellular sector's value represents weighted calculation of two things: investors' calculation of the damage to profits from lower incoming call prices times the risk (or chance, depending on how you look at it) that Olmert will fold or compromise with the cell companies on a less drastic cut.

But even if the value of the cell phone companies does eventually drop by a billion shekels or two billion shekels, we did get one crystal clear reminder from this affair: how much the success or failure of Israel's major corporations is impacted by regulatory decisions.

Since Olmert took over at the Industry and Trade Ministry, he has made snide comments about the "regulators" and the "officials" from government ministries that he thought intervened unnecessarily in business, doing nothing but harm.

And here we are: The man who made "regulator" into a dirty word stamped a violent regulatory foot smack dab into the cellular market, most of which is controlled by the private sector, informing the companies how much they will be charging customers and, in a matter of 48 hours, wiping out NIS 1.5 billion of investors' money.

So what happened to Olmert?

Maybe he had a revelation: He read the report from the British consulting firm Analysis on the price of incoming calls on Israeli cellular networks and realized the whole kit and caboodle he'd been hawking about regulatory intervention in "free markets" was hogwash. Because in Israel, there aren't many free markets - they are mostly monopolistic, oligopolistic, or just plain old government protected one way or another.

Olmert understood what Adam Smith, free market prophet and inventor of the "invisible hand," said 228 years ago: The state's role is to intervene in business in order to make sure markets are actually free.

Israel's tycoons and chief executives know the uncompetitive market conditions very well, the government protections, the customs taxes or regulations that often count for huge portions of profitability, market share and their corporation's company values.

But to the outside world they have a clear policy: Every success is attributed to successful management, courage, willingness to take risks and extraordinary vision - and every failure is the direct result of market conditions or regulatory intervention.

Examination of the Maof-25 blue chip index - the 25 highest market caps on the Tel Aviv exchange - shows that one-third are companies whose profitability rates and market shares are direct derivatives of regulation or lack of regulation; one-third are impacted by regulation but also have major competitive aspects of their business; and the last third operate in competitive markets, mostly international markets, in which regulation is minimal as there are many market players.

Most of the CEOs of these companies would agree with this split more or less. But they would have one small comment: "Naturally we are in the last third. With us, it isn't regulation, its excellence in management, courage and vision. And the proof? Look at my salary."