Guest Columnist: Has a tycoon ever done you wrong?

By
November 5, 2010 16:30

However you look at it, a big part of Israeli business is controlled by small number of people. But claims against tycoons and their business groups aren’t compelling.




David Rosenberg

David Rosenberg. (photo credit: Courtesy)

However much money and power they have, it must be tough for the likes of Nochi Dankner and Yitzhak Tshuva to head home at the end of a long day of merging and acquiring, presiding over board meetings and signing off on annual reports to know that you aren’t much loved.

Journalists dislike anyone with too much wealth and power, and who better exemplifies this than the tycoon class? Politicians may bend to your demands in private, but in public they attack your overweening power. Even stock market investors, those loyal friends of the free market, value your companies less than those unaffiliated with the big business groups.

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Even the fact that you and your fellow titans captained their holdings through the world’s most severe financial crisis in generations hasn’t won you much respect. Indeed, with the crisis over, Binyamin Netanyahu, the sworn enemy of bigger government and more regulation, has appointed a committee to examine how to increase competition at your expense.

Everyone from the prime minister on down talks about concentration and its evils, but the question of how much concentration there is in the economy is not as simple to answer as it seems. It’s even harder to assess how destructive it is.

ONE WAY to measure concentration is to look at the proportion of the top companies on the Tel Aviv Stock Exchange controlled by the big business groups. A Bank of Israel study did that and found that the 10 largest accounted for 30 percent of the market’s value, among the highest levels in the Western world. But that’s not necessarily an accurate reflection of the tycoons’ economic and political power. For instance, the IDB Group owns Makhteshim Agan, but the maker of agrochemicals exports almost everything it makes. It doesn’t need to manipulate the local market because the market is of no consequence to it.

Another way to measure concentration, as two economists did in a study commissioned by (cough, cough) IDB, is by weighing the big groups’ contribution to the economy. That study found that the 10 biggest accounted for just 6% of business GDP, after discounting for exporters like Makhteshim. However, the economic power of companies is far bigger than their sales alone tell because they so dominate their markets. In the food industry, neither Super-Sol nor Strauss needs to own the corner grocery to have an influence over the prices it charges or the products it sells.

Yet, however you look at it, a big part of Israeli business is controlled by a small number of people. It can’t be helped. The economy is small and relatively isolated, limiting the number of competitors in any market. Big international concerns aren’t going to trouble to set up shop here, and our neighbors would never dream of entering the market. This country is going to be a playground for the local kids. But would we do better letting more of them into the sandbox? No doubt, yes.

But the claims against the tycoons and their business groups aren’t compelling. Here are the accusations and the defense:

• Tycoon-owned companies are tired and inefficient: The Bank of Israel study found that companies affiliated with the big groups indeed grow more slowly, invest less in R&D and take on more debt than their independent peers, the implication being that they rely too much on their entrenched position for profits rather than growth and innovation. That seems unfair. The tycoons may tend to owning stakes in older, established industries, but they run their companies well enough. The mogul-controlled banks and insurers didn’t get lured into toxic assets. Their mobile companies put affordable cellphones into the hands of Israeli callers long before most of the world. Many of their businesses sell overseas where there’s no leeway for slacking off.

• Tycoons discourage competition: Ironically, the inefficient monopolies that do exist here are owned by the government (or more properly their unions). Israel Electric, the water company and the ports have resisted being sold and reap the benefits of being answerable neither to shareholders nor consumers. On the other hand, the tycoon-dominated business sector is quite wide open to new entrants. Twenty years ago, Yitzhak Tshuva was a small-time builder, Lev Leviev an immigrant from the former Soviet Union and Rami Levy a grocer in Mahaneh Yehuda.

• Tycoons are a threat to democracy: True, the bigger the mogul the more influence he or she can bring to bear on ministers, lawmakers and regulators. But there is little evidence Israeli moneybags get their way more than their counterparts in other democracies. The Bachar and capital market reforms declawed the banks, antitrust is strictly enforced, taxes are high and privatization didn’t turn into a series of insider deals between the government and the tycoons.

If democracy here is under any threat, it’s not from board rooms at Azrieli Center but from the threat to civil liberties arising from the religious and right-wing.

• Tycoons risk the public’s investments: The moguls are big, but they are not too big to fail in the way that AIG or Royal Bank of Scotland was. Big holding companies can go under, but they are unlikely to bring down big swathes of the economy with them, as do banks and other financial institutions when they collapse. The way to deal with that threat is to properly regulate them. Taking them out of the hands of tycoons doesn’t address the problem.

The dirty little secret about the tycoons and their conglomerates is that there is no good business case for why they exist at all. A cement maker doesn’t benefit from being under the same ownership as an insurance company. The fact that they are is simply a function of the tycoon having no better place to invest his capital, and so he swallows up one business after another. It’s not the kind of strategy that merits a case study at Harvard Business School, but neither does it warrant the government interfering.


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