Business sector ends year of records, scandals

Growth has outstripped most expectations; and shares have soared into the stratosphere.

By YIGAL GRAYEFF
December 29, 2005 07:00
bibi fischer 298 88

bibi fischer 298 88. (photo credit: )

The year 2005 has been a remarkable one for Israel's economy and business sector, full of success, scandal, change at the top and big mergers. Growth has outstripped most expectations; shares have soared into the stratosphere; and foreign investors have fallen over themselves to pour money into Israel. Some have bought the country's biggest state-owned enterprises, while at the same time, Israel's biggest company made the biggest ever acquisition by a domestic firm. In addition, one of the world's top economists became the head of the Bank of Israel, only to see the man who brought him in quit a few months later. To add spice to the mix, two of the biggest scandals in Israel's history took place in 2005, bringing business news onto the front pages. Here's the business year in review: Economic magic At the start of 2005, few could have hoped for a better year, when almost everything in the economy went right. Gross domestic product climbed at an impressive 5 percent, easily beating the Bank of Israel's initial expectations of 3.2% and former finance minister Binyamin Netanyahu's more optimistic forecast of 4.5%. Among policy makers, only Shimon Peres appears to have been over-exuberant about growth prospects, saying in February that the Disengagement process could lead to GDP growth of 6%. The Palestinians are also getting in on the act, with the World Bank saying that their economy is expected to expand by at least 8% this year and that unemployment is expected to fall sharply. Speaking of unemployment, it's not just economic growth that warms the cockles as the driving rain and biting wind of the cold winter set in. The number of jobless has fallen to a four-year low of 8.9% from 10% at the end of last year and the number of workers increased to 2.5 million from 2.41 million. This reflected a rise in work force participation - which includes the employed and the unemployed - to 55.2% from 54.5%. The increase in jobs has meant that more people paid tax, helping total revenues climbed to NIS 122.9b. in the first nine months of the year from NIS 113.3b. in the same period of 2004. The rise was also helped by the government's "Mas Vehalila" tax collection campaign at the start of the year and occurred despite the government's tax cuts, which are set to continue for another five years, assuming Finance Minister Ehud Olmert or Binyamin Netanyahu will continue setting economic policy after the March elections. The increase in tax revenue has helped the budget deficit to almost halve to about 2% of GDP this year from 3.9% last year, well within the Treasury's target of 3.4%. In addition, the national debt has fallen from 105.6% of GDP in 2004, but still rather scarily hovers around 100% and costs up to $12b. a year to pay off. However, because the figures are moving in the right direction, foreign investors have been seduced enough to pour over $6b. into Israel this year, including more than $1b. into untested hi-tech start-ups, as well hundreds of millions into buying major government-controlled companies. In addition to buying for the long-term, foreign players have speculated heavily on the Tel Aviv Stock Exchange, helping to send shares to record highs. The Tel Aviv 25 hit 700 for the first time in July - five months earlier than some analysts expected - and then surprised us all further by breaking 800 earlier this month. The upward march can be traced back to November last year, when the Palestinians gained new leadership and the prospects for peace began to brighten. Add to the mix strong growth, the government's economic policies and record corporate results, you have a recipe high octane stock growth. The huge foreign investment has taken place against a background of record low interest rates, which were cut to 3.5% in January and stayed that way for 10 months. Meanwhile, the Federal Reserve was consistently but gradually raising its rates and history was made in August when US and Israeli rates reached parity for the first time. It was made again in September, when the Fed raised its rates to 3.75% and US rates were higher than those of Israel. It didn't last long, however, and a few days later, Stanley Fischer brought Israel back to parity with the US and has since raised rates to 4.5% to stay ahead of the Fed's curve. Privatization frenzy This year has been abuzz with privatization activity, starting with Israel's third-largest bank and ending with privatization of the second-largest. In January, the government sold 26% of Israel Discount Bank to a consortium led by US businessman Matthew Bronfman for NIS 1.3b., who also has an option to buy another 25% within three years. However, he has yet to close the deal, due to money laundering at Discount's New York subsidiary, which has resulted in US authorities slapping the company with a hefty $25m. fine. In contrast, the government's sale of a controlling stake in Leumi closed within a month. In November, two low-profile US investment companies agreed to pay NIS 2.47b. for a 9.99% stake in Bank Leumi and an 18-month option to buy another 10.01%. A beaming Ehud Olmert told journalists that the offer tabled by Cerberus Capital Management and Gabriel Capital was way beyond the government's expectations but not so much higher than those of the other six bidders. "The other participants offered high prices and they couldn't believe that their bids weren't enough," Olmert said. It seems that neither could anyone else. The tender was one of the last stages of the privatization of Leumi, whose shares the government started selling on the TASE in 1993. Earlier this year, the Treasury sold a combined 10% of Leumi to foreign investors in two tranches for a total of NIS 1.77b. The privatization was also the last to take place in the banking sector after 22 years of government involvement following the banking crisis of 1983, when the state was forced to step in to save the banks from collapse. In between Discount and Leumi, the government sold 30% of Bezeq for NIS 4.24b. to a consortium involving a returning prodigal son, Haim Saban, the billionaire owner of one of Germany's largest TV companies. Ronald Cohen's UK investment company Apax Partners and Mori Arkin, the genius behind the success of pharmaceuticals maker Agis Industries, also came along for the ride, and after winning the tender in May, Bezeq was their's by October, thus ending more than 30 years of government control of the company. Despite the astonishing success of its privatization program, the government has no intention of sitting on its laurels. Over the past year, it carried out important preparatory work for the sale of the ports and Israel Oil Refineries (Bazan), which it wants to start selling in 2006. Other state-owned companies on the chopping block are Israel Aircraft Industries and Israel Military Industries, which continues to teeter on the brink of bankruptcy. The spanner in the works, of course, is the election, with new Labor leader Amir Peretz expected to oppose further privatizations. Scandal anyone? As anyone who has ever dealt with an Israeli building contractor knows, business practices can verge on being just a tad dodgy. It's a reputation the business community did nothing to shake off in 2005. In March, the police and the Bank of Israel announced that they had uncovered one of the largest money laundering schemes in Israeli history at Bank Hapoalim's branch on Rehov Hayarkon in Tel Aviv. The police initially froze $372m. in client assets and arrested 22 employees on suspicion of using two methods used by local and foreign businessmen to launder illegally obtained funds. The markets weren't happy with the news but were soon soothed by the sweet words of Hapoalim chief executive Zvi Ziv, who forecast that earnings wouldn't be hit by the scandal and promised total cooperation with the investigation. It helped that the probe in Israel was mostly limited to the one branch, although an account at a branch of United Mizrahi Bank was also frozen. The investigation took in Israel's Ambassador to the UK, Zvi Hefetz, who was questioned due to his close ties with Russian businessman and Ma'ariv newspaper shareholder Vladimir Gusinsky, one of the suspects in the case. Betar Jerusalem's eccentric Russian-born billionaire owner, Arkadi Gaydamak, was also caught up in the affair and was grilled for 10 hours late last month by the police just a day after he unveiled his own political party. Gaydamak, of course, protested his innocence. So did the senior executives of some of Israel's largest companies, who were arrested in the Trojan horse affair, the largest case of industrial espionage in Israel's history. At the end of May, the police announced that they had arrested 11 private investigators suspected of infiltrating the computer systems of their clients' competitors with a Trojan horse, a piece of software that enabled the users to steal classified commercial information. As part of an operation code-named "Horse Race," they also questioned some of Israel's top business leaders, including the CEOs of Cellcom, Yes and Pelephone, who admitted they had hired the PI's but claimed ignorance of their methods. The police weren't buying it though. "It is hard to believe that the CEOs did not know what their subordinates were doing," said Dep.-Cmdr. Arye Edelman, head of the Tel Aviv Fraud Squad. "We can assume these people worked according to instructions they received from above." Nevertheless, no major company bosses have been indicted, although in June two private investigators were charged with illegally obtaining classified commercial information on behalf of their clients. The scandal won major headlines and as Dan Gerstenfeld pointed out in The Jerusalem Post, it created a new kind of celebrity, with PR and advertising agencies rushing to announce that they were the victims of the attack. "It seems that the intensive coverage brought Israel's business elite to the conclusion that if you weren't worthy of getting the spyware software, you simply didn't exist," he wrote. What was so riveting was that like Watergate, the affair started out as a very small inquiry by two over-stretched investigators and snowballed into something huge. It began six months earlier, when police started looking into complaints from Israeli novelist Amnon Jacont that excerpts of a novel he was working on mysteriously appeared on the Internet without his consent. Jacont led police to his former son-in-law Michael Haefrati, who allegedly created the Trojan horse and sold it to PI agencies in Israel. Bezeq's rather large involvement hung like a cloud over its privatization, which the government had cannily completed two weeks earlier. Like the company CEOs, the government claimed it knew nothing of the skullduggery until everyone else did. Nevertheless, it did eventually promise Bezeq's new owners that that the taxpayer, I mean the state, would conditionally cover 30% of the costs should Bezeq be sued and found guilty for its involvement. If only the targeted companies, which included US computer maker Hewlett Packard, cable television company HOT and cellular operator Partner, had listened to Jerusalem Post technology writer David Shamah, who just five weeks earlier presciently had advised his readers in a loud, blazing headline to "Remove those crummy Trojans from your PC." Change at the top Having started with a bolt from the blue, the year is coming to a stable end despite three political earthquakes - one more powerful than the next. In January, then finance minister Netanyahu astounded the business and economic community by announcing that his nomination to succeed David Klein as Bank of Israel governor was Stanley Fischer, one of the most respected economists in the world and maybe even a dark horse to succeed the legendary Alan Greenspan as the chairman of the Federal Reserve. Nevertheless, the former director of the International Monetary Fund gave up his job as vice chairman of US giant Citigroup, where he was earning a very nice salary that the State of Israel couldn't hope to match, to take the post. Like all new immigrants from Western countries, he came despite the monetary sacrifice and has charmed the media with his softly spoken demeanor, his heavily accented Hebrew and his refusal to speak English at his introductory press conference, despite a request from Jerusalem Post reporter Greer Fay Cashman. The appointment was like Manchester United manager Alex Ferguson agreeing to become the manager of the Israeli football team, or LA Lakers coach Phil Jackson becoming the coach of the national basketball team. Most economic observers couldn't hide their enthusiasm, with Tel Aviv University economics professor Haim Ben-Shachar, saying the appointment was "as good as it could possibly have been." By persuading the staunchly monetarist Fischer to come to Israel, Netanyahu demonstrated the kind of ambitious free-market thinking and can-do ability that the markets loved him for. That's why seven months later, after Netanyahu quit as finance minister, the TASE 25 plunged 5.2% - its biggest one-day drop in three years. Netanyahu and Fischer were an economic dream team and the former's resignation was a huge shock, despite all the warning signs. Netanyahu had long been a very unwilling supporter of the disengagement process in the Knesset, where cabinet discipline forced him to vote in favor of Sharon's plan despite his public opposition. But it all came to a head on one Sunday afternoon in August, just two days after The Jerusalem Post published an interview with him under another very prescient headline that asked, "Why is Bibi still in the government?" Bibi clearly agreed and resigned, sending the markets into temporary hysteria. Sharon, however, appointed Ehud Olmert as acting finance minister later that evening, which calmed traders and the markets recovered fairly quickly - especially as Olmert promised to maintain Netanyahu's policies and keep within his budget framework. In his fourth months at the Treasury, he has continued the privatization process and has barely put a foot wrong. The surprises weren't over, though. Against all expectations, Amir Peretz nicked the leadership of the Labor Party from under the nose of Shimon Peres, prompting the shekel to fall sharply against dollar and one analyst to warn that "The market is opposed to the return of Bolshevik [economic] practices." As if that wasn't enough, Ariel Sharon bolted from the Likud to form Kadima, but the market ruptures caused by this political earthquake soon passed as the new party took a clear lead in the polls. Teva's big deal Teva Pharmaceutical's purchase of Florida-based competitor Ivax Corp. for $7.4b. stands way out as the top merger story of the year - if not of Israeli history. It is simply remarkable that a company from a country the size of Israel has achieved the level of success that would enable it to make such a large acquisition - the biggest ever by an Israeli firm. But then Teva is a remarkable company, and the purchase reestablished its position as the biggest maker of generic drugs in the world. The Ivax acquisition eclipsed the previous most expensive purchase by an Israeli company, which was that of Sicor for $3.1b. in early 2004. The buyer in this case was, you've guessed it, Teva. The company expects Ivax to boost its annual sales to more than $7b. and its employee base to approximately 25,000. Once the acquisition closes early next year, the company will gain access to new markets in South America, as well as in the Czech Republic and Poland, which it had been trying to enter for some time. The best of the rest One of recurring themes of the business and economic sector of 2005 was the constant breaching of records and breaking of new ground, whether for the good - as in the case of the stock exchange - or the bad - as in the case of corporate misbehavior. Other important stories of the year include: A surge in tourism despite the "closed skies" that give El Al an advantage over its competitors. Poverty, which has become a major election issue, even though it's hardly a new problem. The Bachar Law, passed in July, requires the banks to sell their interests in mutual and provident funds. After wailing about how disastrous the reforms would be, the banks can't sell their funds fast enough. Israel's top companies have made record profits, while several smaller ones have carried out initial public offerings in London, New York and Singapore, of all places. Israeli companies are so fashionable that foreign companies have spent hundreds of millions of dollars buying them in numerous deals. One of these transactions involved Intel, which also received a $525m. incentive from the government so it would invest $3.5b. in a new microchip plant in Kiryat Gat. Finally, after several years of trying, Israel signed a historic $2.5 billion gas deal with Egypt. All in all, a truly remarkable year for Israeli business - one that will be hard to match in 2006.


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