The story of Paradigm Geophysical, sold last week to private equity funds Apax Partners and JMI Equity for $1 billion is an unusual one on the Israeli high-tech scene. For several years we have been asking ourselves here where the big companies have disappeared to. There have been many exits in Israel, but most of them have been by software companies, and few have exceeded $200 million. Apart from Mercury and New Dimension, it's hard to point to companies that came close to a ten-figure price tag, in dollars, when they were acquired.
Paradigm Geophysical, which provides software for the oil and gas exploration and production industry, developed well below the radar. The irony, as Paradigm BV CEO Eldad Weiss relates in a special interview with "Globes", is that the company had to be swallowed up in the wide blue yonder in order to reach its impressive exit. "Had Paradigm remained an Israeli company, it would never have succeeded in making the breakthrough."
Weiss, who holds a small stake in the company, has been in Tel Aviv for the past few days, with his family. The company's headquarters shifted to Houston several years ago, and Weiss spends much of his time there. What remains of the company in Israel, the development center in Herzliya Pituah, has some 100 employees, about 15% of the total workforce. To convey how distant Weiss is from the local activity, it is enough to mention that he does not even have an office here. "The company's breakthrough was due, among other things, to the fact that we turned into an international company. We needed the international management resources and capabilities," he says.
Paradigm's road has been a fairly long and winding one, from an Israeli start-up trying to break in to one of the most conservative industries in the world, to the pinnacle. It took nearly 25 years from the time Weiss founded the company in Israel, and there were ups and downs along the way. In 1998, the company held an IPO on Nasdaq at a valuation of $70 million, and in 2002 it was sold to US fund Fox Paine for $91 million, in what was considered at the time to be the most significant private equity deal done in Israel.
Along the way, Paradigm bought ten companies, the most substantial acquisition being that of Earth Decision, which had developed a three-dimensional program, in 2006. According to Weiss, this acquisition "changed the company". He says that it was not just becoming international that provided the infrastructure for success, but also the switch to private ownership. "We would not have been able to make the great leap forward without being a privately-held company," he says. "Life as a public company, especially for a small company, is tough. You have no control over the rises and falls in the share price, and it's a very frustrating situation in which to manage the company."
Life under a private equity fund is no idyll, he says, but it helps in advancing the company. "The fund gives the feeling, which proved well-founded, that there's a daddy. If you get stuck, as happened to us in the crisis of 2009, there's someone to lend a hand, and to come up with a check to keep the company going. As a public company, you're on your own. Under a fund, there is someone with a clear interest in your success. Both when we were a public company, and as a private company before that, every investor played his part, but each was pursuing a different interest and pushed in his own direction."
We haven't exhausted the growth potential
Paradigm is part of an industry that has developed around the world of gas and oil exploration and production. This is a huge industry, estimated to be worth $500-600 billion a year. Software aids represent a tiny but critical fraction of this, turning over some $1-2 billion a year. The best oil reserve in the world cannot be exploited efficiently, or even discovered, without the company carrying out the drilling having the capability of correctly analyzing the seismic data from tests.
Companies in this industry accumulate vast amounts of data, measured in petabytes (a petabyte equals a thousand terrabytes, or a million gigabytes). Paradigm developed software to manage such huge databases, using parallel processing and sophisticated exploitation of computing resources. On the basis of these capabilities, the company provides various applications that assist in the processes of oil exploration and production.
Although the basic know-how in computer architecture remains at the Israeli R&D center, the company has five development centers worldwide, each of which is a knowledge center on a single subject related to the field.
"Globes": How do you see the future?
"Obviously, we have not exhausted the company's growth potential. We're just at the beginning of the road, and I sometimes feel that we are still like a start-up in terms of capability." Weiss says that only now does the company have a comprehensive solution for oil exploration. He compares the company's software package to Microsoft's Office. "The object was to create the Microsoft of the oil exploration industry," he says.
So why sell now?
"We reached a situation in which we needed someone bigger with greater capabilities, and that's not necessarily big money for more acquisitions. It's also important for our customers to know that there is a very strong body backing us. This improves the company's standing. Hypothetically, there could be opportunities for large acquisitions."
During the past decade, Fox Paine twice tried to float Paradigm Geophysical, after the company filed a prospectus in 2006. Weiss says that the offering was not held because "the shareholders decided that it was premature. There was a feeling that this was not the right time, because the market was not stable enough."
That decision paid off. For Fox Paine, which manages $2.5 billion, the return of almost $1 billion on a single deal is an extraordinary bonanza. The value of the deal, says Weiss, reflects normal multiples. "We're talking about professional investors, who were not likely to pay any other price."
Did you believe that you would achieve a $1 billion valuation within a decade?
"In terms of scope of activity, our five-year business plan was more or less on target. We haven’t deviated from it for many years. If I compare the business plan with reality, I might have been a little optimistic in some years, but in the end we got there."
To ensure success
The oil and gas exploration industry is very conservative, with a large number of veteran companies that hardly changes. This means that growth will not necessarily come from that direction. "We are also thinking about other verticals, such as in the mining industry, and everything connected to land, such as water or the environment."
Might we see you buying start-ups as part of that growth plan?
"I find it hard to acquire start-ups because they do not have clear activity that can be analyzed in terms of financial performance. We were never spoilt. In our history, we have always been bought on the basis of profit multiples. Nor did anyone invest in us, except perhaps right at the beginning, without a clear financial basis. Even at the beginning, the projections we provided turned out to be completely accurate, although it might perhaps have looked like a dream."
Weiss himself has not been with Paradigm the whole time. In 2009, he returned to manage the company, which had accumulated heavy losses because of the financial crisis that depressed demand from the oil exploration industry. His immediate future lies in managing the company. "After that, we'll see what happens. It is very important for me to ensure the success of the process," he says. It is not inconceivable that in another year or two he will move on.
Do you have a recommendation for Israeli companies that want to become billion dollar companies?
"I'm almost tempted to say 'Don't do it'. It really is a tough question, because it's hard to understand what industry you are in and with what horizon. The question is, what do you want? At every stage I reached I thought about how to reach the next stage. If a company has the ability to move forward, then you have to maximize that. On the other hand, you have to remain sober and know whether you can carry on or whether you should sell, because there is no practical possibility of carrying on and building the marketing and operational set up that you need alone."
Published by Globes [online], Israel business news - www.globes-online.com - on June 17, 2012
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