Looking ahead we believe that the trend toward mergers and
acquisitions will continue and is likely to dominate future "big"
news. The startups of yesteryear are growing and are now sufficiently
large to be identified as alluring objects for global leaders who
seek specific technologies. This trend for M & A we expect will
continue strongly into 2001. There could be plenty of sizzle!
Portents for the future are the two recent deals involving Israeli
companies. One is Accord Networks (Nasdaq:ACCD) which is being
acquired by Milpitas, California-based Polycom (Nasdaq:PLCM) for $339
million. Milpitas, Calif.-based Polycom, manufactures and markets
network access devices and broadband products. Accord, whose
development and manufacturing facilities are in Israel, produces
video and voice network products. The price reflects a premium of
115% above the market.
The second is Broadcom Corp. (NasdaqNM:BRCM ) which is buying
privately held VisionTech Ltd. in a deal that will broaden Broadcom's
semiconductor portfolio to include video enhancement technology.
Israel-based semiconductor company VisionTech makes chips that allow
television viewers to freeze and manipulate live programs. The deal
is valued at about $677 million, based on Broadcom's closing share
price at the time it was announced.
The specter of a Nasdaq retreat was sounded in a clarion call in our
March 2000 issue. In an article captioned "Beware of the Ides of
March",
we at IHTIR became more concerned with the immediate realities of a
switch in US interest rates. The signal was given on February 17 when
we heard: "With foreign economies strengthening and labor markets
already tight," Mr. Alan Greenspan warned that, "how the current
wealth effect is finally contained will determine whether the
extraordinary expansion that it has helped foster can slow to a
sustainable pace, without destabilizing the economy in the process."
To us this presages a period of monthly hikes of interest rates. This
phenomenom not experienced for several years not surprisingly could
be expected to lower prices by 10 to 20%. We were right about the
event but underestimated its force, that resulted in a 50% drop from
the level on April 10, when Nasdaq prices peaked. Friday, April 14,
it closed out one of the worst weeks in the history of the United
States stock markets. On that unsettling day, the Nasdaq index
plunged by nearly 10% totaling 25.3% for the week. The fall of 7.3%
for the Dow Jones industrial average, was the worst since the index
fell 7.6 % in the week ended Oct. 13, 1989. Between Monday and
Friday, it has been tallied that investors lost more than $2
trillion, or $7,000 on average for each person in the United States!
The seven year old "bull market" was responsible for cushioning the
average American investor. Some of the outstanding Israeli companies
traded on Wall Street, including the three who appear on the Nasdaq
100, experienced sharply lowered valuations but at some point in 2001
we feel will become highly attractive investments. The investment
return from our Model Portfolio, made up of Israeli technology shares
over the past two years, has been sensational. We simply picked what
we felt were sustainable leaders in their field of activity. The ROI
was 175% since January 1999 when we made our choices.
We concluded that many of our holdings were overvalued and as of
November 20 we cashed out the portfolio. In our February issue we
will present our new Millennium Portfolio. This is a sign of our
ongoing commitment to Israeli technology.
It also reflects our perception that the market is offering buying
opportuntites.
The meteoric rise in the prices of dot.com securities, prior to
spring 2000 was sustained by the "New Religion". Central to it was
the belief that dot.com companies could be worth billions of dollars
even though their prospects of profitability were unlikely. Since
those heady spring days the 'dot' has fallen out of the 'com'. Not a
week passes without the unhappy announcement of some dot.com closing
its doors for lack of funds from income or investment revenue. The
perversity of investor attitudes towards the dot.coms before and
after their fall from grace, were marked by the fortunes made and
lost.
Much will be written about the events from this period and
undoubtedly this saga will continue long after we pen this editorial.
What we wrote then and also project it it for 2001.
So what can be said for 2001? The single catch phrase "deceleration"
probably best pinpoints our expectations for the New Year. Israeli
startups will have to scramble for funding as venture capitalists in
the US and Israel have changed their investment strategy tactics. The
logic is overwhelming. Why invest in a start up when the near term
prospect of Initial Public Offerings, a desired cash out goal of all
venture capitalists, is next to nil.
Yet the venture capitalists are still loaded with abundant funds and
we believe that they will continue, at a decelerating rate, to target
their investments toward companies already part of their existing
portfolio holdings. The logic is that these companies, if supported
by injections of capital, will be able to attain better valuations
when eventually taken public.
As dot.coms fold and start ups suffocate from capital shortages, a
positive consequence is that the freed up technical IT personnel is
readily finding employment. They help to reduce staff shortages which
were so worrisome to managers last year.
" There is the prospect of peace in the region in 2000. Peace with
Syria and subsequently with Lebanon, has never appeared to be more
tantalizingly closer", we wrote a year ago. The prospects for peace,
in the past year at least for a fleeting moment seemed to be
realizable, but were shattered by unrealistic Palestinian demands. We
believe that at the utmost the best prospect is for a cold peace, as
both sides weigh the frightening alternative consequences.
With the exception of tourism, temporarily in difficulties due mostly
to the inaccurate and misleading televised pictures of violence,
Israel's economy in 2001 will not suffer any severe damage. Yet it
will in all likelihood decelerate from its 2000 5-6%, level of growth
in its GNP to 2.5% - 3.0%, a rate which is still acceptable.
Our choice for the Israeli most likely to experience moments of
exhilaration in 2001 is Israeli Air Force Col. Ilan Ramon who will
become Israel's first astronaut. He will be in space this summer, as
a payload specialist aboard the space shuttle Columbia. The former
Israeli fighter pilot who became deputy commander for F-16 and F-4
squadron was awarded the rank colonel. On the space flight the 46
year old Ramon will take active part in scientific research.
Looking back at year 2000 we can point to some of our predictions for
the Israeli high-tech sector in the millennium, which were 'spot on
target'. At the outset of the year, as part of our annual attempt to
be prescient we wrote: "Having become an acknowledged center for
technological innovation the new decade should see an even greater
attraction for investment banking merger and acquisition activity. In
this sphere the American aphorism " you haven't seen 'nothing yet'
will become highly appropriate". Our prophecy was realized this year
when in June we reported that " deals of several tens of millions of
dollars are no longer considered as newsworthy. Now it is big time M
& A. With each new announcement observers are tempted to speculate as
to whether this is the last of the megadeals or just a respite
before the next new big buck record is announced". A case in point is
that of Chromatis Networks Inc., that accepted a $4.5 billion
takeover offer from Lucent Technologies Inc. This created a new
record in terms of sheer size for an Israeli company. Chromatis
makes optical equipment for urban areas.