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Israeli high-tech firms face hard times

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JERUSALEM, March 19 (JTA) – When Amir Aharoni quit his job as a senior executive at the Israeli high-tech firm Optibase to establish a start-up called Mobixell Networks, being a technology entrepreneur was a far more promising endeavor than it is today.

True, share prices on the Nasdaq, where Optibase trades, already were falling last December, and dot-com companies were collapsing by the dozens.

Yet Israeli entrepreneurs felt somewhat insulated from the technology turmoil.

They had been spared the worst of the dot-com carnage, since the Israeli industry focused on creating infrastructure technologies for Internet and telecom firms instead of on consumer Web sites, which lacked solid business models and were the first to collapse.

Furthermore, even though investment in Israeli start-ups slowed toward the end of 2000, it had been a record year for the sector, which in recent years has fueled Israeli economic growth.

But things have changed for the worse this year:

* Blue-chip technology companies like Intel and Cisco are reporting profit warnings and laying off employees by the thousands.

* Information technology spending in the United States – where many Israeli firms sell their products – is growing at a much slower pace than expected.

* By mid-March, the Nasdaq stock index had plunged by 63 percent from its high of 5,049 one year ago.

No longer insulated, Israel’s high-tech sector is feeling the shock waves of these developments.

“We have to be concerned,” said Aharoni, whose start-up is developing a technology to manage traffic of multimedia and video applications over wireless networks.

“Even though I think that the uniqueness of our team and the background of our people puts us in a better position, we still have to be careful. We know that no fund raising is certain anymore.”

The high-tech industry’s fall already has affected Mobixell’s day-to-day operations, Aharoni said.

The company is being very cautious about spending. At the same time, it is no longer shooting for a quick “exit,” as venture capitalists call an initial public offering on the stock market or the lucrative sale of a start-up to a bigger group.

As increasing numbers of Israeli tech companies fall victim to the turbulence, officials are concerned about the potential for a broader battering of the Israeli economy.

PricewaterhouseCoopers, the international accounting firm and consultancy group, reported that Israeli start-ups attracted $3.2 billion of investment from venture capital funds during 2000. According to a recent Finance Ministry report, that accounts for 2.9 percent of Israel’s gross domestic product.

In the United States, by contrast, start-up investments accounted for only 0.7 percent of the economy last year.

The slowdown has contributed to the Finance Ministry’s sharp reduction of economic growth forecasts for 2001 from about 4.5 percent to about 2.5 percent – and the worst may be yet to come.

The Finance Ministry report warns that if the start-up sector slows by 25 percent or more compared with last year – a possibility given the current climate – Israeli economic growth may fall below 2 percent. That would be the slowest growth rate in more than a decade.

The status of Israeli high-tech in the world’s eyes was important enough for Prime Minister Ariel Sharon to take time out from his hectic schedule last week for a satellite address to a Silicon Valley conference on Israeli technology.

After spelling out his plans for peace and security, Sharon promised to pursue an economic agenda of “fiscal consolidation, liberalization of financial markets and necessary economic reforms.”

He also promised to move swiftly on tax reform, a particularly popular pledge since many foreign companies operating in Israel are unhappy with the tax rate.

But nothing the government may do can stop the tidal wave from Wall Street that is starting to crash down on Tel Aviv.

The trends confirm what analysts have said for months: that Israeli-Palestinian violence has far less effect on Israel’s high-tech industry than does the Nasdaq.

The most immediate impact is on the ability of Israeli start-ups to raise new cash.

IVC Online, an Israeli venture capital industry research group, recently issued a study showing that the amount of money raised by Israeli start-ups in recent years has tended to rise and fall in line with the ups and downs of the Nasdaq.

“The trend is definitely similar,” says Eran Mordecai, director of IVC Online. “As long as the Nasdaq will not recover, the Israeli high-tech community and high-tech start-ups will have difficulty raising new money.”

Mordecai also expects that some 88 Israeli venture capital funds – which have about $3 billion free to invest – will spend more of their money beefing up companies in their portfolios rather than investing in embryonic start-ups.

This also means that existing start-ups without solid business plans could collapse.

Koldoon, an Israeli database company that tracks the technology sector in Israel and Europe, reports that during the past year 256 Israeli companies – out of some 1,500 total – have shut down.

While many of these companies were dot-coms, the next wave of shutdowns is expected to include more hard-core technology companies. Layoffs already are sweeping the sector.

R-U-Sure, a company that created a computer application for comparing prices on the Internet, was a particularly prominent Israeli start-up to go belly up.

It was funded by Yossi Vardi, who rose to fame for founding Mirabilis, the Israeli company that created the hugely popular ICQ program. Mirabilis was sold to America Online in 1998 for $400 million, a move that led a wave of buyouts of Israeli companies.

Layoffs have hit companies ranging from Yazam, a high-profile venture group that made headlines in the international business press when it started to flounder, to Versaware, a start-up that makes technology for producing e-books.

Commtouch, a Nasdaq-listed e-mail services company, sacked 190 employees, or half its workforce.

The growing casualty list even has hit top Israeli names such as Gilat Satellite, which laid off 275 employees, or 18 percent of its staff, just two days after issuing a profit warning that sent its stock crashing more than 50 percent on the Nasdaq.

According to Tobias Fischbein, Israel technology analyst at the Tel Aviv office of the Lehman Brothers investment bank, Israeli stocks have more or less performed in line with the Nasdaq.

By mid-March, the Nasdaq was down 19 percent since the beginning of the year. Fischbein says that of about 100 Israeli stocks on the Nasdaq, 59 companies that had a market capitalization of more than $100 million were down 19 percent over the same period.

But the combination of layoffs, shutdowns and sliding stocks is not all bad news.

For several years Israel has suffered from a severe skills shortage. Now, fired workers are expected to gravitate toward companies with more viable business plans. Wages already are falling.

Fischbein says this ultimately may contribute to the sector’s financial health. In recent years, he said, a lot of money has been inefficiently allocated – both to companies with no viable future and within companies that were paying inflated salaries.

“The outcome will be better in terms of both the labor market and the Israeli high-tech industry,” Fischbein said. “The noise level will come down, and money will be invested more wisely.

“Of course, it will all be at a slower pace and lower valuations, but all this will contribute to the long-term sustainable growth of the industry.”

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