Lipman leaped then looked
The company’s adventure with Dione shows how tricky foreign acquisitions are for Israeli companies.
Shlomo Greenberg
Lipman Electronic Engineering (Nasdaq: LPMA; TASE: LPMA) took a big hit yesterday on Wall Street. The company lost a quarter of its value two days ago. Why? First of all, its downward revision of its forecasts was disappointing. Secondly, and far more important, in my opinion, the behavior of the company’s management, and the inability of analysts to foresee what happened, was also a disappointment.
At the beginning of July, the company published its report for the second quarter and first half of 2005. Sales rose 52.2% to $58.8 million. The steep rise in sales was a result of consolidating sales by the British company acquired last year by Lipman, plus impressive rises in sales in North and South America. Net profit rose to $7.4 million, 12% more than in the second quarter of 2004. Profit per share was up only 8%, but the main reason for that was an increase in the number of share. Expense rose sharply in the second quarter, which kept the increase in profit lower than it was in the first quarter. These differences are clearly visible in the company’s semi-annual report. In any case, the general picture was extremely optimistic.
In May, two months earlier, parties at interest sold 2.3 million shares, raking in a nice sum, which was legitimate. After the company published its quarterly results, I read that Lipman president Isaac Angel had expressed great satisfaction at the company’s progress. He cited places like Turkey, Spain, and Latin America as regions where the company was achieving great breakthroughs. The share responded to the report with rises that began before it was published, and continue for several days afterward.
That’s how things looked from Wall Street. Now let’s switch to Main Street. Last October, Lipman acquired British company Dione. This company deals in the production and supply of systems for reading smart cards. According to what was reported, Dione was one of the world’s leading companies in smart card reading. Lipman paid $69 million in cash for Dione, and undertook to pay its shareholders (including GE Equity) a further $33.4 million if Dione met annual milestones in 2005-2006, following the acquisition. Dione’s management predicted that its revenue would reach $46 million in 2004.
Angel was very satisfied with the acquisition, which was a Lipman’s springboard for entering new markets, growth, and so on. Judging by the acquisition announcement, the match looked wonderful. The announcement stressed Lipman’s confidence in Dione’s management, and, in truth, the hope that Dione would be the Israeli company’s growth engine appeared plausible.
As far as I remember, analysts also responded positively to the announcement; at least, I didn’t see any hostile responses anywhere to the acquisition. The share rose 30% between October 2004 and July 2005. In early June, the share a peak of nearly $34, then started July at $28.50, a 16% drop. The share recovered in July, however, and touched its record again, following the publication of the company’s report. Between early August and two days ago, the share lost 21%. Since publishing its report on July 26, the company published only one announcement before yesterday, concerning the signing of a nice agreement, and nothing else.
Yesterday’s announcement was completely clear. The acquisition of Dione was not the wonderful match they thought it was. It seems to me that due diligence was not conducted with the diligence that was due. Ladies and gentlemen, that’s nothing unusual in the world of mergers and acquisitions, certainly not when it comes to the mergers and acquisitions of Israeli companies that lack experience in such matters. It took Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) many years of learning and careful planning, because buying a foreign company is the hardest thing that an Israeli will ever do.
Take G. Willi-Food International (Nasdaq: WILCF; TASE: WLFD), for example, which announced two days ago that it was calling off its acquisition of New Jersey-based food distributor Vitarroz. G. Willi-Food chairman and COO Zwi Williger explained that, after a long and careful due diligence process, G. Willi-Food had decided to withdraw from the acquisition. “There are too many pitfalls there,” he told us. Williger will find another company, because there are many such companies in the US. Imagine what would have happened if they had decided to buy the company, and had discovered the pitfalls a year later. What would G. Willi-Food have looked like in that case?
Published by Globes [online] - www.globes.co.il - on September 29, 2005
Dubi
