Buffett acquisition of Wertheimer’s Iscar puts Israel on the investment map

The lobby of Iscar – ‘One cannot overestimate the importance of this investment on the Israeli economy,’ says venture capitalist Jonathan Medved.In the largest ever buy-out of an Israeli company, American investor Warren Buffett has paid $4 billion for an …

The lobby of Iscar – ‘One cannot overestimate the importance of this investment on the Israeli economy,’ says venture capitalist Jonathan Medved.In the largest ever buy-out of an Israeli company, American investor Warren Buffett has paid $4 billion for an 80 percent stake in Iscar Metalworking Cos., an industry leader in metal-cutting tools owned by the Wertheimer family.

“We are investing $4 billion in an amazing band of people from Israel,” Buffett said in an interview with the Israeli financial daily The Marker.

“If your readers know a company that resembles Iscar, even a little, have them call me immediately. I want to buy. Let them call me collect.”

Buffett, considered the second wealthiest man in the world after Microsoft’s Bill Gates, said he intended to visit Israel later this year, not only to visit Iscar headquarters, but also to see if there were “any other pearls out there.”

The purchase is the largest Buffett has ever made outside the United States. He told Yediot Aharonot that “I believe in the Israeli market and the Israeli economy and I think that this is a good time to invest in it.”

According to Israeli venture capitalist Jonathan Medved, the deal puts Israel on the international map for future investments.

“One cannot overestimate the importance of this investment on the Israeli economy. Every superlative is an understatement. There is no investor who speaks to the world, or to the US investor, like Warren Buffett. He is legendary,” Medved told ISRAEL21c.

“He is as conservative and cautious an investor as you can find. Here he is making his first major investment outside the US, and he chooses Israel. That speaks volumes about the opportunities here not only in high tech, but also in the more traditional businesses,” said Medved.

Medved believes that Buffett’s investment will have a ripple effect on the Israeli economy. “He is a smart leader – people watch him. I’ve already heard other fund-managers say: If Buffett sees something in Israel, I’d better get over there and see what’s going on. Without question this will bring a lot of attention and investment in its wake.”

Iscar, one of the world’s largest (by sales) manufacturers of carbide industrial-cutting tools, which are used by carmakers like GM and Ford, is the first business Buffett’s investment firm, Berkshire Hathaway – which has a market capitalization of $135b. – has purchased outside the US. The deal makes the Wertheimer family the wealthiest family in Israel.

Buffett, chair and CEO of Berkshire Hathaway said that “in another five or ten years, we’ll look back and understand that what we declared here is one of the most significant things Berkshire Hathaway has ever done. Iscar will be a very large and important company.”

“We are delighted to partner with the Wertheimer family and IMC’s current management, led by Eitan Wertheimer and Jacob Harpaz,” he said in a statement.”

Asked what he intended to do with management after acquiring the company, Buffett responded, “We’ll let them be. This is why we bought the company. At Berkshire we are 16 people in total, even though the companies in our investment portfolio employ 200,000 people. Our job is only to choose the best players, and usually, like in Iscar’s case, the players are there when we buy the companies. I wouldn’t dream of changing Iscar’s management make-up.”

Iscar is a dynamic full line supplier of precision carbide metal working tools, producing a wide range of carbide inserts, carbide end mills and cutting tools covering most metal cutting applications. Iscar also provides metal working solutions in both engineering and manufacturing to major industries throughout the world.

Many innovative products, designed specially according to customer requirements, have made ISCAR a world leader in manufacturing industries such as automotive, aerospace and die & mold production. Unique and innovative metal cutting tools cover applications including cut-off, face grooving and other turning applications, milling, drilling, boring, threading and operations requiring solid carbide inserts and tools. The manufacturing facilities are divided by function and purpose. Separate buildings produce and press carbide powders.

The news of the acquisition has caused waves of excitement in both the business and political realm in Israel.

“This is major news and a great present for the State of Israel. We salute you, both personally and on behalf of the entire State of Israel. This sale will provide great momentum to the Israeli economy and I am certain that it will lead to other economic benefits,” Prime Minister Ehud Olmert told Iscar’s Chairman of the Board Eitan Wertheimer.

Olmert added at the beginning of Sunday’s cabinet meeting that “this is not just another deal for the Israeli economy, this is one of the biggest investors in the world, who has never invested outside the US before. He represents tens of thousands of investors whose investments depend on his decisions. His decision to invest in an Israeli company, in a country that he has never visited or seen its factories, solely on the basis of its record and on professional opinions attests – first and foremost – to great confidence in the Israeli economy and in full trust both in its stability and in its great potential.

“When a man like Warren Buffett says, to the 25,000 important economists and business people who have come to listen to him, that he believes in the Israeli economy, this is a signal to tens of thousands of investors from around the world to do what is good for them. What is good for $4 billion of Warren Buffett’s money is also good for very many other investors and we can only rejoice.”

Wertheimer told Olmert that he viewed the transaction as lighting an economic torch just as his father, Iscar founder and Honorary Chairman Stef Wertheimer, lit one of the ceremonial torches on Independence Day last week. He added that Buffet’s declaration of confidence was an important statement for the country and will be spoken of in the same light as the Balfour Declaration.

The elder Wertheimer said that the main objective of the deal – which was consummated after six months of negotiations – was to expand industry in the Galilee. A project of his for over 25 years, has created a set of industrial parks in Israel, all with an integrated Israeli and Palestinian workforce, to promote export businesses, create jobs, and reduce gaps in living standards.

After fleeing Nazi Germany the grade school dropout joined the Palmach, the elite strike force of the Haganah (the pre-state defense organization). A former Israeli parliament member, he is today an ardent supporter of joint Israeli-Palestinian businesses. In 2002 he testified before Congress about his idea for a “new Marshall Plan” that advocates US funding to revitalize the Middle East, a plan he still champions in speeches across the world.

Wertheimer’s model park is the Tefen industrial park. Built in 1982, it encompasses everything from transportation to cultural and educational facilities. Tefen is one of four such parks in Israel that generate some $1 billion in combined revenue. The others are located in nearby Lavon, Tel Hai (further north) and Omer, near Beersheba, in the south. Not only is Tefen the site of Wertheimer’s own company, but also over 20 other export oriented companies.

“At Tefen and the three other industrial parks I built 20 years ago in the Galilee and Negev, we’ve shown how an integrated workforce – Jews, Arabs and Druze working together – can make a difference,” Wertheimer told the Fast 50 website.

At the cabinet meeting, Olmert said, “I would like to take this opportunity to commend the Wertheimer family: There are none like you – fair, patriotic, lovers and builders of this country, developers of the Galilee and the Negev, and I am convinced that the great compensation you are receiving following the sale will be a lever for further development in the same pioneering Zionist spirit that has always characterized this country.”

Vice Prime Minister Shimon Peres, called Stef Wertheimer and told him that, “this transaction reflects foreign investor confidence in Israel’s economy, and especially in the economic future in the Galilee.”

With the recent deal, Peres, who is responsible for Israel’s economic relations with her neighbors as well as Negev and Galilee Development, added, “A tremendous opportunity has now presented itself to continue boosting all aspects of Galilee development” and that “the most important asset that Israel possesses is its human resources.”

Peres added that Iscar’s sale would indeed encourage other investors and entrepreneurs from Israel and abroad to invest in the Galilee region, a “region not only blessed with pastoral beauty and holy sites, but also hi-tech, a future first class university and a wealth of human potential, all of which render the Galilee one of Israel’s key economic magnets.”

In view of Iscar’s acquisition, and the interest of various entrepreneurs to explore tourist and business-oriented projects in the the Galilee and the Negev, Peres noted, that both these regions have become “fertile ground for establishing and cultivating thriving business operations in Israel.”

According to Medved, the deal with Buffett shatters many myths that have been established about the Israeli economy.

“The deal is an eye-opener. It confounds traditional wisdom in many ways,” said Medved, who went on to cite several “myths” about the Israeli economy that have been shattered by Buffett’s investment. “First, [the myth] that there is nothing interesting in Israel besides high tech,” says Medved, noting that Iscar is not a high tech firm.

“Second, that a cautious investor will be too scared to invest in Israel because of the political risk. If issues of political risk were there, then a cautious conservative investor like Buffett would not have made this investment.”

“Third, that even if Israel excels in high tech, it does not have world-class management,” he says, pointing out that not only did Buffett chose to keep the Israeli management of Iscar intact, he heaped praise on it.

Medved notes that this is just the latest of positive harbingers for the Israeli economy. Israel has the fastest growing economy in the West, with a rate of over 5% last year. Israeli stock markets are at an all-time high. In addition, the high tech industry has weathered the intifada, and in the last 5 years doubled the relative market share of venture capital markets.