ISRAEL 
HIGH-TECH & INVESTMENT REPORT

from the June 2001 issue


Editorial Comment: "Two Types of Pain"


"Pain" is the adjective widely used by investors in describing the emotional experience caused by falling stock prices, the slimming down of investor portfolio values and the disappointments caused by the disappearance of many dot coms. But the real "pain" is the one caused by receiving the "pink slip"---. In the Israeli universe of high-tech, until a half a year ago, getting the "pink slip" was seen as an opportunity for switching jobs, perhaps better wages and most certainly a more favorable options arrangement. Today getting the "pink slip" not only brings with it the inconvenience of looking for a new job but also the uncertainty of finding work in one's chosen field. We hear about the closure or downsizing of Israeli companies with the accompanying dismissal of hordes of employees. However it came as a real shocker when ECI Telecom, as already mentioned in this Report, said it plans to reduce its work force by about 1,000 employees world-wide and cut the salaries of its top managers by 10%. The company currently has over 6,000 employees. In a seemingly perverse investor reaction in trading on the Nasdaq Stock Market, the company's shares responded by rising 29 cents to $6.38. In the fourth quarter 2000, ECI recorded a net loss of $113m. compared to net income of $56m. the previous year. Revenues for the Petah Tikvah-based digital communications solutions developer increased 6.5% to $306m. from $288m. in 1999. The maker of telecommunications and transmission systems also said its first-quarter revenue would be between $252 million and $260 million. Analysts were expecting revenue of $286 million. The company declined to estimate the amount of the operating loss for the quarter. ECI Telecom in the 1980s began its rise and emerged as Israel's stellar high-tech communications company. It showed an uncanny ability to develop and commercialize a core technology of speech and fax multiplication over existing old fashioned communications lines. The recent dismal results, according to sources close to the company, were only partially caused by the decline in the global telecom market which saw companies like Cisco and Nortel, among others, misjudge the growth of telecom sales. They build up inventories which remained on shelves as demand dwindled. Decisions previously taken by ECI's board of directors, have had an erosive effect on sales and losses. In a turnaround strategy first announced in the summer of 2000, only less than a year after introducing a 'bigger is better' restructuring plan, ECI Telecom announced its new initiative to divide the telecommunications giant into five smaller publicly traded companies. The "demerger" was a bad idea, we were told. Publicly announcing it, before execution, was bad strategy. ECI Telecom was a name known to the market place. The five new companies are five unknown little guys calling on clients," our source added. Another source, also very close to the company, agreed that that the "demerger" was a bad idea. ECI's marketing muscle was fragmented, he suggested. However, he conceeded that in the environment of 2000, it was difficult to hold on to key employees. Many were attracted by the prospect of joining new companies, that would be brought to the stock market and the new perk options, would make them millionaires.

Wall Street apparently bedazzled the ECI Board by forecasting that the total value of the five new companies to be spunoff, would be a multiple of ECI's market capitalization. However, market conditions prevailed. As of the end of April, ECI's market capitalization was under $590 million. Its single digit stock price reflects a near fall of 85% from less than a year ago when it traded just under $40. For investors, undoubtedly there was pain associated with the fall in value of the ECI shares.

However, for the personnel among those receiving "pink slips" the pain is likely to be of a different nature. They will look for employment within this country. Their know-how and experience puts them at the very top of international communications expertise. But should they not find suitable jobs they may have to look overseas and that would be the beginning of yet another "pain".


Reprinted from the Israel High-Tech & Investment Report June 2001

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