The decision on whether to merge IMI into governmental defense companies or to sell it as part of a tender that is open to all is an important juncture: Is the game relevant to only two parties – RAFAEL and IAI – or will a long list of other companies and entrepreneurs, foremost among them Elbit Systems, who see themselves as worthy, be able to participate?
The path to this important juncture has been laden with conflicts involving individuals in the defense industry and political system. Indeed, in 2005 IMI also stood to be privatized, and reached a more advanced stage – a decision was made to merge IMI's essential assets into Rafael and to sell the rest of the company's activities in a tender. Some 13 businesses expressed interest in purchasing the assets, including Israel Shipyards and Elbit Systems, which are currently considered potential buyers.
But the pressure from all directions successfully thwarted the merger. IAI management, annoyed by the decision to merge assets into Rafael, applied counter-pressure, and a decision was eventually made not to choose between IAI and Rafael.
This move buried the deal: IMI did not merge into any of the defense companies and no tender was issued. Sources in the defense companies and ministries remember this well and have assured that this time the plan to find an outlet for IMI is serious. Yet some still regard current measures with a great deal of uncertainty.
In 2005 the price tag placed on IMI stood at $300 million, prior to valuation. Though the Finance Ministry was preparing to conduct a valuation, it was not carried out. Five years have passed, the company's status has declined and its value seems to have decreased. In 2009 the company suffered additional losses – its eleventh consecutive year of losses – and its deficit stands at NIS 2 billion ($560 million).
In addition, IMI has hundreds of unnecessary employees whose salaries are a burden on the company. In certain months in 2010, IMI needed assistance from the Finance Ministry in order to pay salaries. IMI does not have any huge deals - like the recently-concluded Turkish tank deal, which produced revenues of $600 million over six years – in the foreseeable future. The company's relationship with the Indian government was undermined and it was blacklisted; as a result Indian governmental companies may not work with IMI.
Yet despite IMI's deterioration and the skepticism accompanying the privatization process, Israel's defense industry is once again rattled by the question of which company will purchase or merge with IMI, and everyone is waiting in line.
Many of the key players in the IMI decision took an active part in previous rounds. In 2005 the government decided that IMI's Givon and Maltam divisions would be merged into Rafael, based on the understanding that the company's activities were most similar to those conducted by the two divisions, and that they could be integrated easily.
Eyal Gabai, the director-general of the Prime Minister's Office, which will ultimately make the decision on the matter, headed the Government Companies Authority in 2005, when a decision on the merger was made. Gabai apparently holds is a radical opinion, according to which the damage IMI inflicts on the state is too great, and if a solution isn't reached the company should be dismantled. Because he knows this is unrealistic, Gabai is believed to support merging IMI into Rafael or IAI – Rafael is apparently preferred – rather than issuing a tender.
IMI's three most “attractive” assets are the Givon division (rocket systems, satellite launchers, artillery rockets, rocket launchers), Maltam division (advanced systems, aerial attack systems) and Slavin (land systems, renewing and improving armored fighting vehicles). The company is also heavily involved in the munitions field.
Rafael and IMI are the only companies in Israel that manufacture launchers – IMI's Givon, which produces motors for the Arrow missile and launchers for the Ofek satellite, and Rafael's Manor, which manufactures motors for many of the European space programs. IMI's Maltam is a smaller division, with synergies with Rafael's rocket division.
Both of the companies have parallel activities in other fields as well. Rafael and IMI compete closely in developing an anti-tank missile defense system for the Israel Defense Forces. Two years ago, the defense establishment decided to use IMI systems – Arrow and Dorban - manufactured by the company's Slavin division, for which the government had previously planned to issue a tender. The Defense Ministry recently decided to end its ties with IMI, as it prefers Rafael's Windbreaker system. IMI announced its rejection of the decision, saying that it would continue developing and manufacturing its system.
The Defense Ministry is currently trying to find a solution so that two government-owned companies in the defense industry will not developing similar systems simultaneously, competing against each other to supply it to the IDF. Duplicity of this nature between systems exists only between IMI and Rafael, and it is expected to be resolved if the two are merged.
Barak isn't committing
Politically, the heads of Rafael – CEO Yedidya Yaari, a former Navy commander, and Chairman Ilan Biran – are considered to be closely associated with the heads of the Defense Ministry, including Defense Minister Ehud Barak and the ministry's directory general, Uri Shani. Barak's position on the matter is unknown and his support for Rafael is not assured. Barak is considered to be indecisive on the matter, and has promised to promote both companies.
Shani is very much opposed to the existing rivalry between the three companies, not just regarding IMI, but also over specific business matters. Shani recently issued directives for the security industry, ordering it to cease unnecessary competition; he went so far as to threaten that if this was not done his ministry would adopt a policy of greater intervention in their contracts with foreign bodies (the Defense Ministry grants the companies export permits, and can direct which countries and tenders they can compete for).
Shani is expected to support IMI's merger with Rafael or IAI, rather than a tender in which Elbit can compete. Shani recently made the decision to select Rafael's Windbreaker system, rather than IMI's Arrow or Dorban, which different sources say hints at his support for Rafael, rather than IAI, to merge with IMI, though he hasn't publicly expressed his opinion on the matter. Hemda Marek, the Defense Ministry's financial advisor, along with sources in the Government Companies Authority and the Treasury's budget department, are researching whether IMI's merger into one of the companies is even possible.
The assumption regarding the similarity between some of IMI's activities and those of Rafael is still valid, and is highly stressful for IAI, as it could find itself behind this time as well, though IAI does not plan to remain outside of the game. A few days ago IAI CEO Yitzhak Nissan sent a 7-page letter to the defense and finance ministers, in which he explained why IMI should merge with his company.
The synergy between IMI and IAI activities is weaker than that shared by IMI and Rafael, though both companies have a few joint projects – mainly those in which IMI serves as IAI's subcontractor. Alta, IAI's electro-optic division, has some activities that overlap with IMI's Givon division, and IAI has synergetic activities in the anti-tank missile realm (the Lahat missile that it manufactures) as well as in the propulsion field, overseen by the company's Malam factory, which manufactures the Arrow missile.
In his letter, Nissan noted that the geographic proximity between IMI and IAI facilities is a major advantage for their merger. Most of the factories operated by the two companies are in central Israel, while Rafael's are located mainly in northern Israel, though the geographic consideration is not expected to be the deciding factor.
Nissan also wrote that if IAI is selected to merge with IMI, he plans to establish a separate division to absorb IMI in its entirety, rather than distributing it into different units within IAI. Merging by means of dismantling different factories and divisions is of great concern to IMI employees, and Nissan's statement seems to be an attempt to communicate directly with IMI employees, to convince them that a merger with IAI is preferable.
But IAI's strongest point is not its professional synergy, but rather the political clout held by its senior officials. It seems that at this point in time, IAI has the most active lobby in its favor. The company's main source of power is two-fold: Haim Katz, who heads the company's workers' committee and is a Likud MK, and company chairman Yair Shamir.
Katz has a great deal of political power, used to convince decision makers to merge IMI with IAI, a move that would significantly increase his personal power within the merged company. But despite his political clout, expressed mainly by recruiting thousands of registered Likud voters who work for IAI, Katz's power could also be an obstacle, as Likud does not want it to increase.
Shamir, who works in the political arena alongside Katz, is the son of former Prime Minister Yitzhak Shamir; he is also associated with the Likud and is very close to Prime Minister Benjamin Netanyahu. Shamir and Katz are a team that can apply a tremendous amount of political pressure, which, under the current administration, can greatly influence decisions made regarding IMI.
An additional political arsenal held by IAI is Amos Yaron, the company's special advisor. Yaron was the director general of the Defense Ministry from 1999-2005, a period during which the government backed down from a decision on merging IMI with Rafael; Yaron still has very close ties with leading officials in the Defense Ministry. As director general of the office, Yaron believed in a wide-scale merger of companies in Israel's defense industry into two companies – one governmental and one private. Since leaving his post in the Defense Ministry, he has continued to voice his opinion on the matter. As an advisor to IAI, he is promoting this move and believes that the first phase is merging IMI into IAI.
The decision on the merger that the Defense and Finance Ministries are trying to promote excludes Elbit Systems. Elbit is not a governmental company, but is a major player in Israel's defense arena. While decision makers are currently reviewing a merger rather than a tender – which leaves Elbit out of the picture – Elbit does not plan on giving up easily. Two weeks ago Defense Minister Ehud Barak visited the company, and Elbit continued its campaign with a letter sent by company President Joseph Ackerman to Barak and Finance Minister Yuval Steinitz.
On the tactical level, Elbit is trapped: It can only obtain IMI is if a decision is made to issue a tender. In that case, Mickey Federman, who controls Elbit, has an advantage, as it is reasonable to assume that his company can make an attractive offer. If a tender is issued, Elbit, under its president Yossi Ackerman, will have to compete equally against a number of other private sources who have expressed interest in IMI, and others who will also join.
Last time a tender was discussed regarding IMI units, 13 companies expressed interest in making a purchase. Among the potential buyers is Israel Shipyards Ltd., as well as Sammy Katsav, who purchased IMI's light weapons factory from the state at the end of 2005. Elbit has an advantage over other private companies due to its close ties with senior officials in the Defense Ministry, its reputation and financial capabilities.
Elbit's major advantage is its experience in the field of mergers and acquisitions, which was a major impetus for its growth, and it is one of the reasons the company is interested in IMI. In recent years Elbit has conducted upwards of 30 such moves, the most noteworthy of which were the acquisition of Tadiran Communications, Elisra, and most recently Soltam.
In terms of synergy with IMI, Rafael seems to have the greatest synergy, closely followed by Elbit, which is ahead of IAI. IMI's munitions activities can be merged with that of Soltam; Elbit completed its acquisition of Soltam in 2010. Elbit and IMI have worked together in the past, and Elbit served as IMI's subcontractor on the Turkish tank project; there is a particular synergy between the Maltam activities and Elbit's unmanned aerial vehicle.
Elbit has not conducted a large acquisition in the past two years, though it planned to do so and garnered bonds valued at NIS 1 billion ($280 million). Elbit does not seem to have a potential acquisition lined up at present; IMI may the last large acquisition it will be able to make in Israel, and Elbit needs it in order to maintain its growth pace. Sources in Elbit are trying to garner the support of decision makers and hosted Barak, as well as President Shimon Peres, in recent months to explain why Elbit is the right target company for IMI.
Elbit's motivation is also driven by a harsh rivalry between its management and that of the IAI. Elbit and IAI are direct competitors, and Elbit would like above all else to prevent IMI's merger with IAI.
Treasury opposes merger
What could help Elbit is the wide-spread opposition in the Finance Ministry's Budget Department, headed by Udi Nissan, to merging IMI with IAI or Rafael. The budget department believes that such a move would force the state to reset IMI's huge deficit, with no significant return (since IAI and Rafael are governmental companies), which could cost the state a sum of NIS 5 billion ($1.4 million).
Sources in other Treasury departments, including the Government Companies Authority, headed by Doron Cohen, have expressed more support for the merger, believing that of all possible options, it can be implemented quickly. Ofer Eini, the head of the Histadrut Labor Federation, is considered a supporter of a merger with Rafael or IAI, without holding a preference for either. Employees believe that their rights will best be maintained if IMI merges with a governmental company.
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