Who Really Owns Israeli Capitalism?

An interesting article from the daily bible of capitalism, the Financial Times about who owns Israel. Forget the nationalist rhetoric designed for the masses, Israel is a market economy designed to produce superprofits for the few and a diet of never ending war on the Arabs to divert the attention of its own citizens. But every once in a while Israel’s poor explode, as in the Ten Protests today. Unfortunately Zionism usually succeeds in the end because the leaders of these protests are determined to keep them ‘non-political’ i.e. away from the question of Zionism. Read my article Support Israeli protest movement without illusions

Tony Greenstein

Israel’s connected conglomerates

Financial Times

August 17, 2011 7:36 pm

By Tobias Buck Picture an average Israeli family who have just bought an apartment in the suburbs. Imagine their new home, along with the entire neighbourhood, was built by the same company that made the cement for the construction site. And that the business also provides insurance cover to the family, mobile phone subscriptions and the apartment’s internet connection.

The family fridge is filled with products from a supermarket chain owned by the company. The family’s wardrobes are filled with suits, skirts, underwear and shoes bought from shops belonging to another of the company’s branches.

The same company also owns the newspaper in the letterbox and the asset manager that takes care of the family savings. The father works at one of the country’s biggest chemical plants, while the mother earns her wage at a racy biotech start-up. Both the employers are owned by the company, which also sold them their last summer holiday – and then provided the aircraft
that flew them to their beach resort.

Even this exhaustive list of markets, products, services and transactions does not do full justice to the astonishing reach and influence of the IDB group, the Israeli holding controlled by Nochi Dankner. IDB owns large or leading companies in markets as diverse as mobile telephony (Cellcom), construction (Property & Building Corporation), supermarkets (Shufersal), cement (Nesher), paper (Hadera), chemicals (Makhteshim), retail (Golf, Polgat, Intima), insurance (Clal), medical devices (Given), travel (Israir, Diesenhaus, Unital Tours) and newspapers (Maariv). It employs 40,000 people and claims to control assets worth $30bn.

In its size and reach, IDB is not unusual in Israel, where huge chunks of the domestic economy are controlled by a handful of sprawling business groups. Israel’s central bank estimates that “some 20 business groups, nearly all of a family nature and structured in a pronounced pyramid form”, control 25 per cent of all companies listed on the stock exchange – and about 50 per cent of the market in total.

Indeed, the names of Israel’s tycoons, or oligarchs, are known to almost everyone in the country. Vying with Mr Dankner for the top spot are: Yitzhak Tshuva, whose oil-to-insurance Delek group is Israel’s biggest energy company; Shari Arison, Israel’s richest woman, whose group owns Bank Hapoalim, the country’s biggest lender; the Ofers, the country’s wealthiest family, with interests in shipping, banking, electric cars and real estate; and Moshe Wertheim, Israel’s “beverage king”, a leading distributor of beer, spirits, soft drinks and bottled water.

All of them are active in numerous markets outside their core holding – and they are all the focus of mounting national controversy. Over the past month, the tycoons – and their close links to leading politicians – have become a key target for a growing social protest movement. But they are also facing an increasingly determined assault from Israeli regulators and economists amid claims that the conglomerates are undermining competition, driving up prices and cutting out minority shareholders.

“Israel is unique in the sense that we have accumulated two different problems,” says Dror Strum, a former chief of the Israeli Competition Authority who now heads an economic think-tank. “First of all, the market is very much occupied by large conglomerates that go far beyond the industrial sector. Secondly, there is concentration in the capital market as well – with many cross-linkages between the conglomerates and the banks. We have only five major banks that give credit in the Israeli market, and these banks are all heavily related to the conglomerates.”

In some cases, the close ties between the country’s banks and conglomerates are the result of direct ownership. But they are also founded on personal relationships and the banks’ long history of providing capital to fund the holding groups’ expansion: Mr Dankner’s cousin Danny, for instance, recently served as chairman of Bank Hapoalim. A minority of the bank’s stock,
meanwhile, is held by different branches of the Delek group.

These close connections are regarded as a problem not least because they encourage the misallocation of capital. That is because banks and fund managers are more likely to use “the money of ordinary savers to fund the pet project of the controlling shareholder”, says Yishay Yafeh, a professor of economics at Jerusalem’s Hebrew University.

Another worry is that Israel’s banks are reluctant to fund new market entrants – out of fear that increased competition will harm the interests of an affiliated conglomerate. Mr Strum points to the apparent problems faced by companies eager to challenge Israel’s three dominant mobile phone companies: “No one can emerge to fight the old gang because no one will offer him credit.”

The conglomerates, unsurprisingly, see it differently: “We believe that competition is high in the core markets that we are involved in – energy and infrastructure,” says Delek.

IDB, meanwhile, declined to comment but referred to a recent study funded by the group in which four senior economists concluded that “there is no excessive concentration in Israel”.
The tycoons themselves offer a study in contrasts. They differ in age, relative wealth, origins and outlook. (Few, for instance, share Ms Arison’s well-documented passion for new-age philosophy.)
Most benefited from Israel’s successive waves of privatisations – which included the sale of state-owned banks in the mid-1990s – that often allowed them to pick up valuable assets at relatively low prices.

“Everything was sold to a few families,” says Nili Even-Hen, who heads the economics department at The Movement for Quality Government in Israel, a watchdog. “The families just bought and bought, they got richer, and so could buy even more firms.”

Ties between the tycoons and the political class remain strong, helped by what Ms Even-Hen describes as the “revolving door” between the two sides. Until earlier this year, one of Delek’s biggest subsidiaries was headed by the former chief of staff of Ehud Olmert, the former Israeli prime minister.

The IDB group, too, has several former government officials on its payroll, including the former head of the Israeli Securities Authority. Another similarity is that most holding groups are structured in the form of a pyramid, allowing those at the top to exert control over companies far down the chain despite owning only a fraction of the economic interest. Such structures have long been a target for corporate governance activists, who argue that they damage the interests of minority shareholders.

“Some of them are clearly over-diversified,” says Prof Yafeh. “They are active in areas that often have very few synergies. This has little to do with maximising profits.”

Stung by the recent protests, Israel’s government has promised to press ahead with measures to increase competition. There is also growing support among policymakers for a law that would force the separation between financial and non-financial holdings.

Few doubt, however, that Israel’s mighty conglomerates will continue to dominate the corporate scene for many years to come.

Partnership path for foreign groups Many foreign companies give Israel a wide berth, a key factor in limiting competition and driving up prices. One reason, according to analysts, is the relatively small size of the market.

Another is the politics of the region, which mean foreign groups cannot use the country as a springboard for expansion into neighbouring states.

However, the entrenched position of Israel’s conglomerates is also to blame. Only a few foreign groups dare to launch a head-on assault on the Israeli market. Instead, most try to partner with one of the conglomerates.

The food industry is a good example: both Unilever and Danone, the European consumer goods giants, are long-established partners of Strauss, the Israeli food group. Nestlé of Switzerland, meanwhile, entered the market by buying a minority stake in Osem in 1995. It has since taken ownership of the group.

© THE FINANCIAL TIMES LTD 2011