Taking Stock / The Company, Not the Country

By 9:11 A.M., Abraham Hirchson had already declared a victory.

The Finance Ministry issued a press release stating: ?Finance Minister Abraham Hirchson praises the Mercury deal and says it constitutes an expression of confidence in the Israeli economy.?

Later in the afternoon, a second press release informed the media that Hirchson had already met with the CEO of HP and had thanked him for the acquisition.

Hirchson?s attempt to garner an image boost is understandable, but in a deal in which a U.S. computer giant buys out Mercury, there is little confidence in the Israeli economy.

Mercury was founded by a talented Israeli technology entrepreneur, Aryeh Finegold, and under the leadership of his heir, Amnon Landan, it became one of Israel?s biggest technology success stories. Finegold and Landan had an impressive vision of a new market that Mercury essentially invented ? computer systems to check software. The vision became a $600 million business.

What weighed on the company?s performance was the huge quantity of employee options that allowed the company to exploit the accounting loophole and thus keep the cost out of its profit-and-loss report.

Notes in the financials indicated that while the company reported profits of tens of millions of dollars, net of the options, it was essentially losing money. About nine months ago, it became clear that the company had falsified option-allocation dates for executive options in a trick that became known as backdating, and Landan, the central beneficiary of the forgery, had to resign. The stock plunged, it was tossed off the Nasdaq?s main board, and Mercury became a takeover target.

Mercury?s evolutionary process morphed it from an Israeli company to a U.S. company, most of whose employees are on the West Coast, headquartered in Mountain View, California. Israel was mostly a development center. When Landan went home, and was replaced by Tony Zingale, the company started to lose its Israeli identity.

Landan had no Israeli heir, and the options scandal-battered directors and executives were no longer able to fight for independence. Mercury, like many Israeli companies before it, will no longer control its destiny, but become a division of an American giant.

For Mercury shareholders, today is a holiday: HP is paying a 33-percent premium over market for the shares. There is no benefit for the Israeli economy from the deal.

First of all, most Mercury shareholders have been U.S. institutionals for a very long time, and there will be no substantial tax revenues like there were for the Iscar deal.

Secondly, most major global computer companies have big development teams in Israel ? so there is no great innovation in this deal. HP itself bought out Israeli Indigo about five years ago, after that company failed to generate consistent profits on its own.

Thirdly, as opposed to other companies whose potential was only revealed when they were snapped up by an American giant, Mercury has been considered a success for many years. The business opportunity to buy it was just created.

There is no comparison between the Mercury and Iscar deals: When Warren Buffett bought privately-held Iscar, he expressed confidence in its Israeli management and declared decisively that the management would remain in place and that the company would continue to be headquartered in Israel. It is likely that had Warren Buffett known that just a week after he actually forked over the cash, the factory would turn into the repeated target of missile attacks, he would have thought twice about the deal.

Buffet isn?t just the world?s greatest investor, he is also an investor who never came near Israel and his company has no particular know-how in the area in which Iscar operates ? rendering the acquisition both surprising and unusual.

Deals like HP and Mercury, even if smaller in scope, have come and gone by the dozen: Intel bought DSPC; BMC bought New Dimension; and Computer Associates bought Memco ? and all of them wanted to complete the range of products they offered and keep an R&D center in Israel.

HP is also a huge computer company that wants to integrate Mercury into its product line, and in this case too, it is clear that all the decisions about Mercury?s future will be made in Palo Alto.

Against the backdrop of the intense military conflict, it is tempting to call HP?s willingness to buy Mercury an expression of confidence in the Israeli economy; but Mercury is not terribly dependent on Israeli prosperity and the deal reflects only confidence in the company and its current position in the market ? and not in the country in which the people who once led the company were born.