Taking Stock / Ram Caspi Mocks the TASE

"Market? Valuation? What stock market are you talking about? Everybody knows that in major deals when control of the big publicly traded companies is transferred, it turns out that the market value is detached from reality."

So claimed attorney Ram Caspi, legal representative of several Israeli banks and some of its biggest corporations, at a hearing held a the Dan Tel Aviv hotel on January 10, 2003, before the Accounting Standards Institute.

Yes, it was Ram Caspi shining forth, this time expounding on a subject particularly dear to his heart: Tel Aviv's capital market. That morning Caspi spent a quarter of an hour mocking the Tel Aviv Stock Exchange, the Accounting Standards Institute and Standard 15, which stipulates that companies must factor in market value when recording their negotiable investments in their books.

Back then, when Caspi spoke, the capital market was reeling, the credit crunch was acute and the banks and their biggest customers were too, under terrific pressure from the capital market and the Supervisor of Banks. Caspi was sent to the hearing by his friends, to torpedo Standard 15. The collapsing share prices of the biggest companies on the stock market made their financial statements look ridiculous, as many had continued to book their negotiable investments at high prices long relegated to the dim memory.

Market value is king

The solution many companies found was to commission appraisals from certified appraisers, and there are a lot of them around. You give them a check and they take care of the rest. Excel tables can suffer abuse without making a fuss.

And then the market turned around and share prices started to soar. Supporters of the appraisal method chortled - here was the proof that market value was meaningless, they said. Just look how share prices are rising now, they said.

But each week that passes proves exactly the opposite, namely that share prices are the real foundation for transactions, not commissioned appraisals, which are looking pretty silly right now.

The first to prove that market value is king were the Safras. They sold the controlling interest in First International Bank of Israel (TASE: FIBI) to Zadik Bino at a bargain rate of 50 percent below the bank's shareholder equity, because that was the price the market dictated.

Last month it was Itschak Shrem's turn to remind the market what appraisals are worth. He sold a third of the Polar Investments (TASE: PLR) group to a U.S. investor for 50 percent below the price cited in an appraisal Brightman-Almagor had prepared just eight months earlier.

Shrem sold the Polar shares at half price even though the capital market had meanwhile rallied to an astonishing degree. Interest rates dropped, Israel's risk premium did too and shares on Nasdaq, which determines the value of many of Polar's investments, climbed by almost 40 percent. Shrem's deal said it all: market value is what counts.

Climbing down from the tree

Yesterday came the turn of Roy Gill and Eitan Eldar. After two years of claiming that market price means nothing, and that the Israel Land Development Corporation (TASE: ILDC) shares they'd bought for NIS 300 million were worth every penny, they officially announced on Monday that the sole and only determining factor is market value.

Eldar and Gill sold a 4.5 percent stake in ILDC at the market price, giving the Excellence-Nessuah brokerage an option to buy the rest of their ILDC shares at market value too. ILDC's price on the market is NIS 450 million.

Like the rest of Caspi's clientele, Gill and Eldar had clung for a year to an evaluation commissioned from Zinger & Even. The first appraisal evaluated ILDC at NIS 1.1 billion, which was three times its market value. In the last couple of years, Zinger & Even had to gradually climb down from the tree. Every half-year it updated the evaluation in the direction of the company's market cap. After the recent gains on the Tel Aviv Stock Exchange, the two figures, the market cap and the appraisal, finally met. Naturally, Gill and Eldar arrived at that historic collision only after the group of companies they headed had collapsed into rubble.

At the end of the day

You can laugh at the Tel Aviv Stock Exchange, you can call it a casino with manic depression, you can complain that many of its companies do not generate value over time, and that only the interested parties ever see profits. You can also mock the institutional investors that seem determined to buy at the peak and sell in the dips.

But at the end of the day, barring the case of mergers and acquisitions creating unique synergy, when companies enter a major deal, raise money, buy or sell, they all toe the line drawn by the market.