In recent weeks, all eyes have been focused on Iran and its President Muhammad Ahmadinejad. We have been ignoring or minimizing the threat that Dubai currently poses to Israel.
The Government of Dubai has announced with little fanfare several business deals that could affect Israeli businesses in the future.
It makes for great newspaper headlines when Netanyahu proclaims about Iran, “It is 1939 all over again.” But I am equally concerned that landmark days in Israeli history like February 17, 1982 will stop happening. That is the date that the first Israeli company, Teva, went public on the Nasdaq exchange.
The Nasdaq has announced that it sold 20% of itself to Borse Dubai in a complicated swap involving the OMX Exchange in Sweden. Borse Dubai is a holding company created by the government of Dubai for their holdings in Dubai Financial Market and the Dubai International Financial Exchange (DIFX).
When the deal was announced, Borse Dubai’s chairman, Essa Kazim told the New York Times, “Our primary objective is to build a world class, growth oriented exchange out of Dubai and to become the center for capital markets activities in the emerging markets.”
Senators Chuck Schumer and Chris Dodd are the only ones raising red flags. “I believe the acquisition of such a large stake in a US exchange by a foreign government raises some serious questions,” wrote Schumer to US Treasury Secretary Paulson.
Believing that protectionism could hinder the US economy, the Bush administration basically supports the deal but will review it for national security implications.
The Dubai still needs the approval of, The Committee on Foreign Investment in America, an interagency committee led by the Treasury Department. Israelis will remember that this is the same committee that objected to Checkpoint’s purchase of Source Fire on national security grounds.
There is growing unease on the part of he American public about the purchase of the cornerstone of capitalism by countries that are not friendly to America or even democratic. "The question here is, are you in a situation in which you have very influential governments becoming very influential in your economy who are pursuing policies that are at odds with your own policies," said Clyde Prestowitz of the Economy Strategy Institute to Voice of America.
The website www.breakingviews.com was in favor of the allowing the deal to be completed but called for greater transparency from the funds themselves and more independence of the funds from their respective governments. Their analyst pointed out that no one even knows the exact amount of assets in these funds.
In some ways, this is a reminiscent of the protests lodged against the Dubai Ports World takeover of 6 US ports. The protests resulted in the cancellation of that deal. After 9/11, the American public quickly understood the effect of the country's ports being operated by a foreign entity. It is harder to comprehend the national security implications of a foreign takeover of a stock exchange.
Where does the Dubai purchase of the Nasdaq leave Israel? The total market capitalization of Israeli companies on the NASDAQ is approximately $50 billion. 90 companies from Israel are listed on this exchange making Israel the number one foreign issuer.
Distracted by Iran, the pro Israel activists have not even offered an analysis of the effect on Israel of the Dubai purchase of the Nasdaq.
To many, Dubai appears to be a moderate Arab state. Yet, Dubai does not recognize the right of Israel to exist. The website www.dubai.com, says, “Please note that Israelis and travelers whose passports bear Israeli stamps will be denied a visa.” Anyone, Jew or Christian who visits Israel, will not be able to enter Dubai.
They participate in the Arab boycott of Israel. The website of the www.jafza.co.ae Jebel Ali Free Zone of the Emirates states that certificate of origin is required for imported goods. The website clearly expresses the purpose of this certificate of origin. “This is used by customs to confirm the country of origin and equally needs to be seen by the office which ensures any trade boycotts are enforced.”
Michael Freud has previously reported on his telephone conversation with a member of the Boycott office of the Customs Department of Dubai, Muhammad Rashid Adin, “Yes, of course, the boycott is still in place and is still enforced. If a product contained even some components that were made in Israel, and you wanted to import it to Dubai, it would be a problem.”
If the Arab boycott were extended to the Nasdaq, the Israeli economy would lose an important source of capital. The logical Israeli response would be to turn to the London Stock Exchange (LSE). But we will be blocked there also.
In a related transaction, the Nasdaq sold Borse Dubai a 28% stake in the London Stock Exchange. The government of Qatar has bought through its Qatar Investment Authority a 24% stake in the LSE at the same time. Israeli companies now face the prospect of listing on an exchange that is almost 50% owned by Arabs.
There are presently more than 90 Israeli companies listed on the London Stock Exchange and the Alternative Market (AIM). Israel is the fourth largest foreign issuer there and quickly climbing up the rankings.
The London Stock Exchange has increased its cooperation with the Tel Aviv Stock Exchange. This has benefited both Israeli companies listed on the Tel Aviv Stock Exchange and Israeli institutions. Most likely, expansion of this cooperation will be put on hold in deference to their Arab owners.
If Israeli access to the capital markets is impeded, our hi- tech economy will suffer. For the hi tech sector, the public capital markets have proved the most effective way to raise capital to fund operations and acquisitions and maximize the value of the business. The Israeli government sans capital gains taxes from the hi- tech sector could face budget deficits.
The bad news from Dubai is not finished. The government of Dubai purchased a 7.5% stake in the private equity firm the Carlyle Group. The Carlyle Group is well known for its ownership of defense contractors. Even it boasts many Jewish partners, like David Rubinstein, The Carlyle Group is equally known for managing the money of the Bin Laden family.
The Government of Dubai’s involvement with the Carlyle Group could affect Israel in several ways. The firm has already announced that it is establishing a Middle East Fund to invest in the region that will exclude investment in Israel. "The New York Times" reports that sources close to the fundraising for this fund say that it would be next to impossible to raise money from other Middle East countries if Israel was one of the countries in the Middle East Fund.
The many defense contractors controlled by the Carlyle Group could refuse to use Israeli subcontractors in deference to Abu Dhabi. In 2006, defense exports from Israel totaled $4.4 billion.
Even worse, the government of Dubai could block the IDF from purchasing weapons vital to Israel’s defense from these military suppliers. They will also have the direct access to purchase them for their own defense.
We need to mobilize support to block the Government of Dubai’s purchases of two of the world’s busiest stock exchanges. Israeli companies could list on other exchanges but none of the others approach the capital raising abilities of the Nasdaq and London.
The Nasdaq, in appreciation of the value of Israeli companies on the exchange, currently defrays some of the cost of listing for Israeli companies. The Nasdaq also holds Israeli Company day to introduce Israeli stocks to institutional investors. These programs which help Israeli companies may not be continued under Dubai ownership. This will not affect stellar companies like Teva, but Teva is a unique star in the Israeli business constellation. The spigots of capital will not be turned off right away by Dubai. They are much too clever for that. It will happen gradually and quietly. They will just slowly limit the supply of capital to Israel. The other shareholders/owners will blithely defer to Dubai out of laziness or greed.
Laura Goldman worked on Wall Street for over twenty years for such firms as Merrill Lynch and UBS Warburg. She now runs her own investment advisory, LSG capital, from Tel Aviv. She is an independent commentator, and her views do not necessarily represent those of "Globes".
Published by Globes [online], Israel business news - www.globes.co.il - on October 10, 2007
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007