The Real Winners and Losers

Similar characteristics, and the same conservative approach to business, are the basis for the special relationship that has formed between Wertheimer and Warren Buffett - this is what has allowed the Iscar deal to move along so quickly and so efficiently.

The two are both nonconformists who have little interest in what is fashionable or what everyone else is doing. They don't like the stock market, or the brokers, and certainly not the sophisticated financial world. They believe in old fashioned values: entrepreneurship and hard work.

Eitan manages Iscar in the "kitchen" style. In other words he believes in informal meetings over a cup of coffee in the corridor. That is where the important decisions are made - without paperwork or bureaucracy. Iscar has not had a formal board meeting for 15 years.

Buffett manages an enormous company from Omaha with only 16 employees in his office. He has a small office and drives his own car down the street to eat a hamburger for lunch.

The Koor conglomerate in the 1980s had an administration of 400 people, fancy offices in the center of Tel Aviv - until it collapsed.

The personal, human touch in business is important, and as of today no one can argue with that. It turns out that character and culture do determine things. They have brought together the the conservative culture of the U.S. Midwest with the hardworking culture of the yekkes from Nahariya.

Tax Max

After all the nice talk about developing the Galilee, and the vote of confidence in the Israeli economy, we should also take a look at the tax issues which were so important in doing the deal. After all, no one likes to pay taxes, even if he is a billionaire.

Last year the Knesset passed a new version of the Capital Investment Encouragement Law. the law is neither egalitarian nor transparent, and it has cross subsidization - as well as two particularly bad methods for giving grants. One is the "Ireland track" and the other is called the "strategic track."

The head of the Israel Tax Authority (ITA), Jackie Matza, thinks that Buffett's investment will not qualify for the strategic track, and therefore will not receive an exemption from taxes on the profits resulting from Iscar's present operations.

What Iscar will get is a tax exemption for 10 years on all future growth for the company - no small benefit.

First of all, the process of determining the tax status for the deal is not over yet. Second, Wertheimer and Buffett have a direct line to Prime Minister Ehud Olmert. They knew what they were doing in involving Olmert in the deal, and even gave him credit - and in public - for his help and support. It certainly did not hurt that Olmert's right hand man, the director general of the Industry and Trade Ministry at the time, and now director general of the Prime Minster's Office, Raanan Dinur, spoke directly to the head of the Investment Center, the head of the tax authority, and the director general of the treasury - on the subject of the effects of the tax laws and the Investment Encouragement Law on the deal.

Here lies the real issue. Because of the investment laws, Iscar pays almost no taxes today. That is how the company has managed to achieve an amazing 30-percent profit margin on sales.

That is infuriating, since in a country where the social and wage gaps are so large, where the state budget is breaking under its excessive number of various tasks and goals - it is unacceptable to give a tax exemption to such a profitable firm.

After a certain point, from the time the company establishes itself and starts to make money, the state should no longer provide any more help. Remember that any tax benefits - of any type - means raising the tax burden on the rest of the taxpayers. That includes the middle and lower classes, who are already suffering.

Bad blood

Until 1997 Discount Investments owned 25 percent of Iscar. But then something happened - and there was serious bad blood, even threats between the Wertheimer family and Discount over the issue of publishing Iscar's financial results.

Wertheimer did not want anything reported at all, but Discount went ahead and published something. Wertheimer was furious and forced Discount to sell its stake back to the family.

It did not matter that Discount was the one who saved Iscar in its early days when it invested in the company and helped it develop.

But in 1997 Discount was no longer needed. So it found itself on the outside.

Discount Investments received $200 million for its share. Today that would have been worth $1.25 billion.