NEWS ANALYSIS Largest acquisition of Israeli firm spurs debate over high-tech’s future

JERUSALEM, March 11 (JTA) — With the announcement of the largest-ever foreign acquisition of an Israeli firm, Israel’s high-tech sector is once again basking under the international spotlight. But although there is a consensus in Israel that the increasing number of mergers and acquisitions is a vote of confidence in Israel’s technological prowess, not everyone is celebrating. A debate over the future of Israel’s high-tech sector is heating up, and some high-tech players are worried that Israeli entrepreneurs are selling out too fast. On Monday, BMC Software of Houston, a company with $958 million in annual revenues last year, said it had agreed to acquire New Dimensions Software of Tel Aviv for nearly $700 million in cash. The deal came less than a year after America Online payed $287 million in cash to purchase Mirabilis, a small Israeli company that develops technology for the Internet. And just two days after the BMC Software announcement, SunGard Data Systems of Pennsylvania said it would acquire Oshap, another software group, in a stock transaction valued at about $210 million. According to Giza Group, a Tel Aviv investment bank, the value of mergers and acquisitions between Israeli and foreign technology groups climbed from $1.5 billion in 1997 to a record $2.13 billion in 1998. After this week’s deals, the total has already reached $1.1 billion in 1999. But critics say that Israeli companies, which are often weak at marketing and management, are not willing to take risks to try and go global themselves. They are too easily seduced, say the critics, by the prospect of quick cash, after which they are often swallowed up and become local research and development centers for overseas giants. Even Dan Barnea, New Dimension’s chief executive, was not all smiles after cutting the BMC deal. His dream of nurturing New Dimensions into a global company was cut short when the firm’s main shareholders, who had been at loggerheads over internal issues, accepted BMC’s offer. “If not for the shareholder’s dispute, I would have dared to go further,” Barnea said. “I really hoped we could grow and prove that an Israeli company could become a big player on international markets.” According to Barnea, the enormous financial burden required to build sales and distribution channels discourages many Israeli entrepreneurs from trying to expand internationally on their own. “Being in Tel Aviv — far from key markets — just makes it harder,” he said. “When people face these difficulties, and have an alternative like cooperating with foreign groups that already have these channels in place, they go for it.” After the BMC-New Dimensions deal, some critics even urged the government to intervene to stop future deals. But Natan Sharansky, Israel’s minister of industry and trade, said on Thursday that Israel is committed to a free market. “We have nothing to fear,” Sharansky told Max Watson, BMC’s chief executive, who was in Israel to seal the deal. The investment, said Sharansky, proves that Israel has become one of the most interesting research and development centers in the world, and an attractive target for foreign investment. But this is precisely what is ringing warning bells among some high-tech analysts, who fear Israel’s technology sector may be destined to become one big R&D subsidiary of Silicon Valley, and will never emerge as a viable, productive sector to drive economic growth in the 21st century. “Israeli entrepreneurs have yet to show the business leadership needed to become global players,” said Charlie Ben Chabat, head of research at Robertson Stephens Evergreen, the investment bank’s Tel Aviv branch. “Many Israeli companies are afraid to take the financial risk needed to climb past a certain plateau.” Ben Chabat believes the time has come for Israeli companies to start setting their sights higher. He thinks Israeli companies should get aggressive and start buying foreign companies themselves — as a few of the more successful Israeli high-tech companies have done. Ben Chabat is also afraid that the trend could have a negative effect on Israeli society. “A society cannot sustain itself solely on R&D and engineers,” he said. “R&D is usually only 15 percent of a company’s budget. If there is no marketing and production in Israel, society will become more polarized because there will be no middle-class professions, such as clerks and accountants.” Still, some say it is wrong to tell Israeli entrepreneurs not to accept attractive offers. “If shareholders want to sell, why shouldn’t they?” said Zvi Schechter, managing director of the Giza Alex Brown venture capital fund in Tel Aviv. “It’s best to specialize in what you are good at, and Israelis are good at the early stages of building a company.” But Nir Barkat, managing director of BRM Technologies, a U.S.-Israeli investment firm that specializes in developing Israeli companies, said his group has turned down several tempting offers to sell their holdings. “We have a clear preference for building big companies,” said Barkat, whose group helped found Check Point Software, one of Israel’s most successful software companies. “You shouldn’t stop trying to grow just because someone waves money at you.” The problem, Barkat said, is that when an overseas group makes a lucrative offer, investors often put pressure on entrepreneurs to sell. “The solution is to network with strong partners overseas to build a richer environment that increases the chances of success,” he said. “If Israelis learn how to build big companies, they will start turning down the money.”