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Stanley

Israel well-positioned to compete against India and China
By David Wanetick May 08, 2005

David Wanetick is a Managing Director at Gateway Reports, an affiliate of The Wall Street Transcript, and the author of several books on investing. He can be reached at dwanetick@twst.com.


Israel's greatest natural resource is its brain power. But how will Israel be able to compete on the basis of brain power when the Chinese and Indian powerhouses produce far more engineers and scientists than Israel?

How will Israel continue to attract foreign companies seeking to conduct research and development when salary levels in India and China are a fraction of the salaries that Israeli engineers and scientists are accustomed to earning?

Yes, China and India each graduate roughly 350,000 scientists and engineers each year versus the 14,000 that Israel graduates annually. And Indian engineers earn about half -and Chinese engineers earn about one-sixth - of the $100,000 that the comparative Israeli engineer earns. Israel will simply not be able to compete against India and China in terms of scale or cost.

So how will Israel be able to maintain its coveted place as a champion of cutting edge technology? First, Israelis have been much more successful in developing breakthrough technologies than either the Chinese or the Indians.

In the case of China, OECD figures indicate that Chinese nationals filed a mere 200 patent applications in 1995 and 299 in 1997. In 2001, only 5.43% of the patents filed in China by Chinese inventors were for invention. This was remarkably fewer than the 72.8% of innovation patents, as a percentage of total patents, filed by foreign firms in China.

India is much more successful in providing technology services such as manning call centers and writing functional computer code than in developing novel inventions. India's rigidity of management in terms of stature and formality impedes improvisation, creativity, and dedication to achieving goals. While development centers of international companies in India filed for over 750 patents by mid-2003, Indian IT service companies filed for less than 90.

Israel, on the other hand, has the third highest number of patent filings per capita and, according to IMD's World Report, ranks third in the world in terms of the quality of basic research. Moreover, Israel ranks very high in terms of research 'productivity' (scientific publications per capita) and 'quality' (the frequency with which other scholars cite publications in their own articles).

In computer science, Israel ranks second in the world in productivity and third in the world in quality. In chemistry, Israel ranks 4th and 5th, respectively; in molecular biology, 3rd and 4th; in biology and biochemistry, 5th and 10th; and in physics, 2nd and 9th.

Further, when taking into account how often Israeli patent applications form the basis for subsequent patent requests abroad, and using actual (rather than per capita) figures, Israel comes out in 13th place even though it has a much smaller population than the 12 leaders. In addition, Israel ranks first in research productivity in economics and business, mathematics, psychology, and psychiatry.

Second, discovering truly superior scientific revelations is contingent on the brilliance of small numbers of researchers. Using the incidence of Nobel Laureates as a proxy for genius, Israel's population stands head and shoulders above the rest of the world. While China and India may have hordes of good but less than phenomenal scientists and engineers, their numbers alone will not mute Israel's advantage in producing transformative breakthroughs.

Third, Israel's real competitive advantage is the ability to understand where major problems exist and then to visualize commercially-viable solutions to alleviate the pressure points.



John

http://www.loiclemeur.com/english/2005/04/israel_rocks_15.html

April 12, 2005

Israel rocks. לויק לה מר
Arrival in Israel

It was my very first time there and obviously I had some "clichés" in mind. I was told the security was crazy at the airport and I was not disappointed. It started at the gate in Europe, special gate, additional security checks. Arrived there, I spend 15 minutes in front of the police officer asking weird questions. Is this your first time in Israel ? Yes. Do you have family here ? No. Do you have relatives ? Yes. What kind ? Friends. What friends ? Business friends and just friends. What are their names ? Yossi Vardi, Ouriel Ohayon and others. Where did you meet them ? In Davos and at business school. What is Davos ? It is the World Economic Forum event. What business school ? HEC in Paris. Who is Yossi Vardi ? The founder of the Israeli company ICQ (I joked on that with Yossi who said it was an insult). What is ICQ ? Are you joking ? No. It is an Internet company. What kind ? Instant messaging. When were you at school with Ouriel Ohayon ? I told you, in Paris at HEC. Is he living here ? Yes. For how long ? A year and a half etc etc. And now the fun part, I arrived without having an exact address, just the city name, Kinneret. What hotel do you stay ? I don't stay in a hotel. Why ? I participate in a conference. There is no hotel ? No, it is a camp. What is the address ? I don't know. Wrong answer :-) It took me another five minutes... Yat Siu had exactly the same problem, even worse actually as he asked the officer not to chop his passport because he goes regularly to Arab countries that may not like it and he got another special interview for asking that. Anyway, it was not so bad as contrarily to other countries, most police officers are very nice and young Israeli girls... which helps continuing the conversation.

Kinnernet



Thanks again Yossi for having invited me to this crazy event. The theme is creativity and about one hundred Israeli geeks and entrepreneurs participated, as well as ten participants from abroad. Everybody came with their favorite gadgets, from the very oldest computers and calculators to small helicopters, weird "motorbikes" and even small rockets were launched, a fully equipped truck was taking video from a sky balloon. Creativity was everywhere and I was very happy to meet all the geeks and entrepreneurs. Everybody came back to some kind of children way of thinking, open to anything and thinking that everything was possible, it is quite hard to keep this way of thinking as you get older and that was very refreshing. There are lots of Kinnernet2005 pictures available here.

Export Institute
I was also invited to make a presentation at the Israel Export & International Cooperation Institute and meet the Israeli VCs and entrepreneurs. There was also Simon Levene of Yahoo, Edmund Fish of AOL and Steffi Cerzny of Burda on the panel. It was fun for me to see that Six Apart was at the same level as Yahoo and AOL on the invitation. Anyway, I moblogged the audience and started by explaining how easy it is to moblog even from a phone, drove them into political blogging (One Voice that tries to help solving the palestinian conflict with a weblog, DSK, monputeaux), into "you and me" blogging (c'est moi qui l'ai fait and xslf local Israeli blogger friend), CEO bloggers, etc. After the conference I met with many entrepreneurs and I was amazed (actually during the whole trip) on how this country is entrepreneurial, creative and has passion with high-tech and Internet. The surprise came when I realized that there are only around 10 000 weblogs in Israel, I would have thought that people that get so much the Internet would be more active with blogs.

During my trip I could meet with blog entrepreneurs, representing notes.co.il, a closed blog community targeted at journalists, politicians, CEOs, and Nir Ofir of Tapuz.co.il, more targeted to the Young Israelis (thanks again for the sunny breakfast, Ofir).

Thank you Ido Kenan for having written this article about Six Apart and me in one of the main daily newspaper in Israel.

Thanks to my friend Ouriel I could discover Tel Aviv and the cool bars at night, the nightlife is very active. Ouriel says that it is difficult to have artists coming to Tel Aviv therefore there are few cultural events as we have in Paris (theatre for example) and that is why the Israeli like so much to socialize in the evening, it is the activity they like the most. There is one hip and cool bar every 50 meters in some Tel Aviv areas. It is common there that somebody you do not know starts speaking to you and it is very nice. Israeli are happy to meet and always very warm welcoming foreigners. Thanks again Ouriel for hosting me there.


Security.

With great emphasis in the last two years, everything we hear about Tel Aviv on TV is the terrorism so the image we have is obviously that of a totally insecure and frightening city. I had several discussions about this with the people I met and you feel immediately that it is in everybody's minds as most of the Tel Aviv inhabitants either know somebody who lost friends or family or lost a relative themselves. For the last six months, there have been no incidents in Tel Aviv and I should say I felt very secure. I walked around late at night and took cabs alone, went in many public places where each time I felt very well. Of course the fact that you are screened before entering any place or bars reinforces this feeling. The very few negative impressions I had is when I saw several civilians carrying guns as you carry your mobile phone (actually we shared rooms at Kinnernet and my room mate, a young teacher in robotics, had one so it was my first night sleeping with a gun in my room) and also the fact that everybody told me to avoid taking busses and actually to just avoid getting too close to busses.

I could have visited Jerusalem today but fortunately I did not as there were tensions there.

I was also surprised that most Tel Aviv inhabitants do not really care about religion. Tel Aviv is quieter on Friday and Saturday but still quite busy, restaurants and bars are full at night, and I do not think I have even noticed a kosher restaurant (I did not pay too much attention either I should say) and all my friends said that the best restaurants were not kosher and were packed.

I had excellent food in Tel Aviv, all kind, excellent meat and of course shaksuka.

The answer I was often given by the friends I discussed with is that the Jews outside of Israel were much more respectful of their religion than in Tel Aviv because they were far away and that is how they "keep the culture and spirit", where the Tel Aviv inhabitants do not seem to care much. There is a large non-jew community in Israel, as an example one million russians were accepted to immigrate into Israel in the last few years, most of them non jews.

Everybody speaks good english in Israel, I wonder why european countries and France do not push more the kids to learn more english, a key for better integration in our globalized world.

I was warned that I needed 2.5 hours before my return flight home to get to the airport and that was a good advise, the security and the questions asked going back are even longer. My bags were screened like never before, the officer took the shoes I had in my bad and spent 5 minutes on each of them, as well as on my laptop and any electronic device, ipod, even the french monthly magazines I had took 30 seconds each (I wonder if one can hide explosives in a paper magazine).

Anyway, I came safely back home the head full of good memories of my trip and all the people I met there. See you all soon again and thanks for all the fun. For those of you wondering what the end of this post title is, לויק לה מר is my name in Hebrew.

George

A High-tech Laboratory Called Israel (January 1999)

http://w4.siemens.de/FuI/en/archiv/zeitschrift/heft1_99/artikel06/index.html

The Holy Land is nurturing a range of innovative, young companies. Its policies are now paying dividends in telecommunications, computers and software.



High technology is increasingly replacing traditional industrial products in Israel. Here, a pick-and-place machine from Siemens at ECI Telecom

Quick! After the United States, which country is currently registering the largest number of new high-tech companies? Great Britain? France? Japan? Germany? Wrong! It's Israel—and that's in terms of actual numbers, not as a proportion of the country's population. Although only half the size of Switzerland, Israel boasts over 3,000 high-tech companies, four-fifths of which are less than ten years old. What's the secret?

"Our country is one big laboratory," says Azriel Hemar, Deputy Chief Scientist and Director of International Relations and Cooperation at Israel's Department of Industry and Economics. With immigrants from 140 nations and neighboring Arab countries that are not always friendly, Israel has become a laboratory for cultural tolerance, integration and the rocky road to lasting peace. In the 1990s alone, over 800,000 Jews immigrated to Israel from the former Soviet Union, pushing the country's population past the five million mark. Nowadays, signposts, newspapers and television programs are not only in Hebrew, Arabic and English, but also in Russian. Some 10 % of the new immigrants are scientists who have received an outstanding education and this has given a huge boost to the Israeli economy.

An Incubator for High-tech Companies
But educated immigrants are not the only reason Israel has been so successful. "The office of the Chief Scientist supports innovative companies to the tune of $300 million every year," explains Hemar, who adds that the "Incubator" program has made a huge contribution in terms of the growing number of successful start-up companies. The original aim was to help Russian immigrants take their first steps in the free market economy. But today 26 Incubator Centers throughout Israel are supporting all sorts of budding companies. If an application is authorized, the state takes responsibility for 85 % of the company budget for two years and puts experienced managers at the disposal of the inventors. "Once this start-up period is over, the companies have to stand on their own two feet," says Hemar. "We have achieved this goal with 350 companies—a success rate of 56 %," he adds. Just under a third of the money spent supporting these companies flows back into government coffers as royalties.

"From oranges to semiconductors" is a slogan that aptly sums up the dramatic change in Israel's export policy. For many years, agricultural products, textiles and conventional industrial products dominated exports. But now, 80 % of industrial exports and a third of total exports are high-tech products. Electronics, telecommunications technology and software earn $6 billion a year abroad for Israel. Moreover, Israel is one of the world's five top countries when it comes to investment in research as a proportion of gross national product. It also has a ratio of 135 engineers per 10,000 inhabitants—much higher than, for example, the 85 per 10,000 in the U.S.

Incubators—support centers for start-up companies—are scattered all over Israel

The Mother of all Progress
The typical Israeli high-tech engineer studies at the Technion in Haifa and then spends several years working for the military before either setting up a business or joining a start-up company. It is probably true to say that the military is very much the driving force of technological progress. A military career is nothing unusual here, especially when you take into consideration that national service for men and women is 36 and 18 months, respectively. Following the Six-Day War in 1967 and the subsequent embargo, which was heavily endorsed by France, Israel was forced to rely on its own strength and develop its own high-tech products. The result was a massive jump forward in a wide range of areas, including defense electronics, image processing technology, radar and telecommunications, process control and anti-missile systems. For a time, the small nation even tried to develop its own fighter plane. Although this project was eventually abandoned for lack of funding, it produced hundreds of top-class aviation engineers eager to take on new challenges.

The advantage of serving in the nation's armed forces is not only the fact that engineers work with top-of-the-line technology. According to Hemar, it is just as important that they "get used to the discipline of research work and the exact compliance with specifications at an early age. I am sure that the next generation of data and telecommunication systems, or encryption algorithms will be developed by people who have worked in a military laboratory."

JV Route to R&D
In the meantime, companies such as Motorola, Intel, IBM, Microsoft, Mitsubishi and Deutsche Telekom have recognized Israel's potential and have opened branches or set up research centers there. Between 1992 and 1997 foreign investment increased tenfold from $400 million to just under $4 billion per year. Siemens too is involved. In fact, the company's activities in Israel date back to 1924. In 1995 a local Siemens Company—Siemens Ltd. in Tel Aviv—was established for the purpose of concentrating activities and taking advantage of the opportunities offered by peace in the Middle East. "Unfortunately the peace process ran into difficulties," explains Hermann Kölle, Managing Director of Siemens Ltd., "but when it gets going again, Israel is sure to become the competence center and growth engine for the entire Middle East."

Until now, Siemens' contacts with customers in Israel have been handled by agents. This was especially true with regard to supplying and commissioning systems required for power generation and distribution, semiconductors, components, lighting and medical equipment. Kölle considers the six acquisitions, holdings and development joint ventures that Siemens has initiated in Israel as particularly important. These companies are among the best in the world when it comes to developing hardware and software for new telecommunications solutions. "One of my most important tasks is to find promising start-up companies and get them in touch with people at Siemens," says Kölle. "Unfortunately, things in this regard don't always go according to plan. It often takes too long for the companies I contact to respond. What's more, we don't have enough staff in Israel to be able to search actively for such companies. But despite these problems, we have been able to pass on over 100 inquiries from start-up companies to our groups via the Corporate Department of Technology."

Cross-Country Strategy
Kölle is convinced that this form of development cooperation with Israeli companies is worth the effort: "Local engineers are very well trained, team-oriented and interested in long-term cooperation. What's more, they are very stubborn when it comes to solving problems. They have an intense dislike of formalities and hierarchies and often tread unconventional paths," he says. Noam Alroy, one of the founders of Savan Communications Ltd. in Netanya—a company in which Siemens has a 10 % stake—puts it even more explicitly: "The Germans work in a conventional manner while the Israeli's like to break out of the mold and look for short cuts."

The combination of Israeli and German mentalities and approaches to work is advantageous, explains Alroy. "On the one hand, we have an international corporation with a global network and an excellent technical reputation, and on the other hand, a small, flexible, innovative company that's capable of developing high-tech products." Within the space of two years, Alroy and his team of 25 came up with a device that became the subject of much attention around the world: a high-speed modem (VDSL) that can transmit speech and data at a maximum speed of 13 Mbit/s through conventional copper cables over a distance of 1.5 km (almost 1 mile). That's one hundred times faster than ISDN. Siemens' role is to produce the necessary ASICs (application-specific integrated circuits) for this invention.

Israeli electronic exports are concentrated in four major areas

Success without Government Support
To date, no other company has come up with such an inexpensive, highly flexible solution so suitable for use in industrial facilities, hotels, university campuses or city centers. The innovative system has the potential to earn billions in Europe and the Far East over the next few years. What is Savan's secret? "We knew exactly what we wanted and got the best experts we could find," says Alroy. "This meant that we were able to cover the entire development chain—from the physical, mathematical basis right up to digital signal processing aspects and the design of microchips." Savan explains that he decided not to accept government assistance because "this would have made it practically impossible to enter into a partnership with Siemens and 3COM, two companies we knew could help us sell our technology abroad."

Amnon Yacoby, president of Floware Systems Solutions in Or Yehuda, had much the same experience. "Because we wanted to work more closely with companies like Siemens, we returned the assistance from the government and opted instead for private venture capital," he says. The company now employs 60 people and has developed the WalkAir system, which can connect data and communication networks to the public network without any need for cables. The system, which uses the 3.5 to 26 GHz band and has a range of 3 to 10 km, also guarantees high speeds. This allows small and medium-sized companies in particular to be networked quickly and cheaply by bridging the gap between themselves and the operator network. WalkAir is currently undergoing a range of European field tests.

The importance of working with globally active companies is also emphasized by Zvi Rehavi, General Manager of MedisEl in Jerusalem and Yahud: "We Israelis are very talented when it comes to developing products and technology, but we lack the right management culture. We probably don't have the right mentality to become global players. It would take years to train our people in these skills and establish really big companies in Israel." MedisEl has adopted a business strategy that takes this reality into consideration. "We develop a new technology—usually with top Russian experts—to the prototype stage and then look for a suitable global company as a partner to manufacture and market our products," says Rehavi. The list of innovations produced by this company, which is only seven years old, is impressive. It includes a laser scan system for medical applications, a linear Stirling compressor for cooling systems, and a lightweight, ring-shaped combustion engine. The company has even come up with a machine that can generate pure drinking water out of thin air. Moreover, it can do this in the most arid areas on earth and at a very low price.

People from very different backgrounds work side-by-side at Siemens Data Communications. From left: employees from Sweden, Palestine and Israel

One of the most interesting joint ventures is the one signed between Siemens Data Communication (SDC) in Karmiel (east of Haifa) and the Palestinian company Hi-Tek Engineering in Ramallah in October 1998. The opening celebrations in the autonomous region were attended not only by Siemens CEO Heinrich v. Pierer, but also by the Palestinian Minister of Finance Muhammad Al-Nashashiby and former Israeli Prime Minister Shimon Peres. "This is the first high-tech venture between a Palestinian and an Israeli company," says Tareq Maayah, the 32-year old founder of Hi-Tek Engineering.

Palestinian Engineers in Israel
Up until 1995 SDC was known as Ornet. Orna Berry, an Israeli data communications specialist, had founded the company together with several colleagues three years earlier and brought it to the top of the international market with its efficient and reliable LAN booster (a fast switching system for local computer networks). However, in order to successfully market the products internationally, the company needed a strong partner. So Berry sold Ornet to Siemens and went into politics. She was a big success in her new field as well, becoming Chief Scientist at the Department of Industry and Economics. Says Eran Ben-Tal, SDC's current Managing Director, "Because Siemens has an excellent global marketing network, we handed over responsibility for manufacture, sales and marketing to them. We now concentrate exclusively on the development of new technologies."

At the moment, the company—which is situated in Karmiel, an idyllic location between rolling hills and tall cypress trees—employs 82 people, 62 of whom work in research and development. The main areas of development for the young team—average age 28—are units and software for Gigabit Ethernet data transmission, multimedia communication and network management.

Technology Instead of Intifada
In addition, 13 Palestinian graduates from the Bir Zeit University in Ramallah were trained and integrated into SDC's various projects over the course of 18 months. "There were no real problems apart from the lengthy procedure involved in obtaining entry and work permits," reports Avi Ben-Zichri, head of research and development at SDC. "Palestinian engineers are superbly trained as far as theory is concerned. What they lack is practical experience." In Palestine some 3,000 engineers are currently out of work, while in Israel, an equal number of engineers is urgently needed. So the exciting and well-publicized cooperation between SDC and Hi-Tek Engineering also makes very good economic sense.

The pioneers of the joint venture, who received training in Karmiel as to what SDC actually needs, have returned over the past few weeks to Ramallah to begin with the first joint projects in their own development center. The planners of this project depend heavily on communication via data networks because Palestinians are still sometimes prevented from crossing the border separating Israel and the autonomous region by the Israeli army. This happens even though the project is supported by the government, the Office of the Chief Scientist and the Peres Peace Technology Fund. "I had to wait a year and a half for authorization to drive over the border in my own car," says Tareq Maayah who holds an American passport and lived in California for seven years. Maayah returned to the Middle East at the beginning of the peace process in 1993 to advise the Palestinian government on technical matters and set up his own company.

The mistrust between Israelis and Palestinians is still much stronger in official positions than in personal relationships. "During the training period at SDC there was no animosity of any kind," reports Avi Ben-Zichri and adds: "That's not something that should be taken for granted. After all, many of us—me included—were in the military and helped to put down the uprisings in Ramallah. And believe me, we weren't handing out candy to the kids there." Adds Maayah: "Of course I used to throw stones at the occupying army in my time," he grins. However, his past does not prevent him from being friends with Ben-Zichri and Ben-Tal. "As engineers we all speak the same language and have the same goals. I think the only real hope for a peaceful settlement lies in such cooperative projects."

Ulrich Eberl




A Healthy Dose of Venture Capital

For many start-up companies, financing through venture capital is essential if they are to survive in the dynamic high-growth markets of telecommunications and computer technology. In 1998 alone, over $1.7 billion in venture capital was pumped into the German market, three times as much as in 1996. In the U.S., this figure is a staggering $10 billion every year, a third of which is provided by industry. But venture capital is not new territory for Siemens either. Since 1984 Siemens has invested in promising companies through associated companies and venture departments within its own groups. In order to focus all these individual activities, Siemens Venture Capital GmbH was founded on January 1, 1999.

In Israel, Siemens is both directly and indirectly involved in over 50 start-up companies. For example, Star Ventures, whose headquarters is in Munich, received $22.4 million from Siemens. To date, Star Ventures has invested over $168 million in some 90 companies in Israel, the U.S. and Germany. "We are one of the largest sources of venture capital in Israel," says its founder, Dr. Meir Barel.The company's success speaks for itself: Star Ventures has already brought 16 companies to the stock exchange, where they began trading well above their capitalization levels. Average returns of between 20 and 40 % annually are nothing unusual for the VC professionals. "However," says Barel, "stock market profits aren't everything. Investors such as Siemens are primarily interested in gaining access to new technologies and making contact with innovative start-up companies."


Ed

http://golb.typepad.com/

Some serious stuff about High Tech Israel - Part 1

The Socratic approach here might be as follows: ‘Israel is a high-tech powerhouse: true or false – and if true, how did it come about? Ask your questions, discuss, and then leave your scrolls on the table on the way out’.

Conclusions like: ‘you’re darn right it is’, to some of us impatient ones, just beg to be jumped to, and so stand back as I leap. (Too late: I’ve already leapt.)

We’ll talk about several quantitative (in this post) as well as qualitative (in the next post) validations of this brash claim before addressing the more complex issue of philosophizing about root causes.

Because we are, by any measure, quite a tiny country – that some would like to see shrink even to zero (Oops! Stay out of politics), almost all parameters that pertain to technical capabilities, resources and achievements are most meaningfully defined on a per capita basis: here are a few that aren't:

Israel has more than 140 companies listed on NASDAQ: only Canada and, of course, the U.S. of A have more.
In 2005, California-based VCs invested in 895 local high-tech start-ups; New England-based VCs invested in 385; and Israeli VCs invested in 378 home-grown ones – and don’t even bother to ask about the numbers for European countries: the total for all of Europe in 2005 was about the same as for Israel…
“In the first three quarters of 2004, Israel high tech companies placed third in capital raising after California and Massachusetts, but ahead of Texas, New Jersey, New York and other states. Israeli companies placed second in capital raising among European countries, after the UK, and ahead of Germany, France, Sweden, Switzerland, Denmark and Ireland.” Efrat Zakai, Director of Research, Journal of Israel Venture Capital, December 2004.
“It is estimated that some 15% of all communications equipment sold around the world comes from Israel.” UK Trade & Investment publication.
And a few that are on a normalized basis:

Israel has ~140 scientists and engineers per 10,000 of population, nearly twice as many as the US, and more than twice as many as Japan.
Israeli is second only to the US in the per capita number of scientific papers published in refereed journals, and in patent applications filed.
The percentage of citizens who are university graduates is among the highest in the world.
The last few points indicate that the raw material is at hand for the creation of a thriving high tech-based economy, but as us pedants are wont to remark, this is a necessary but not even close to a sufficient condition. Compare Israel, for example, with Switzerland. (OK, they did progress from cuckoo clocks to Swatches.) So, what was the primary catalyst here for converting opportunity into reality? (It’s great to be able to pose only those questions to which one believes one has answers – one of the few benefits of being a blogger rather than a bloggee.) Answer:No choice!

With nothing much under the sand here except more sand, if one insists on attaining a GDP per capita that is comparable to what is to be found in, say, Spain – and we’ve already passed them – and later, what the Swiss enjoy, there is no more feasible strategy than to create high added value products.

Now for more on high tech Israel and the Beatles, yes, the Beatles: stay tuned for Part 2...

Some serious stuff about High Tech Israel - Part 2
Yesterday's Post included the quantitative validations of the claim that ‘Israel is a high-tech powerhouse' - today we cover the qualitative, and as promised, the Beatles.


So, what was the primary catalyst in Israel for converting opportunity into reality?

No choice ! With nothing much under the sand here except more sand, if one insists on attaining a GDP per capita that is comparable to what is to be found in, say, Spain – and we’ve already passed them – and later, what the Swiss enjoy, there is no more feasible strategy than to create high added value products.


One such was the achievement of the Beatles ! To exaggerate a bit, one might say that they bridged the gap from Imperial Britain to North Sea oil. (When I was a kid in England, practically the whole Globe was Imperial Red – and not the sort of red that Karl Marx would have liked to see.) How much higher added value can one get than by selling zillions of plastic disks or tapes which cost pennies to make, but command prices of many dollars a piece? (The UK repaid these Liverpudlians by handing out a few knighthoods, not a significant cost.) Unfortunately, Israel songsters sing in their own language, not widely appreciated on a global scale. Another field that enjoys a fantastically high ratio of selling price to material cost is the fashion industry. (I once weighed my daughter’s upscale bikini: we’d paid ~$1,000/lb for the cotton of which it was composed – just a bit more than the price of the as-harvested variety.)

Sadly however, it’s not a viable strategy for Israel to rely on fashion or the performing arts for its economic growth – and citrus exports will hardly cut the mustard. (I wonder where that strange expression originated…) But look at software, for example: the ‘manufacturing cost’ of, say, a $100,000 enterprise software product is comprised mainly of the box in which it is shipped – if, indeed, it is not downloaded from computer to computer. Now there’s added value for you.

Way back when, my rule of thumb for guessing the price of an electronic ‘black box’ was to estimate its weight: commodity products, were $X/lb. (Pity, but I’ve forgotten the value I ascribed to ‘X’, but it was quite small.) But boxes that perform miracles in the communications field, for example, sell for a huge multiple of the weight of the box, a large factor in the ability of such products to command premium prices being the highly sophisticated silicon chips and the embedded software. Some of these chips themselves, many of them designed and a quite significant number thereof also manufactured in Israel, can command prices per unit weight that would allow gold foil to be used as the wrapping material.

For medical products, the ratio of price to cost is also often seemingly outrageous, but if you need a stent, you need a stent, never mind that it costs many thousands of $/lb. By the way, stents were invented in Israel , as were many other devices now judged indispensable, e.g. the Intel Centrino chip that is now ubiquitous in laptop and other mobile computers – which only adds to the frustration one feels here at our national lack of ability to generate PR about ourselves that is fair, accurate, and therefore very positive! (Sorry: I promised to forswear political comment – but one could opine that, with friends like France, for example, a healthy dose of truth-based PR – not necessarily an oxymoron – would not come amiss.)

OK: so we have a driving need to succeed, and lots of relevantly qualified people – a good start, but not enough to account for how Israel has managed to attain what is no less than an extraordinary status in the world of high-tech. One of the underlying cultural factors that predate the foundation of the State is a deep-seated belief in the value of learning in all its aspects. Thousands of years of wandering about as a people, but not yet a nation, reinforced the need to carry one’s identity and profession around with one. No prize for naming the best repository for these assets: the head.

With nationhood came the ability to create world class institutions for every kind of learning, but the first need was to survive whilst surrounded – and grossly outnumbered – by not the friendliest or most tolerant of neighbors. A sine qua non for survival is a high-tech army in which virtually all able-bodied male and female citizens must serve - except those whose extreme religious beliefs make them unwilling and, indeed, unsuitable for inclusion.

Almost all young people, then, typically at age about 18, are drafted, the men for 3 years or more, the women for 2 years. Wow! What a price to pay for a country of one’s own! But the dividends from this investment of resources are huge: 1) mutual acculturation of immigrants from widely different places of birth; 2) education to literacy for those who need it; and - the clincher - 3) accelerated high tech exposure to those talented enough and motivated to advance in the field. It’s no accident, therefore, that many – in fact nearly all – of Israel ’s most successful high-tech companies were founded by individuals from a small number of elite Israel Defense Forces (IDF) units.

One of the most important factors in enabling maximum leverage from the skill sets acquired by these personnel is that the IDF retains no rights whatsoever to technology developed under its aegis. Of course, specific matters relating to national security must be respected, but even the most advanced military and security-related technologies can typically form the basis for valuable commercial and industrial products.

This “omission” in the restrictions that apply to, for example, Intellectual Property (IP) generated in the US under Government support, has proven to be a very powerful incentive to potential entrepreneurs: no red tape – just do it ! (Relax Nike: I’ll only borrow your slogan just this once.)


Ed Mlavsky

pon

Mercury buyout a sign of things to come
By AVI KRAWITZ


The $4.5 billion acquisition of Mercury Interactive Corp. by personal computer maker Hewlett-Packard likely won't be the last big, hi-tech merger Israel sees, as local companies become increasingly attractive candidates for major deals in the industry.

"The consolidations are a global trend that we are seeing impact Israel, and the Mercury deal is the most notable one to date," said Daniel Meron, vice president and research analyst at RBC Capital Markets. "There is a big pool of knowledge and know-how that has gathered in Israel in the last couple of decades where other tech companies can look to strengthen their leadership and grow into new businesses or enter new niches."

Meanwhile, the HP - Mercury merger, which was signed after US markets closed Tuesday, marks the largest ever hi-tech acquisition of an Israeli company and boosts HP's Israeli employee base by some 50 percent.

HP agreed to pay $52 per share for Mercury in its first major acquisition since the $18.9b. buy of Compaq Computer Corp. in 2002. The purchase is the latest in a string of Israeli companies bought by HP over the years, including last year's acquisition of Scitex Vision for $230m. and its buyout of Indigo in September 2001 for $882m. - itself a record-making deal at the time for Israeli hi-tech.

When the Mercury deal closes, HP will have its largest research and development center in Israel. HP stressed that Israel's R&D capabilities was a driving factor in its pursuit of the deal, which is expected to close in the fourth quarter.

"It should be clear that we bought this business because our product lines are highly complementary. It gives more value to our customers and we look at Mercury's sales and R&D capabilities as some of the leading in the industry," said David Gee, VP software at HP in a conference call.

Gee noted that HP already has over 2,000 employees in Israel and the Mercury merger will add close to 1,000 more. Mercury has, in total, 3,000 workers globally.

"From a software standpoint, this will be one of the largest R&D facilities of any we have anywhere in the world," Gee added.

Mercury, which makes software testing solutions, will boost HP's software business, which Gee said would create "one of the world's most powerful management software companies" and send a message to competitors [such as BMC and IBM] that it intends to be aggressive in that market.

HP is looking to the deal to boost its software business which it expects to grow to $2b. annual revenue as a result. The merger will stimulate revenue growth of approximately 10-15% in the first year and some 20% in fiscal 2008, HP said.

HP downplayed reports that it was taking advantage of the low share price Mercury has been trading at since it became embroiled in regulatory probes over its grants of options to top executives, three of whom have left the company. As a result, Mercury has had to restate its financial statements as far back as 1998 and its shares have been reduced to trading on the Nasdaq's "pink sheets."

Meanwhile, the price HP agreed to was 33% higher than Mercury's share price at the close of trade Tuesday when the deal was announced. The stock, which already was up 40% this year, in part on expectations the options scandal would make the Mercury a takeover target, rose 27% to $49.74 during afternoon trade in New York on Wednesday after the announcement.

HP also downplayed its decision to give its Israel operations such a boost while fighting intensified in northern Israel.

"Essentially this was a strategic business decision and there is no connection between the deal and the political situation," said Yuval Scarlet, senior VP of products at Mercury Israel. "But the timing is perfect. This country needs some good news and I think we delivered some very exciting news for the market in times when people are not so happy here."

Analysts were more upbeat about the timing of the agreement.

"Following Warren Buffet's acquisition of Iscar Corporation, this is another example of exerting confidence in the economy and in Israeli companies," said Richard Gussow, senior analyst at Excellence Nessuah. "To have agreed to the transaction at this time with war going on up North, is even more impressive."

The deal also comes against the backdrop of a wave of recent international hi-tech mergers including a $5.4b. buyout of ATI by Advanced Micro Devices Inc. earlier this week. Analysts were confident this trend would continue.

"Given the recent state of high-premium acquisitions in the software space, we would expect consolidation to continue at current valuation levels," said WR Hambrecht analyst Robert Stimson in a research note. He called the price paid for Mercury "a sizable premium."

Looking specifically at the Israeli market, RBC's Meron listed M-Systems, Retalix, ECTel and TTI Telecom as companies that have been the subject of speculation as possible takeover targets, but said he was not aware of any pending deals.

"A lot of Israeli companies are well entrenched and have a leading market share in their respective industries, Meron said. "I think over the next few years you will definitely see more and more consolidations in the tech industry as a whole. I think Israel is part of the bigger picture."

Bloomberg contributed to this report.

pno

HP buys Mercury
Interactive Corp. for $4.5b

The acquisition is the largest ever in the history of Israel's high-tech industry.

Mercury founder Aryeh Finegold: HP got a bargain
Eitan Tapiro 26 Jul 06

As first reported by "Globes" at the beginning of May, US computer giant Hewlett-Packard Co. (NYSE:HPQ) has announced that it will buy Israeli company Mercury Interactive Corp. (Pink Sheets:MERQ). HP said it would pay $52 per share for Mercury, or $4.5 billion altogether. The price is 33% higher than Mercury's closing price on Wall Street. The deal is expected to close in the fourth quarter.
--------------------------------------------------------------------------------

Mercury founder Aryeh Finegold: HP got a bargain
HP's new growth engine
Chief Scientist: Mercury acquisition proves Israel’s software leadership
--------------------------------------------------------------------------------

HP’s acquisition of Mercury is the largest cash transaction in Israeli high-tech history. Only Lucent Technlogy’s (NYSE:LU) acquisition of Chromatis Networks in 2000 for $4.7 billion was larger, but it was share-swap deal. The acquisition of Mercury is even larger than Warren Buffett’s take-over of 80% of Wertheimer family owned Iscar Ltd. through Berkshire Hathaway Inc. (NYSE:BRK-A; BRK-B) for $4 billion.

Business technology optimization company Mercury is traded at a market cap of $3.1 billion on the Pink Sheets, the list to which it was relegated from Nasdaq after it failed to file its financial statements for the second and third quarters of 2005 on time, because of an investigation into employee stock option allocations at the company.

Mercury has been under investigation for backdating stock option grants to executives to boost the latter’s profits. The company has not published its financial reports and therefore been relegated to the Pink Sheets. In early July, the company released partial financial results, and said the financial damage from the improper recording of stock options totaled $500 million.

Mercury is scheduled to publish its financial report for 2005 during the coming months. During a conference call in July, Mercury president, CEO and COO Anthony Zingale said the company believed that it now met the criteria for relisting on Nasdaq’s main board. The company posted $836-850 million in sales in 2005, 22-24% more than in 2004.

At the same time Mercury published its partial results, it said that the US Securities and Exchange Commission (SEC) was considering initiating civil proceedings against company executives, including chairman Dr. Giora Yaron, directors Yair Shamir and Yigal Cochavi. Mercury chairman, president and CEO Amnon Landan and other executives resigned in November 2005 in the wake of the scandal.

Mercury’s share closely reflects events at the company. The share price fell to $25.70 in late 2005 in the wake of the options scandal, but subsequently rose 36% to stabilize at $38-39.

The acquisition of Mercury is expected to boost HP’s software business to over $2 billion a year. As soon as the deal is closed, HP is expected to operate Mercury as an independent unit within its software division, and the companies’ combined sales power will begin with the joint sale of products.

Hewlett-Packard president and CEO Mark Hurd said, “Today, we are combining two market-leading businesses to create the most powerful management software portfolio in the industry. Together, they will help customers cut their IT costs, speed the delivery of new services and drive profitable growth at HP. We expect this important acquisition to deliver significant value for our shareholders.”

Zingale said, “Together, HP and Mercury instantly become the industry’s premier provider of business technology optimization (BTO) software. A deal of this magnitude creates significant opportunities for our customers, our shareholders, our people and our partners.”

Although Mercury is not considered a classic Israeli company, it can be counted as HP’s third acquisition in Israel. Until 1998, it operated in Israel through a local distributor, CMS, which it acquired and converted into Hewlett Packard (Israel) Ltd. HP initiated R&D activity in Israel even earlier, establishing HP Labs at teh Technion - Israel Institute of Technology in Haifa.

In 2001, HP acquired Benny Landa’s digital printing press maker Indigo for $720 million, which gave HP 1,300 employees in Israel. Later, HP invested $200 million in setting up a factory to produce ink heads and printers in Kiryat Gat. Last year, HP acquired wide-format digital printer maker Scitex Vision for $240 million in cash. The acquisition of Mercury will add its 665 Israeli employees to HP's workforce in Israel, boosting it to 2,200.

Published by Globes [online], Israel business news - www.globes.co.il - on July 26, 2006

pon

There is an innacuracy in the last post : Mercury has 1000 employees in Israel and HP had 2000 R&D employees in Israel.HP will therefore have 3000 R&D employees in Israel.

npo

HP’s new growth engine

Aggressive consolidation in the software market over the past couple of years left HP with little maneuvering room.
Shmulik Shelah 26 Jul 06

In terms of technology, the acquisition of Mercury Interactive Corp. (Pink Sheets:MERQ) has been on the agenda for a long time. The list of buyers was led by Hewlett-Packard Co. (NYSE:HPQ) and CA Inc. (NYSE:CA), two competitors in the enterprise computer resources management niche.
The backdrop to the intensifying competition in the field is the huge increase in large companies’ spending on enterprise information systems. When a company spends hundreds of millions of dollars a year on computer systems, it cannot allow itself not to know at any given moment what a hardware or software application is doing. Every small problem can lose it customers.

Software giants spotted the software monitoring and management niche a long time ago. HP’s computer resource management system, OpenView, faces off against CA’s Unicenter, IBM Corp.’s (NYSE:IBM) Tivoli, and the systems of BMC Software Inc. (NYSE:BMC) and Mercury. Everyone is competing against everyone else for everything relating to enterprise computer resource management. For its part, HP has never claimed to be a large software company. Its software business generated $1.1 billion of the company’s total $86 billion revenue in 2005, a very small proportion for a company with a global workforce of 100,000 people and a lot of technology R&D.

With the entry of more companies, such as EMC Corp. (NYSE:EMC), into the field and the growing strength of competitors, HP had little choice but to buy outside technology or try to sell what it had. Aggressive consolidation in the software market over the past couple of years left HP with little maneuvering room. The decision to acquire Mercury cost HP $4.5 billion, and leaves the impression that this was a carefully planned move to consolidate its market position with an important growth engine in the field.

The acquisition of Mercury will, first and foremost, enable HP to add to its product line one of its largest competitors for business technology optimization. In recent years, Mercury definitely positioned itself as the household name in the field with its “Mercury Optimization Centers”, which provide control over enterprise IT systems and applications management. HP said the acquisition would boost sales of its software business to over $2 billion.

In addition, the enterprise IT resource management market cannot remain indifferent to HP’s move. Now that the industry underdog has made such a strategic move, CA will have to respond. After it has made a number of acquisitions in recent years, it will be interesting to see what it will do.

Published by Globes [online], Israel business news - www.globes.co.il - on July 26, 2006

onp

Chief Scientist: Mercury acquisition proves Israel’s software leadership

Chief Scientist Dr. Eli Opper: Obviously, such a deal isn't decided on during two weeks of war, but the timing is important.
Hadas Manor 26 Jul 06

“The announcement that Hewlett-Packard Co. (NYSE:HPQ) was acquiring Mercury Interactive Corp. (Pink Sheets:MERQ) came last night in the midst of Katyusha barrages against Israel. It means that when there’s something of great quality, investors don’t consider fleeting matters,” Chief Scientist Dr. Eli Opper told “Globes”. Opper resides in the Krayot, north of Haifa, which has been hit by numerous Katyusha barrages by Hizbullah since the war began two weeks ago.
“On such a day, after two weeks of war, one of the largest companies in the world announced that it was acquiring an Israeli company for a huge sum,” added Opper. “Obviously, such a deal isn't decided on during two weeks of war, but the timing is important. After all, if the management of a US company decided yesterday to suspend an acquisition decision, we’d consider the decision to be significant. We can therefore consider the positive side in that they made the announcement in the midst of a war. It helps, of course, that HP is very active in Israel, so they know first-hand what is happening here. But the fact remains that the war did not deter them.”

Opper said, “Mercury is unquestionably one of the flagships of the high-tech industry in Israel over the past 15 years. Since 1988, Mercury has become a very serious company. Therefore, right now, when people are talking about exits by start-ups compared with companies with a lot of employees, unquestionably Mercury is an example of a start-up that became a global leader. Mercury also a technology leader and we aim to create more companies like it.”

Commenting on the acquisition of Mercury while it is under investigation for backdating stock options grants for executives, Opper said, “I cannot comment on that, because [former Mercury chairman, president and CEO] Amnon Landan, who led the company to fantastic achievements until last year has already paid with his job. Those running the investigation know what to do, but I can only praise him for the business he founded.”

“Globes”: On the other hand, Mercury’s investors aren’t buying industrial activity in the way Warren Buffet acquired control of Iscar Ltd. in the Tefen industrial zone, but shares. The question is to what extent is the Israeli-ness of the company relevant?

Opper: “The fact that Mercury is an Israeli company that started out as an Israeli start-up, based in Israel and founded on Israeli know-how is significant. The know-how of the company and its people is what is being bought. The buyer is HP, one of the largest companies in the world by any measure, which demonstrated before that when it buys an Israeli company it keeps the activity in Israel. HP did that when it acquired Indigo and then other Israeli companies. Indigo’s activity in Israel continues and flourishes. This means that HP buys activity, it doesn’t export it, and I’m sure that will also be the case with Mercury.

“The acquisition of Mercury again demonstrates that Israel is a leader in software. In this context, I’m reminded of the acquisition of New Dimension Software by BMC Software (NYSE: BMC) several years ago for $900 million, a record price at the time. The company still operates and flourishes in Israel under BMC.”

Published by Globes [online], Israel business news - www.globes.co.il - on July 26, 2006

Paul

New Intel chips based on technology developed in Haifa

Intel today launched two new families of processors based on Pentium M technology.
Shmulik Shelah 27 Jul 06
The battle in the processor market has heated up. Intel Corp. (Nasdaq:INTC) today announced the launch of two new processor product lines for desktop and laptop computers. Today’s announcement follows last month’s launch of Intel’s new family of processors for servers the Xeon (codenamed “Woodcrest”). Intel says the processors launched today “are the best in the world”.
Basically, Intel today replaced its basic series of processors for desktop computers, such as the Pentium 4 and Celeron with Core 2 Duo series, previously codenamed “Conroe”, based on micro-architecture of the Pentium M processor.

Several weeks ago, Intel announced that it would bring forward the launch of its new series of processors for laptop computers (codenamed “Merom”), considered an improved version of Pentium M micro-architecture based on the Centrino family of processors.

The technology on which the new micro-architecture is based gives the same performance as other processors, but uses less power and generates less heat. Core 2 Duo processors has double the computing core and other improvements. Today’s launch is another step forward in the recognition of Intel’s Haifa R&D center as one of the company’s leading centers in the world, since the technology was developed in Israel.

Published by Globes [online], Israel business news - www.globes.co.il - on July 27, 2006

Pierre

La marine israélienne utilise des drones pour des missions dangereuses
Par Youval Barzilaï 26 Juillet

La marine israélienne se dote du drone naval Protector, le premier du genre.

Developpé par Rafael, le Protector est une construction israélienne qui possède une coque rigide de neuf mètres de long.

Chaque Protector est equipé au minimum de quatre caméras et d’un sonar ou d’un radar capable de fournir une image tridimensionnelle.

Il dispose d’une puissance de feu (le système Typhoon), développé par Rafael qui peut
également équiper le Protector de projecteurs et d’un système de sonorisation. La vitesse maximale du vaisseau est de 50 noeuds.

La marine utiliserait le drone pour des missions dangereuses, telles que la surveillance de la côte en cas d’infiltration suspecte.-

Stanley

Updated Jul. 25, 2006 4:54
Sheba Medical Center to treat Lebanese for free
By JUDY SIEGEL-ITZKOVICH

Lebanese children and adults wounded in the Hizbullah-Israeli crossfire in Lebanon have been invited to receive free treatment at Sheba Medical Center at Tel Hashomer. The cost will be paid by Jewish and non-Jewish donors in Israel and abroad, hospital director-general Prof. Zev Rothstein said on Sunday.

"We are not to blame for this war. We don't ask who is to blame," said Rothstein. "We have an open Jewish heart. Our aim is to save lives and reduce misery. We don't hate like the terrorists," he added.

"It is better for a Lebanese family to hear that Israelis saved their lives rather than for them to teach their children that they should kill Israelis. Our humanitarian care shows the difference between us and them."

Humanitarian treatment for Lebanese victims of the war will not come at the expense of Israeli patients, said the hospital director-general. "Israelis gain by the fact that we have experience treating patients from around the world and the region with all kinds of conditions. We have extra beds, including in intensive care and rehabilitation. We have housing for Lebanese families and food at no cost."

The Health Ministry, which owns Sheba, has been informed of the hospital's offer to Lebanese, which has been promoted on Arabic-language radio broadcasts and by a Sheba representative stationed in Cyprus, where many refugees have gone.

"The ministry is not involved. We will take all who need us, including adults. We treat Arab and Palestinian children all year round, especially those who need heart surgery and treatment for cancer; all the costs are paid by donors, especially the Safra family and the Peres Foundation for Peace."

Asked what the hospital would do if the relative of a Hizbullah fighter asked for care at Sheba, Rothstein said that "Hizbullah terrorists for their own reasons would not want to come here for treatment, but hypothetically, if a child were brought here, we would not ask whether his father is a terrorist."

"We do not distinguish between patients of any creed or nationality," said Rothstein. "In general, our Safra Children's Hospital is open to patients from across Israel, the Mediterranean region, the Palestinian Authority and the Arab world. Indeed, more than 15 percent of the cardiac surgery and cancer patients at the pediatric hospital are children coming from abroad, including the Palestinian Authority."

Sheba's Edmond and Lily Safra Children's Hospital has 150 beds serving 8,000 in-patient admissions and 60,000 emergency room visits a year. More than 10,000 infants are born there a year, including at least 1,200 requiring special or intensive care. Sheba Medical Center itself is the largest medical center in the Middle East and Israel, treating more than one million patients a year.

Ziv Hospital in Safed is currently treating a 47-year-old Lebanese woman brought by her son with bullet wounds in her back to the border. She is in serious condition, attached to a respirator and under anesthesia.

Meanwhile, the Health Ministry reported Sunday that since the start of the fighting nearly two weeks ago, its hospitals have received 1,292 Israelis wounded from missile attacks. Of those, 19 are in serious condition, 37 in moderate condition and 325 suffered light physical injuries.

A total of 875 came in seeking help for anxiety attacks. Gradually, six community facilities in the North will take over from hospital emergency rooms in treating those with emotional trauma.

Health Minister Ya'acov Ben-Yizri told the cabinet on Sunday that six hospitals from Nahariya northwards were undergoing work to protect their oxygen tank facilities from missiles and that windows were being reinforced.

John

For whom HP voted
27.7.06 By Guy Rolnik (Haaretz The Marker)

By 9:11 A.M., Finance
Minister Avraham Hirchson had already declared it a triumph.

The Finance Ministry issued a press release: "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, Mark Hurd, and had thanked him for the acquisition.

Hirchson's grab at an image boost is understandable. But HP didn't buy Mercury because the company is Israeli. It bought Mercury because it's Mercury. It is less a show of faith in Israel's economy than a show of faith in the company's capabilities.

Mercury was founded by a talented Israeli technology entrepreneur, Aryeh Finegold, who left the company in the competent hands of 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. Their vision became a $600 million business.

But Mercury had a millstone around its neck, in the form of massive quantities of stock options. For years it took advantag eof loopholes and kept the cost out of its profit-and-loss balance.

Losing money

Notes to its financial statements indicated that while the company was reporting profits of tens of millions of dollars - net of the options, it was losing money hand over fist.

Nine months ago, the world learned that on top of granting massive amounts of options, Mercury had been backdating their grant dates. Landan, the central beneficiary of the fraud, had to resign.

Mercury stock plunged. It was tossed off the Nasdaq main market and became a toothsome takeover target.

Mercury began its life in Israel and moved to the U.S. Most of its employees are on the West Coast, headquartered in Mountain View, California.

Israel came to serve as its development center. When Landan went home, and was replaced by Tony Zingale, the company finally started to lose its Israeli identity.

No boon for the treasury

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: it becomes 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. But there is no benefit for the Israeli economy from the deal.

Most of Mercury's shareholders are American institutionals. The deal will not generate substantial tax revenues, as did the sale of Iscar to Warren Buffett for $4 billion.

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.

Missiles on Iscar

It is possible 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 worlds 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. All the decisions about Mercury's future will be made in Palo Alto.

As the fighting rages, it is tempting to call HP's acquisition of Mercury an "expression of confidence in the Israeli economy". But Mercury is not dependent on Israeli prosperity: the deal reflects only confidence in the company, not in the country that birthed the people who once led the company.






Gregor

The bittersweet acquisition of Mercury by HP
http://taliaben.typepad.com/israeli_vc_on_sand_hill_r/2006/07/the_bittersweet.html

$4.5B acquisition - that’s big news regardless of where the company is located. In the 16+ years since Mercury was founded, it grew to become one of the icons of Israel’s hi-tech industry. Something that all start-ups aspired to, the pride and joy of our software industry.

When I joined the company in ‘90, it was a teeny start-up, situated “the villa” in Herzelia. In our wildest dreams, we wouldn’t have imagined that it would be valued at $4.5B (I sometimes dream what would’ve happened if I wouldn’t have sold my stock….).

It’s not new news. Rumors have been out for a long time (even I blogged about it back in May). Mark Hurd and Sandeep Johari say numerous times that “HP is going to make some moves in software that are much larger”… But today, it was made official.

So why bittersweet?

When I see headlines that say HP buys troubled Mercury Interactive, I get a knot in my stomach. Mercury was a great company, who’s reputation was severely tarnished recently by the whole options-backdating issue. Yes, the company had troubles, but I don’t like to think of it as troubled, and am saddened that this is the final chapter in this great story.
Software continues to consolidate. Mercury was a potential acquiror of start-ups, so as far as I’m concerned, that’s one less player in the market.
I liked having a great Israeli company to brag about. Talking about part of HP’s OpenView management software division doesn’t quite have the same impact for me.
I’m sure there are lots of good things that this will ultimately bring to the shareholders, directors and officers of the company. However, right now, I can’t seem to think of them.

Tali Aben

Stanley

Behind the scenes of a mega deal

How long did the negotiations go on for, when were the agreements reached, what was the obstacle, who are the banks, and what kind of political message does this deal send? “Globes” reveals what went on away from the limelight.
Gitit Pincas 26 Jul 06

How did it all begin? In the near future, Mercury Interactive Corp. (Pink Sheets:MERQE) and Hewlett Packard (NYSE: HPQ) will publish the document in which will they detail the long, tortuous negotiations that finally led to the mega-acquisition of Mercury by HP for $4.5 billion, in the largest ever deal, in Israel’s technology sector, and in fact, Israeli business altogether. Until then, “Globes” will outline the path that led to the signing of the contract. “Globes” was the first to reveal the negotiations back in May, naming Hewlett Packard as the buyer.
It became clear a year ago that Mercury had actively entered the radar of some of the computer giants which began to consider acquiring it. This was before the options scandal, a development that sealed Mercury’s fate as a company that should perhaps be sold. At that time, the software market was warming up, and Mercury’s specific segment was characterized by handsome growth rates even when times were tough.

Moreover, Microsoft had begun to move toward offering QA software solutions, a development which brought a long list of software giants such as SAP, IBM (NYSE: IBM) and Computer Associates Inc. (NYSE: CA) to the realization that they would need to make an acquisition to strengthen their activity in the field, or alternatively, enter fields that would constitute a virgin market for them. IBM has already acquired one of Mercury’s competitors, Rational Software, and the other companies still didn’t come up with an answer.

But Amnon Landan, Mercury’s legendary chairman and CEO and the strongman in the company, was not in a hurry to sell. He repeatedly said that if Mercury decided to go it alone, within a few years it would be in the top flight alongside the global software giants. All the IT giants had their sights set firmly on its good technology, impressive customer base, and handsome growth rates. Landan, however, stuck to his dream - to become a top flight international software company.

The event that turned everything upside down was the recent options backdating affair which resulted in the resignation of Landan and two other strong managers and later forced the company to make a profit write-down of more than $500 million. With the scandal over the options now out in the open, Mercury’s board promoted Anthony Zingale to president and CEO and appointed Giora Ron as chairman. The two were assigned one task only: to sell the company. According to a source close to the negotiations, HP did not approach Mercury. Rather it was Mercury with its new management that went out looking for a buyer. IBM, CA, and HP were the first ones to express an interest; they were later followed by Oracle Corp (Nasdaq: ORCL) and Siebel Systems.

Who picked up the bargain

Having now embarked on the search for a buyer, Mercury hired US investment bank Goldman Sachs (NYSE: GS) to manage negotiations on its behalf and find someone with means who would be willing to take on the deal. Every big US software company that was involved in the negotiations has a different investment bank acting for it, and the one that cashed in was Merrill Lynch (NYSE: ML) which represented HP. Sources close to the deal say, however, that Zingale was the one at the front throughout the negotiations, in a format similar to other deals where the chairman ensures that everything is above-board while the CEO does the talking.

The accountants advising on the deal were PricewaterhouseCoopers, with Kesselman & Kesselman involved only with regard to the company’s R&D center in Israel. The same applied to the lawyers. Apparently, the Israeli team Zysman, Aharoni, Gayer and Co. were not involved in the negotiations, with San Francisco law firm Morrison Foerster handling them instead.

The risk transfers to HP

Anyone who read “Globes” in May will have already known then that HP was on the verge of acquiring Mercury. The two companies reached agreement that Mercury would be acquired by HP. The negotiations reportedly became exclusive. By the time the final protracted stage of negotiations had been reached no other companies were left in the frame. Mercury did not expect to receive two envelopes yesterday, just the one from HP. After the acquisition was reported in “Globes”, Mercury decided to move all the discussions on due diligence and other related matters to HP’s headquarters in Palo Alto, California, and Mercury’s US headquarters in Mountain View, leaving Israel out of the picture, for fear that the source of the leak was based in Israel. The two sides subsequently agreed on the wedding.

The due diligence review then reached the crucial legal stage. What would happen to the class action suits against Mercury and its managers after the acquisition? What about cases in which they would have to compensate shareholders in one form or another? “The risk ultimately transferred to HP,” said source involved in the deal. “They decided to do it because they felt sufficiently secure despite the considerable exposure. They have obtained supporting legal opinions, which have affected the value. It would have been lot higher otherwise.” By how much? “Not a lot,” he replied.

The security issue was raised

HP is not afraid of making acquisitions in Israel. It proved this in the past when it acquired Indigo and Scitex Vision. What’s more, Mercury is, in fact, a US company. However, a source involved in the negotiations said that security was nevertheless an issue and was raised during talks held in recent days, once Mercury had completed the restatement of its accounts and put the options affair, at least from the practical standpoint, behind it. Market sources say that the deal has sent a political message, whether HP likes it or not. Now that it is invested in Israel up to its neck, HP has decided that the technological world is still more important than the political one.

Published by Globes [online], Israel business news - www.globes.co.il - on July 26, 2006

Stanley

Mercury founder Aryeh Finegold: HP paid bargain price

"The two companies fit together like hand and glove.”
Shiri Habib 26 Jul 06

“Hewlett-Packard Co. (NYSE:HPQ) paid a bargain price for Mercury Interactive Corp. (Pink Sheets:MERQ),” said Mercury founder Aryeh Finegold today. “Mercury has a special characteristic that is very rare in high-tech. It dominates its market. I’m talking about domination at a level that if it acquires another company, it would be on the verge of investigation as a monopoly. 95% of customers in the market buy Mercury products.”
Finegold founded Mercury in 1989 in a small house in Or Yehuda. “Today, I feel like a father whose son has brought his bride home for the first time,” he said. “In my opinion, Hewlett Packard and Mercury are a suitable couple, and I expect they’ll have a good future together.”

“Globes”: Other companies wanted to acquire Mercury. In your opinion, did Mercury pick the right buyer?

Finegold: “These are two companies well suited for each other. The acquisition is a good move for both Mercury and Hewlett Packard. They fit together like hand and glove, and it’s easy to see them together. I know Hewlett Packard from when they tried to acquire my first company, Daisy Systems Corp. Hewlett Packard was founded by two gentlemen, William Hewlett and David Packard, men with great charm who founded a model company.

“The link-up between Hewlett Packard and Mercury is very successful. Hewlett Packard sells IT systems that the whole world uses, and Mercury knows how to optimize their systems. In my opinion, Mercury can double or triple the performance of Hewlett Packard’s hardware and software.”

Published by Globes [online], Israel business news - www.globes.co.il - on July 26, 2006

Stanley

Mercury: Taxes go to US, activity stays in Israel
Nevertheless, a move to Ireland may still be on the agenda.
Hadas Magen 27 Jul 06

“Mercury Interactive Corp. (Pink Sheets:MERQ) wondered whether to stay in Israel or go to Ireland, because of taxes. There’s a good chance it will stay in Israel thanks to the deal with Hewlett-Packard Co. (NYSE: HPQ),” says the company’s representative in Israel, Adv. Shmuel Zysman. “The main thing about this deal is that Hewlett Packard is expressing its confidence in the Israeli economy at this time. It indirectly declares, and I hope that it will do so directly, that Hewlett Packard’s products development center will be in Israel.”
Zysman said the deal did not involve a tax payment by Mercury in Israel. Mercury is a public company, and most of its shareholders are in the US, and they will have to pay taxes on their profits in the US. The company’s main shareholders include Wellington Management Company, UBS Global Asset Management, T. Rowe Price Group Inc., and J&W Seligman & Co. Inc. These are investment funds, some of which own stakes in other Israeli companies.

Zysman says Israel will profit from the exercise of options by Mercury’s employees. “Every employee has options, the exercise of which will generate tax revenues for the state. In addition, there’s a strong likelihood that the state will subsequently benefit from Mercury’s continued activity in Israel, and from an increase in its activity in view of Hewlett Packard’s intention to set up its development center in Israel. This means that there will continue to be high revenue from activity in Israel, as well as from employees’ salaries, which have generated $1 billion to date. In addition, Mercury will continue to pay taxes on its profits. We’re talking big money.”

Zysma recently represented Mercury in negotiations with the Israel Tax Authority to pay reduced tax on the distribution of a $500 million dividend. Mercury has already made an advance payment of $75 million. The company’s tax rate is 15% on the basis of Article 16A of the income tax code. Under this article, a multinational company may pay a reduced tax payment at the rate paid in its country of origin, in order to encourage investment in Israel. The minister of finance is authorized to apply the article, and delegates this authority the Tax Authority director general.

Mercury pays a 5% tax rate on its dividends. The Israel Tax Authority wants the company to pay the full 23.5% rate applied in Israel, while Mercury is willing to pay 15%. The Tax Authority claims that Article 16A is intended to encourage investment in Israel, whereas in Mercury’s case, money is leaving Israel in the form of dividends.

A few months ago, Mercury representatives met then-Minister of Finance Ehud Olmert to outline the company’s position. Olmert left the decision in the hands of the Tax Authority. Zysman claimed at the time that it was in Israel’s interest to accede to the company’s request, since the company brought in a lot of money to Israel. He added, “If Israel doesn’t agree on this matter, Mercury will have to explain to its shareholders why it is in Israel, rather than in a country like Ireland, which permits reduced taxes. There is a real concern that they will decide to leave.”

Zysman says there is a good chance that the deal with Hewlett Packard has solved the problem, “although it is still on the agenda.”

Published by Globes [online], Israel business news - www.globes.co.il - on July 27, 2006

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