One MediGuide worth two Aladdins

At present, a private company with a dream has it all over a public one with a record.

1. A recognized national sport in Israel is to argue over the price paid for a company that was sold. Was it high, low, or just right? A branch of this sport is casting a mean eye at exactly how much each of the founders pocketed, whether the funds and investors involved managed to get their money back, and in general, what value the company created when it was independent.

In the case of Israeli company Aladdin Knowledge Systems (Nasdaq: ALDN; TASE: ALDN), which is to be sold to private equity firm Vector Capital for $160 million, there is no argument. This is not a "glorious exit", neither for CEO and founder Yanki Margalit, even though he will receive $20 million from the deal, nor for the other shareholders, nor for the employees, nor for Israel's high-tech industry. What we have here is a founder whose hands were tied behind his back and who, with a pistol at his head, was forced to sell the company he founded 23 years ago for what he surely sees as peanuts. No wonder Margalit prefers not to be interviewed at present. There's no victory here.

The valuation at which Aladdin came to the end of its bumpy road is sad, but it's only one very representative example of Israeli high-tech.

2009 is already here, and in 2010 we will be able to sum up two pretty significant decades in Israeli high tech its first two decades as a real industry. Not just sporadic ventures, but with investors, technologies, managers, financing bodies, and a whole supporting ecology.

On the face of it, the industry is wonderfully well positioned. True, the market's tough, but that's the case in the US, in Europe, and in Asia too, so Israel is no different from anywhere else. Actually, fund and company managers and overseas high-tech representatives say, Israel is a source of entrepreneurship, and firms are always looking to invest here. The industry's reputation has spread far and wide, and the local successes inspire them to look for the next promising idea here.

This is where Aladdin enters the picture. What real value did it generate when you examine how it ended? 20 years of the Israeli high tech industry, and apsrt from Check Point (Nasdaq: CHKP), Amdocs (NYSE: DOX), NICE Systems (Nasdaq: NICE; TASE: NICE), and Comverse Technology (Nasdaq: CMVT), there are few Israeli technology companies with a market cap above $200 million. Some companies have been sold over the years for hundreds, even billions, of dollars, but their sisters are still with us with their values decimated.

The situation at the beginning of 2009 is that companies like Alvarion (Nasdaq: ALVR; TASE: ALVR), DSP Group (Nasdaq: DSPG), and Syneron Medical Ltd. (Nasdaq: ELOS) are traded in the region of $200 million; Radware (Nasdaq: RDWR; TASE: RDWR), Radvision (Nasdaq: RVSN; TASE: RVSN), Ness Technologies (Nasdaq: NSTC) or Orbotech (Nasdaq: ORBK) in the $100-200 million range. If you discount their cash, you arrive at the fairly dismal conclusion that their technology isn't very highly valued. There are about 50 public companies with market caps of up to $200 million, some of them symbols of the high tech industry.

No logic

And then, in a complete surprise and below the radar, a deal can suddenly come along such as happened at the end of last year, when start-up MediGuide was sold to St. Jude (NYSE: STJ) for $300 million, or such as happened at the end of 2007, when IBM (NYSE: IBM) bought XIV for the same amount. That's almost double the value of Aladdin, or double Orbotech with change left over for a start up at end of season prices, and almost three Radwares or Radvisions.

An anomaly? After all, there's no sales or profit multiple that can justify hundreds of millions of dollars for a start up that is all promise and optimistic valuation. It turns out, therefore, that MediGuide, which has technology and products for navigating from outside the body, and storage company XIV before it, and other Israeli companies that have been sold, profited from being still private and not exposed to the whims of the public that at times of crisis will abandon a company at almost any price. Their advantage lies in the fact that, since they are private companies, their backbone of shareholders is made up of sophisticated people with stamina, and so they are less exposed to a fall in value than listed technology companies.

This year, if all goes according to plan, companies like OpTier, SuperDerivatives and Eyeblaster intend to enter the portals of Nasdaq. It may be that if had they already succeeded in being floated (Eyeblaster is the only one that has already filed a prospectus, but it cancelled its plans) their values now would be lower than the value they could obtain in raising funds as private companies or in a sale. When the market recovers, if their luck is in, they plan flotations at valuations that Aladdin, which will report annual sales of $125 million, could only dream about.

Published by Globes [online], Israel business news - www.globes.co.il - on January 14, 2009

© Copyright of Globes Publisher Itonut (1983) Ltd. 2009

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