Taking Stock / Mount Hermoni

1. A mountain of dollars: That is how much cash, securities and deposits Tadiran Communications had as the third quarter ended. It had accrued the assets in five years of successful operations in the defense business.

Last week, there were three people controlling that bounteous kitty: Tadiran's chief executive, Hezi Hermoni, and two big investors who joined in 1999, Shamrock and First Israel Mezzanine Investors, controlled by Stanley Gold and Ishay Davidi, respectively.

Hermoni, Gold and Davidi knew that if they were clever, they could turn "cash in kitty" into "cash in their pockets." They have spent the last six months searching feverishly for the best way to do it. On Thursday, they found it.

2. Nochi and Mickey: Hermoni, Davidi and Gold closed their first deal with the man controlling IDB Development Corporation, Nochi Dankner. This is how it happened.

They'd heard he wanted to get rid of the 19 percent stake in a rival defense equipment company, Elbit Systems, held through IDB company Elron Electronic Industries. They also heard that Mickey Federmann, who managed Elbit Systems and himself held 30 percent of its shares, didn't want to buy it. In short, they smelled an opportunity.

Hermoni et al contacted Federmann and suggested negotiations to buy their shares in Tadiran Communications, a 35 percent controlling stake. With the cash in Tadiran's coffers, they hinted, Federmann could buy Dankner's shares in Elbit Systems. Put down $140 million, Hermoni & Co. told Mickey, and you'll get Tadiran Communications and Elbit Systems.

Mickey Federmann didn't like it. It's a matter of character: He isn't into wheeling and dealing between publicly traded companies. He didn't like that whole chain reaction effect.

New partner in his bed

If he thought he could get a better, straighter deal, he had miscalculated. Dankner immediately offered his 19 percent stake in Elbit Systems to Hermoni, Davidi and Gold. They agreed to buy the Elbit Systems shares. Federmann woke up the next morning and found a new partner in his bed, Hezi Hermoni, who promptly hinted to the press that Federmann wasn't performing and that he, Hezi, would bring Elbit Systems into a whole new era.

Federmann had no choice. If he didn't want Tadiran and Hezi Hermoni as his partners, he'd have to buy the shares from Dankner himself. He did. He organized a loan from Bank Leumi and bought the shares for $200 million. It was expensive and painful, but he had no choice.

3. A new partner: Since cutting that $200 million check, Federmann has been haring about trying to find a partner and relieve himself of some of the financial burden. Elbit Systems is a great company that may return his investment, but Federmann isn't the type to spend sleepless nights worrying about gigantic loans.

And he began to rethink that original proposal by Hermoni, Davidi and Gold. Suddenly that fat kitty over at Elbit Systems gained fresh new allure. The entire defense industry is consolidating and a merger involving Tadiran might be complicated, but perhaps it was really the requisite move.

Heavy loans do a lot to sharpen the mind.

Meanwhile, back at the Koor Industries ranch, the conglomerate had a problem, fondly called Elisra. It is a defense company that cannot seem to ride the wave. Elbit Systems is churning out cash, Tadiran is creating tremendous value and Elisra - its main product is labor disputes.

Two years ago, Kolber managed to sell a third of Elisra to the Israel Aircraft Industries at the extraordinary price of $300 million. That infusion of oxygen from the state-owned company was a breath of fresh air for battered Koor, but it did nothing for Elisra, which did nothing but deteriorate from quarter to quarter.

Kolber was on the lookout for solutions. Recently he sat down with Federmann and the two brainstormed, producing many ideas, one being to consolidate Tadiran, Elbit Systems and Elisra. Many ideas, all fueled by one fat kitty.

5. Who stole whose deal: Late Wednesday, Kolber and Federmann were still talking about alliances. On Thursday, Kolber started negotiations to buy Tadiran, and by 7 P.M. that night the deal was done.

Sources near Federmann say: Kolber stole our deal.

Sources near Kolber say: Federmann tried to steal our deal.

On the record nobody's saying anything; Kolber and Federmann are the epitome of courtesy. They don't even know words like that.

Koor will be paying Shamrock and FIMI $140 million for 32.5 percent of Tadiran. Gold and Davidi are wrapping up one of the most impressive financial rides the local market has seen in a decade.

6. The math: Tadiran was sold at a company value of $440 million and the press cheered. But Kolber had sold the same company to Shamrock and FIMI, and to a group of its management headed by Hermoni, five years ago at a third of the price. And now Koor's buying it back at top dollar.

Sell, sell, sell

No - wrong - it wasn't three times the price, actually it's nine times. The company Koor's buying back isn't the same company it sold.

The Tadiran that Shamrock and FIMI took public two years ago isn't the Tadiran they'd bought. It was Tadiran plus the loans taken to buy the company from Koor.

If the loans are factored in, then the price at which Tadiran was floated was three times above the price at which it was bought from Koor. Now it's being sold at three times its offering price. Three times three equals nine.

It is embarrassing to buy back a company you'd sold for nine times the price. That isn't the kind of thing management dreams of doing. But that quarter-billion dollars in the kitty helped them overcome all sorts of psychological obstacles. Kolber wanted the cash and also figured that without Tadiran, Elisra was doomed.

7. Hezi Hermoni is the man who was responsible for one of the greatest successes on the Tel Aviv Stock Exchange in recent years. He had been a Koor employee, he found Shamrock and FIMI and talked them into joining him and seven managers and buying Tadiran from Koor.

On Thursday afternoon, a few hours before the new deal with Koor was closed, Hermoni called his broker and told him to sell, sell, sell. Within minutes he'd wiped out 90 percent of his holdings in Tadiran, and taken home NIS 36 million.

He had his reasons. Two years ago, he told of his first meeting with Kolber and Kolber's right-hand man Biran, when they had bought Koor: "The day they came to Tadiran, I saw they were financiers, people who don't let grass grow under their feet. I started looking for buyers."

Last week Biran described his view of the deal: "We spent $141 million buying a company with a quarter-billion dollars in cash." It is already crystal clear that Koor means to have Tadiran use that lolly to buy Elisra.

Wait a second, Biran, what about the minority shareholders? That $141 million got Koor 32.5 percent of Tadiran, and that quarter-billion dollars also belongs to the minority shareholders from the public who own the other 67.5 percent. Hermoni, Davidi and Gold got theirs; Kolber and Biran will find a way to get theirs, but what about the investors?

Well on Sunday, they saw their investment lose 4 percent of its value. And yesterday, Tadiran was down more than 5 percent. And that's only the beginning.