Home / World / Star of the North: How Warren Buffett bought the best industrial firm in Israel – Business

Star of the North: How Warren Buffett bought the best industrial firm in Israel – Business



When legendary investor Warren Buffett acquired control of Iscar, the Israeli machine tool manufacturer, in 2006, he told TheMarker that the acquisition was one of the most important deals his holding company Berkshire Hathaway had made. He said that not only the company's products, but also its management team could contribute great things.

It was a historic agreement for all involved. It was Buffett's first acquisition outside of the United States, and he celebrated it at his company's annual meeting with 35,000 fans in Omaha, Nebraska, where Berkshire Hathaway is headquartered. It was also Buffett's third largest purchase at that time. For Israel, it was one of the largest acquisitions abroad: around $ 4 billion for 80% of the company, with a value of $ 5 billion.

The deal left many people stunned, jaws open. They wondered how a metal tool company for the work in Galilee that very few people had ever heard of, and whose administration nobody knew about and nobody interviewed, had become an economic monster that the most famous investor in the world was willing to pay so much money. for. Later, in 2013, Buffett bought the remaining 20% ​​of Iscar for $ 2 billion more, an amount that represented a doubling of the company's value to about $ 10 billion.

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Since then, Iscar has returned to his secret and anonymous ways. Now it can belong to Berkshire Hathaway, which is publicly traded, but Buffett does not provide financial details about its private holdings, unless it so decides in its famous annual letter to shareholders. In recent years, he has not even mentioned Iscar. The company's employees jealously keep their numbers close to their chests, as they have done for decades. Google searches do not give much, except for technical information for the metallurgical industry.

What happened to Iscar in the seven years between the first sale and the second, and in the six years since then? Buffett's predictions that Iscar would be one of the most important offers for Berkshire Hathaway? The answer, like everything else about Iscar these days, is in the mind and hands of one person: the president of the company, Jacob Harpaz. From the sale, and after the founder Stef Wertheimer and his son Eitan ended their participation in the company, the story of Iscar became a dance between two people: Harpaz and Buffett.

In 2006, and in the seven years that followed, during which the company doubled in value, Iscar was an unusual global financial marvel that demanded a more detailed examination and explanation. When Buffett received the financial reports from Iscar, he discovered something amazing: an industrial company in the nasty business of manufacturing bits and cutting tools for the metal industry, with its facilities near the not always quiet border between Israel and Lebanon, and It showed earnings figures similar to those of the best high-tech companies.

As far as possible from tel aviv.

As Buffett said, the administration is at the heart of Iscar's history, and it is also the story of Harpaz, who served as CEO for 27 years, from 1992, until he was appointed president. Wertheimer and his family founded Iscar and took the company to sales of hundreds of millions of dollars a year, but Harpaz is the one that made it the second largest company in its industry worldwide, with a 17% stake in the company. 19% of a global company. estimated market at about $ 8 billion. Iscar also seems to be the most profitable company in its business worldwide.

How did management do it? The answer is complicated. Iscar develops innovative and advanced products for the metallurgy factory market, and many of them have been patented, but they do not have a secret formula like Teva had with Copaxone, their medication for multiple sclerosis, or Google did with their algorithms search. Iscar operates in an industry that benefits from the knowledge developed by the Israeli army, similar to the companies in the fields of cybersecurity, weapons and aviation. He does not have any special knowledge developed in the academic world or in hospitals. In fact, Iscar's location in Israel seems to be a weakness compared to its global rivals, from the distance of its customers to the fears of a factory closure in case of a security explosion, which has happened several times in the past. past, even Rockets that hit the plant.

But what seems to be an obstacle is actually one of the main explanations for Iscar's success: it's not a Tel Aviv company, and Harpaz, who lives in the city of Kfar Vradim, near the border with Lebanon, is not part of the club of CEOs of northern Tel Aviv and surroundings. Iscar is one of the two largest employers in the north (the second is Rafael Advanced Defense Systems), and that is fundamental throughout its history, both in terms of management as respected by Buffett and the other 3,500 employees of the company. company in Israel. More than 1,000 workers are Druze or other Arabs, an exceptional number for the Israeli labor market.

"When a company like Iscar gives a local resident the opportunity, which includes a car, elegant meals and professional interest, he is willing to give his soul. [in return]. People arrive at 5 a.m. and leave at 11 at night. They know that they will not have that opportunity anywhere else, "said someone close to the company." For non-Jewish employees, who can not work in a defense company like Rafael, this motivation is even stronger. "

A long-time employee said that given the labor market in Galilee, Iscar is what was once the Israel Electric Corporation throughout Israel: an employer that provides job security and will never fire you in difficult times. The company has almost no employee turnover and its professional knowledge base is constantly growing. Almost all top executives have worked for Iscar for decades. (The newly hired CFO worked for years on the company's account at his accounting firm). Those who retire, including management, are replaced by someone from within the company, not by someone who has parachuted from the outside.

Compared to companies in Tel Aviv or the United States, Iscar does not recruit "talent" from MBA programs in Israel or around the world. Engineers from Galilee schools are hired. Sometimes he finds new employees among those who never finished high school but have exceptional skills and trains them for manufacturing, operations or sales.

Today, the management team includes Harpaz; Ilan Geri, the long-standing marketing manager who took over as CEO when Harpaz became president of Iscar and the president of its parent company, IMC Group; Haim Cohen, the vice president of global manufacturing; Ronen Zisser, the CFO; Dov Avraham, the vice president of sales; and the vice president of operations and personnel, Arie Ravhon.

There is no interest in the exhibition.

Harpaz was born in 1951 in Kiryat Motzkin, a suburb of Haifa. He was wounded during the Yom Kippur War near the Suez Canal and lost his foot. In spite of the injury, he treated his wounded comrades and managed to evacuate them from the battlefield, for which he received the third highest decoration of the army, the Medal of Valor. He studied mechanical engineering at the Technion – Israel Institute of Technology in Haifa, worked in a metallurgy lab and then joined Stef Wertheimer in Iscar. They put him to work in marketing and, from there, he became CEO in 1992.

Harpaz never planned to work for Iscar full-time. He never thought he would work in manufacturing either. He thought that teaching was a more appropriate career for him. He ended up working for Iscar because of the way the company treated him after being wounded in the war. Wertheimer, who was the CEO at the time, came to visit Harpaz at the hospital. While he was recovering from his injuries, Harpaz decided to help a little in the development of Iscar, and he never left.

His first job was to lead a development team that consisted of one person: himself. One day, Wertheimer walked through Harpaz and heard him reprimand Iscar's sellers for not knowing how to sell. Wertheimer had no idea who the young man was, but he called him: "Come here, redhead. What are you doing here? Developing? Good. From now on you're in sales. "

Following the acquisition of Buffett by the company, Harpaz was named president of all companies in IMC, the metalworking division of Berkshire Hathaway, which includes a large number of companies similar to Iscar, such as Tungaloy in China, TaeguTec in India and Ingersoll and Tool-Flo. in the U.S. Iscar may be the largest producer of cash for the group (40% of the total), but from the top floor of the company's management building in the Migdal Tefen industrial zone, Harpaz controls 160 companies in 65 countries that employ 14,000 people They have annual revenues of more than $ 3 billion, with a phenomenal profit margin of more than 30%, a surprising figure for an industrial company.

Harpaz is nice and charismatic. No other Israeli executive can match his business achievements. He is excellent at marketing, customer relations, understanding market needs and development requirements, even if his English is very "Israeli". The real reason is quite simple: Harpaz has no interest in exposing the media in any way.

Iscar has given Buffett between $ 5 and $ 6 billion in the last 10 years, according to sources close to the company. This means that Buffett has fully paid for his investment in Iscar, and Iscar still has another $ 1 billion in the kitten. Its sales have increased by hundreds of percentages during this period, and it has a cash flow of $ 1.1 billion per year of operations, more than double the figure at the time the company was sold to Buffett.

These incredible numbers explain why Harpaz has gained admiration, some sources call it worship, from the Berkshire Hathaway administration in general, and from Buffett specifically. Harpaz can manage the Iscar group as he wants and make any acquisition he wants. No one is going to challenge their judgment. The board of directors of Berkshire Hathaway hardly participates in the decisions of Harpaz and always supports it, even when things go wrong.

The Chinese challenge

None of this guarantees that Iscar will not face great challenges in the future and that the successes of the last 15 years, in terms of growth and profits, will continue for the next 15 years. The main business of Iscar is to develop, manufacture and sell cutting tools for the metallurgical industry. Its main customers are manufacturers of the automotive industry (35% of its sales), aviation (15%) and energy (15%), and any slowdown in these industries can also affect Iscar immediately.

Traditional manufacturers of internal combustion engines are big Iscar customers, so a massive change to electric motors, something many expect to happen, but only at a slow pace, could be a problem for the company. The change to the manufacturing of assembly lines with 3D printing, at the expense of metallurgy, will also represent a challenge. Add to all this the question of the age of Buffett and his successors, who can change the administrative structure of Berkshire Hathaway and Iscar in the future, even if this does not happen in the next few years. The challenges that Israel faces, from security problems to labor market problems and the supply of engineers, are also part of the equation. And due to its size and large participation in the global market, Iscar would be exposed to almost all the major economic crises around the world.

Iscar has entered the field of information technology in recent years due to its business needs, and now employs more than 300 people as programmers and other computer professionals. But like high-tech companies, the company also faces the difficulties of hiring qualified computer professionals, along with the rising costs of doing so. Because Iscar is part of the Berkshire Hathaway group of large companies, it focuses on its traditional industrial sector and does not have its own arm of corporate venture capital to invest in new companies. That's what Berkshire's top management does in the United States.

Iscar's response to all these trends is the development of innovative and more expensive products, such as cutting tools that allow faster or more durable production, but nobody promises that the Chinese will not buy development capabilities that allow them to compete. with Iscar in these areas sooner or later. In addition, Chinese companies enjoy the advantage that most of the industry's main raw material, metallic tungsten, comes from mines in China. Another challenge is sales methods: today, online retailers such as Amazon and Alibaba sell industrial cutting tools, and their participation in the market is expected to grow.

Even the complete independence enjoyed by Harpaz is a double-edged sword: he is free to act quickly, but at the same time, nobody pushes him to think in the long term, to focus on strategy, to release other management executives. daily or prepare the next generation of managers. As of now, Iscar is in good shape. The acquisition of Buffett and the company's growth over the last decade have made it a global brand. And because of Israel's cybersecurity and weapons industries, the "Made in Israel" label has also become a valuable symbol. But the question is how long Iscar can remain the economic wonder that Buffett discovered in 2006.

The answer depends on a different question: Who will go first, Harpaz or Buffett, and what will follow? Neither of the two, both brilliant sellers, has shown a great effort to invest in a new generation to take over after they leave.

The era after Buffett.

Buffett said he hoped Iscar would become an important acquisition for Berkshire Hathaway, but it seems that this time, the guru was a little out of place. Iscar may be the most profitable company that Berkshire Hathaway owns, but a corporation that even generously estimates itself with a value of $ 12 billion to $ 15 billion does not represent more than 2% or 3% of the total value of Berkshire, which at this time it is $ 505 billion. Iscar is a wonderful and profitable business, but it can never be very important for Berkshire Hathaway, which focuses on insurance, railroads and stocks in companies like Coca Cola and Apple. The holding group is not abandoning the metallurgical industry. Four years ago he bought Precision Castparts, which manufactures parts for the aerospace industry, for $ 37 billion, but his future and the stock price will be influenced mainly by his other shares.

When Buffett or Harpaz finally leave, anything could happen in Iscar. At the time of the acquisition, Buffett expressed his total opposition to the sale or issuance of publicly traded shares in any of the private companies owned by Berkshire Hathaway, including Iscar in particular. When TheMarker asked him 10 years ago how long he planned to own Iscar, he said: "I do not sell." He promised that he would not take the public company either, something he had never done before. No one doubts that Buffett will keep his promises, but no one knows how long he will be around and what those who follow him will do.

A large number of different scenarios are possible for the future of Iscar. Buffett can continue to run Berkshire Hathaway for five more years, Harpaz can remain where it is for another 10 years, the market for cutting tools can remain stable and even grow moderately. Due to its special organizational culture and loyal administration, Iscar could very well continue to operate as it has done so far.

In a different scenario, Buffett or Harpaz could withdraw and the new administration could decide to participate more in the supervision of Iscar and IMC. Then he could transfer the management of non-Israeli companies to the United States, making Iscar a more American and less Israeli, less agile, less audacious and less profitable corporation. Today, Iscar spends much more time in compliance processes than in the years prior to the sale to Berkshire Hathaway, and has been forced to give up sales to countries like Iran and Cuba.

There is an infinite number of scenarios between these two possibilities, but one thing is clear: if Harpaz is maintained, it will not be for the money. It is estimated that Harpaz received a bonus of tens of millions of dollars at the time of the sale to Buffett in 2006 and again in 2013. Since Berkshire Hathaway bought the entire company, Harpaz has been receiving a compensation package in accordance with the standards Americans and in good years his salary reaches seven figures. What may be surprising is that all this money has not changed him, does not motivate him and has not made him change his historical decision: that Harpaz and Iscar will remain almost an enigma for the Israeli public.


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