Global Economics

Buffett Takes a Cut of Iscar


Before last week few of Warren Buffett's shareholders had heard of Iscar Metalworking Company, the legendary investor's latest acquisition. On May 5 the Berkshire Hathaway (BRK) chairman announced that his company would pay $4 billion for an 80% stake in the privately held Israeli cutting-tools company, its first-ever acquisition outside the U.S. A day later, Iscar Chairman Eitan Wertheimer stood before 24,000 shareholders at the Berkshire Hathaway annual meeting in Omaha, Neb., and declared: "We, our families, all the Iscar employees and their families are proud to join you."

The deal brings together two successful corporate cultures -- both with an emphasis on hard work and value. It also could have a major impact on the Israeli economy. That's because, as a result of the deal, the Wertheimer family is likely to pay about $1 billion in capital gains taxes into the Israeli government's coffers -- an unexpected windfall. With the Israeli budget already running a $2 billion surplus, the government is considering slashing value added tax by one percentage point to 15%.

INDUSTRIAL STRENGTH. Prime Minister Ehud Olmert praised the deal as "an amazing statement about the Israeli economy" that "ought to generate great enthusiasm." He added: "There is no other investor in the world who can say, 'What's good for Warren Buffet isn't good for me.'" The Tel Aviv TA-25 stock index rose 2.7% to a record high on May 7, before declining slightly on May 8. The Israeli shekel also strengthened against the dollar to its highest level in nearly a year.

No wonder the market was happy. Founded in 1952 by Stef Wertheimer to manufacture metal cutting tools, Iscar has in the past decade turned into a major player with subsidiaries in 60 countries and factories in Europe, Asia, and the Americas. The company specializes in precision tools for the automotive, aerospace, and die-and-mold industries. It is located in the Tefen industrial park in the hills of Israel's Galilee, only about 7.5 miles from the border with Lebanon, often a flash point for violence in the volatile region.

In recent years, Wertheimer has turned over the reins to his son Eitan, 53, and focused on using his business success to promote Middle East peace through industrial parks modeled after Tefen and four others he has built in Israel. Wertheimer, 80, believes industry is the key for creating jobs and stability in the region.

So far his attempts at regional peacemaking have met with little success. But the Wertheimer family has already announced that it will put proceeds from the deal toward further promoting the cause of industrial parks and peace. The cash sale of 80% of Iscar makes the Wertheimers Israel's richest family.

CLOSELY GUARDED BOOKS. It's been a long road. The German-born, self-educated Wertheimer, who came to what is now Israel at the age of 10, turned a backyard metalworking business into one of the country's most profitable companies. A third of Iscar Metalworking's 6,000 employees are based at its Tefen headquarters, where most of its research and development and a substantial part of its production take place.

"They are at the cutting edge of technology in their field and spend countless millions on research and development to stay ahead of the game," says Noam Aharon, chairman of Polygon Tamarisk, an Israeli startup in the metal technology field. Polygon has been working with Iscar for the past four years.

Over the years, Iscar Metalworking has closely guarded its financial figures. Israeli financial sources estimate that the company's net income last year was $440 million on revenues of $1.4 billion, but the company refuses to comment on the figures. "This kind of profitability is almost unheard of when you consider they are involved in manufacturing," says Zeev Holtzman, chairman and founder of Giza Venture Capital, a Tel Aviv-based venture capital firm.

Iscar Metalworking's largest competitor is Swedish-based Sandvik, which recently reported net income of $265 million on $2.87 billion in revenues. Nearly a third of its revenues came from its cutting-tools division.

OPPORTUNITY WRITES. But even with such high profitability, Eitan Wertheimer was worried about the future. "As an Israeli company in the global market, it was not easy to make acquisitions abroad," he admits. It was no secret that in recent years he was looking for ways to bring in a strategic partner. Sought after by international investment bankers interested in taking Iscar Metalworking public, the younger Wertheimer feared the exposure would not suit the family-run business, whose board of directors hasn't held a formal meeting in more than 15 years.

After lengthy research on various options for the company, last October Wertheimer decided to write the "Oracle of Omaha" a letter. Shortly after he sent it, Buffett got back to him, and within six months the negotiations were concluded. In an interview with the Israeli daily Haaretz after the Berkshire Hathaway annual meeting, Buffett made it clear he appreciates Iscar's corporate culture. "It's an amazing company run by amazing people," he said.

Wertheimer, who will continue to run the company with his team, was just as excited. "Our joining the Buffett family will open up a lot of doors that were closed to us in the past," he told Israeli reporters in Omaha. It will also allow Wertheimer to continue to operate under a veil of secrecy with Iscar Metalworking's trade secrets and financial results deeply buried in Berkshire Hathaway's annual reports.


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