Taking Stock / Why Goldstein Sold and Reifman Bought

Danny Goldstein: 5,000 workers at the Formula Systems group, thousands of investors in the company's shares and countless people in hi-tech circles were absolutely gob-smacked last Wednesday. Formula's founder and chairman, Danny Goldstein, upped and announced that he'd sold the controlling interest in his company to Emblaze, which is controlled by Eli Reifman.

How could the founder and spirit of Formula sell his baby to a company like Emblaze, and to an entrepreneur like Reifman, they wondered in shock. In the blink of an eye, shares in Formula dived 7 percent on the Tel Aviv Stock Exchange.

Actually, they had no cause to be surprised. Goldstein has already shown that when an opportunity arises to shed shares at a high price, he has absolutely no soft spot toward the company he created.

Back in the autumn of 2001, exactly five years ago, Goldstein signed an agreement selling the controlling interest in Formula to what later became known as the Peled-Givony group.

Even at the time of signature, the market strongly suspected that the buyers were nothing more than a troop of flippant financial acrobats who had managed to fool the banks for a few months.

However, the market figured that anybody valuing his money should give them a wide berth.

Goldstein knew perfectly well that they were a dangerous bunch. So the deal he closed promised him most of the money up front, even if they failed to raise enough for their purpose.

Happily for Formula, its investors and employees, the Peled-Givony group collapsed before it had time to raise the money necessary to pursue the deal, and Goldstein remained at the helm. But he continued to look for a chump who would take the company off his hands for a fortune.

Ishay Davidi: This founder of the First Israel Mezzanine Investors group is exactly the opposite of Peled-Givony, or Reifman, for that matter. Davidi could boast the status of the No. 1 investments man in Israel thanks to internal return rates of 30 to 40 percent, which is high even by international standards.

So when Davidi announced 21 months ago that he was investing in Formula, investors were cheered. Something was going to change at that company after the seven lean years, during which it disappointed investors.

So Davidi came into the company, withdrew gigantic dividends, and discovered that it was very hard to turn the company's business around, and that investors did not really like holding companies of its ilk.

And then came the opportunity, in the shape of Eli Reifman. After a short negotiation, it turned out that he was prepared to pay an insane premium of 63 percent beyond Formula's market capitalization. Davidi took zero time to realize that this was a golden opportunity.

A 63 percent premium for a company of Formula's type is very high. It becomes enormously so when one considers that Formula and Emblaze have absolutely no synergy.

Eli Reifman: Why is he prepared to pay that 63 percent premium? Easy. For the last 12 years, he's been running a financial bubble called Emblaze, a company that managed to raise a huge $700 million from English investors thanks to his extraordinary marketing skills.

It has changed its business model three, four or five times, lost a combined $200 million and has yet to generate material operating income.

Reifman is probably sick of being called a 'bubble boy,' and he's probably been looking for a profitable business to weld into Emblaze. Buying a giant like Formula could fill the void inside Emblaze with real business, and grant Reifman some legitimacy.

The big question is how Reifman's corporate culture will marry Formula's and how Reifman will manage to find and keep strong hired managers to lead the company. But that's evidently a question that the buyer and seller are repressing for the time being.

Is he paying too much? That evidently matters rather less to Reifman. In a couple of years, nobody will remember how much he paid, and Reifman will be able to tell everybody that Emblaze is a real company with real substance.

Nobody will remember that this substance was born of milking investors and buying companies at inflated prices.