"Dear colleagues,
"Everything in Herzlya (the hub of Israel's high-tech companies) is the same: the hotels, sun and beaches, although the
tension zones are only dozens of kilometers away everyday life has not changed much. Only the restaurants are not as
crowded as they usually are.
"As for our campus, we have increased security and work closely with the local police to reduce the risk of terrorist
attacks.
"The partial reserve service draft throughout the country has only slightly influenced our company so far.
"Never in Israel's history was the company unable to ship products to customers. We see no threat that something will
change to prevent us from shipping products today but we will take some precautionary steps, if needed, to minimize
exposure to our company.
"I would also like to remind you that the media reports coming from the tension zones emphasis extreme situations and
not our everyday reality."
The publicly announced threat of a boycott of Israeli goods by European countries is unlikely to be enacted by the
European Union. Denmark has already unequivocally stated that it would veto such a move. Israel's high-tech products
due to their sophisticated level of performance are mostly bought by demanding American buyers. There is no evidence
whatsoever, that high-tech companies would falter in fulfilling contractual obligations in the foreseeable future. Even as
Saddam Hussein launched 40 Scuds into Tel-Aviv, during the Desert War, Israeli high-tech never faltered in its obligations.
The new generation of high-tech executives is, more than ever, flying overseas for meetings with clients, their high-tech
counterparts and existing investors. Presently, most foreign businessmen will not visit Israel. "I regret to inform you that my
firm has cancelled our participation. I am very disappointed. If you call me I would be delighted to talk to you," read this
e-mail received by the Israel High-Tech & Investment Report, (IHTIR) in Tel-Aviv; Mr. Testa was the announced scheduled
keynote speaker at the IVA--Annual Israel High-Tech Conference, the most important venture capital conference in Israel.
Mr. Richard J. Testa is a co-founder and chairman of Testa, Hurwitz & Thibeault, LLP, one of the largest law firms in
Boston. His biography states that the American National Law rates him "one of the 100 most influential lawyers in
America". Mr. Testa, during our lengthy telephone discussion, said "that he has a long relationship with both Israel, the
Israeli venture capital community and has an incredibly large base of Israeli technology based companies that are served
by his firm". He added "I attended four out of the last five meetings of the IVA and I have many friends in Israel but the
cancellation of our participation was the judgement of the firm. The events that are occurring are extraordinarily
unfortunate. Once the current troubles are over, and I hope that they will be over shortly we will renew our friendships. I
personally view the current situation as temporary. A decision has been made at my firm to send a group to Israel in the
fall." said Mr.Testa.
A welcome exception to the rule was the presence of members of the global Coudert Brothers law firm which, since its
founding in 1853, has specialized in international corporate and commercial law. The firm represents clients in their
investment and commercial transactions on a worldwide basis through a network of offices in North America, Europe,
Asia and Australia. A number of members of their firm were at the IVA Conference. We met attorney Gary Benton, a
conference attendee from the Coudert Brothers, Palo Alto, California office. "I am not bothered by the current spate of
violence but my wife is concerned so I keep in touch with her by telephone." said Mr. Benton.
David Blumberg, managing partner of Blumberg Capital, an eminent venture capitalist whose company has offices in the
region of the Silicon Valley, told the Israel High Tech & Investment Report that he was delighted to attend. The challenge
lying ahead is clearly for the Government of Israel to restore stability. The foreign investor would like to feel that he can
visit Israel without the fear of dining at a restaurant or a café and becoming an innocent victim of a suicide bomber.
At a recent briefing by the heads of Israel's venture capital industry, it was pointed out that investments into local high tech
companies for the first quarter of 2002 are likely to reach a highly satisfactory level of $400 million -- in keeping, on a
proportional basis, with venture capital investment in Europe and the United States. The coming six month rate of
investment may trend considerably lower, impacted not only by the past recession in the US but by the violence
perpetrated by terrorism, notably Palestinian suicide bombers.
The valuations of Israeli high-tech companies publicly traded on Nasdaq have fallen. This has been the result of the
current global slump in this sector, rather than for any other reason. In 2002 the Israeli shekel has been devalued and this
should improve the profitability of these companies that traditionally export more than 95% of their sales. Their revenues
are in dollars, but their salary and other expenses are paid in New Israeli Shekels.
The challenges currently faced by the Israeli technology sector are twofold. Dark clouds are forming which presage the
possibility of Israeli venture capital industry becoming a casualty of the current Middle East violence. The Israeli
government just announced an austerity budget, which many view as placing an unequal burden on various sectors of
the society. The budget may bring on unwelcome short-term shocks to this country's economy, which has been stable
for many years and in 2001, recorded zero inflation. On balance, Israel's high-tech sector may become leaner, but its
long-term wellbeing is assured.
A number of e-publications have contacted us and requested our opinion as to the effect that the current call up of
reservists following the increased level of hostilities is having on this country's high tech sector. In the 'Wired News' article
Farhad Manjoo reported, "Morgenstern, like many others who commented on how Israel's high-tech sector might be
affected by the turmoil, painted a surprisingly upbeat picture of the situation".
One of our friends, employed at a well-known high-tech company, forwarded us the following memorandum sent to the
company's employees.
"In light of the current political situation in Israel and the concern it causes in our team, I wanted to update you on the
situation in our company.
"I would like to inform you that our company's activities continue as usual, and surprising as it may sound, the
preparations for IPEX and new product launches keep us all pretty busy, very focused and motivated.
"The situation is quite complicated and the Israelis have changed their life style. We spend our time at work and at home,
we try to avoid crowded public places and we listen to the news very frequently. The everyday routine goes on: children
go to school and we go to work. Morale is somber and the feeling of personal security is reduced. In this difficult time,
work provides us with some sense of sanity and stability.