Dual listing for Israeli companies
Israel is well-known for patriotism. So how is it that so many of the country's best and brightest companies bypassed the Tel Aviv Stock Exchange in favor of listing on US markets? In fact Israelis were proud of their high-tech corporate progeny achieving such high-flying success in the States, even as the domestic capital market suffered through thin trading volumes and low valuations. But now the winds of Zionism are blowing strong, and US-listed Israeli companies are being drawn home to dual-list on the TASE under fast-track rules. 'It's very important for us as Israelis that our stock exchange is revived,' declares Israel Teiblum, CFO of Magic Software, the first company to take advantage of a new law for dual listing on the TASE. 'We hope other companies will follow.'
The path to the TASE has only just been cleared for Magic Software and other like-minded companies listed on the Nasdaq Stock Market, the New York Stock Exchange and the American Stock Exchange. Unlike most countries, whose young companies usually list at home before seeking a secondary listing in the US through an American Depositary Receipt program, Israel has dozens of companies that chose the US for their primary listing. That's helped make Israel second only to Canada in terms of foreign listings in the US. And no wonder: Israel has some of the world's toughest listing, accounting and reporting rules under the Israel Securities Authority (ISA). Even the notoriously strict US Securities & Exchange Commission looks like a pushover by comparison. Besides, the hot money for telecoms, software and computer hardware was mostly in the US.
The battle to repatriate listings began around four years ago, recounts Gad Soen, president of Israel's Association of Publicly Traded Companies. 'These companies make up the most important, vital sector of the Israeli economy. We couldn't give up and let them be listed outside the country - otherwise we wouldn't have any capital market here. We wanted to bring them back.'
Soen helped persuade the ISA's chairman, Miri Kataz, to appoint the Brodet Committee, which concluded that it was vital to the Israeli capital market to have hassle-free dual listing. At first the ISA continued to insist on special rules, but with the encouragement of the ministry of finance it tabled a new law letting US-listed companies dual-list on the TASE with no additional regulatory requirements. At the same time, the TASE decided to exempt such companies from listing rules, maintenance regulations and listing fees. The law was passed in July 2000 by the Knesset, which then approved the TASE's dual listing proposal in the fall. By mid-December three companies had become pioneers: Magic Software, Blue Square and Metalink.
Question of motive
Make no mistake: 'The Zionist motive is important - but not the most important,' says Soen. Magic's Teiblum agrees that helping to 'revive' the local exchange is secondary to other reasons for dual listing: 'It's definitely much easier for domestic investors to trade in Israel compared to trading on Nasdaq. And there's a major shift of investor interest toward Israeli technology stocks here.' He points to the business pages of the Globe, the local Hebrew-language newspaper, and the local translation of Barron's, Dow Jones' weekly business journal. 'There are definitely more pages on what's happening to Nasdaq-listed Israeli stocks than on what's happening on the TASE,' says Teiblum.
Moreover, that pool of domestic equity investment capital is about to spike upwards. In early December, the government lifted the limits on equity investments for insurance companies, which have an estimated Shk100 bn ($24.5 bn) under management, and pension funds may follow suit. 'More and more, Israelis have a lot of money to invest. We want them to be able to move freely from one place to the other, to do what they want when they want,' Soen says.
The TASE, for its part, is proclaiming a 'new era' with benefits for dual-listed companies, their founders and investors, not to mention Israel's securities industry as a whole. 'Dual trading will increase liquidity, trading volumes and the number of investors, and it will positively affect company valuations,' states Ronit Harel Ben-Ze'ev, the TASE's economic and listing VP. She says that by listing on the TASE, companies will attract retail investors who may not trade US shares because of high costs and the time difference, as well as institutional investors such as insurance companies that are restricted from buying non-Israeli shares. Then there are European fund managers who may prefer the TASE for its trading hours and transaction costs, as well as international emerging markets funds restricted from buying Israeli stocks that are only listed in the US.
Ben-Ze'ev goes on to detail the 'home market effect', pointing out that most Israeli companies traded in America are small in US market terms but would be considered large companies on the TASE. The larger ones will also benefit from trading in TA 25 Index options, and the exchange is planning derivatives trading in the TA 75 and Tel-Tech indices. Just having 'an additional trading arena and an additional investor base' may help some companies. For example, Teva and Nice, which were already dual-listed, saw their US trading volumes decline in 1999 but Tel Aviv trading picked up the slack with the TASE's proportion of their trading increasing.
The entrepreneurs who originally fled Israel for Nasdaq riches should certainly welcome the new law. Ben Ze'ev provides this example: You found a company with your shares valued at $1, go public on Nasdaq at $10, dual-list on the TASE at $8, finally sell out at $50, but only pay capital gains tax on the $7 difference between the founding value and the TASE listing value. Had you skipped the dual listing, you would be stuck with taxes on a $49 gain.
Israeli employees, too, will benefit from being able to exercise their stock options more easily and at a lower cost than in the US market. And in a hot job market where companies must compete to attract the best talent, that could count for a lot. Irith Rappaport, vice president of IR & Financial Communications, says companies can take advantage of the new law to broaden their shareholder base in Israel. 'Up until now, the success of Israeli companies has been felt so far away from their actual market,' she says. 'The new law brings the stock market closer to the people.' The IR consultant encourages companies to 'unify their message' as they bring their listings back to Israel. 'Now it's up to us as IR people to take advantage of a whole new market opening up,' she says. 'It's going to be an educational process for a new society of people able to invest in these companies.'
How many, how fast?
It's uncertain how many US-listed Israeli companies will take advantage of the new law to list on the TASE. With more than 20 companies already dual-listed under the old rules, Ben Ze'ev has a target list of around 50 other US-listed companies with over $50 mn market cap. Of these, around ten have been listed less than a year and have a market cap under $300 mn, and the new rule stipulates that to be eligible, a company must have over $300 mn market cap or be listed in the US for more than a year. So at least 40 are immediately eligible, and after meeting with many CEOs and CFOs recently, Ben Ze'ev hopes that over time most will join the TASE.
Still, there has only been a trickle of dual listings in the wake of the new law. When will the biggies come, such as Check Point, which the TASE would love to lure? 'Not now,' says Itai Cohen, an equity analyst with CIBC Oppenheimer in Tel Aviv, 'especially because of the political situation. A company wouldn't want to be recognized as a pure Israeli company because Israeli companies are currently trading at a discount compared to their competitors.'
Now some would say that Oppenheimer is bound to be negative about dual listing since it has a near-stranglehold on Israeli trading of US-listed stocks. But Cohen echoes the TASE in stating the benefits of dual listing. 'It's a win-win situation for companies,' he says. 'Liquidity will go up, there will be more interest from the local media, and it's much easier to find good workers when you're in the news.' He adds, however, that for most of these stocks 'the price will be determined in New York.'
Soen, too, points out that politics, national security and Nasdaq's rocky decline through 2000 have combined to dampen the enthusiasm of companies for a TASE listing. 'But I'm optimistic that as the situation stabilizes, more and more will come.' What about Israeli companies like Technoplast or Pilat Technologies with their primary listings in Europe? The London Stock Exchange, the LSE's Alternative Investment Market, Easdaq and Euro.NM are all home to Israeli companies lured by listing standards still lower than the US. For now they're not eligible for dual listings under the new fast-track rule, though the TASE as well as the Association of Publicly Traded Companies are hopeful that they'll be allowed within a year or two.
Better late than never
The debate over the TASE's future is still on. 'The dual listing law should have been passed five years ago,' comments Dan Gerstenfeld, editor-in-chief of Digital Israel, the Jerusalem Post's new online business journal. 'With such slow progress by the ISA and the TASE, we may have already missed the train.' He's doubtful that Nasdaq 100 companies like Check Point or Comverse will bother with a TASE listing. 'If they do, it will be for Zionist reasons, not economic ones,' he insists.
Gerstenfeld is convinced the TASE should join in a global alliance. 'They should definitely try to team up with whoever they can,' he says. 'The question is whether the TASE is attractive for the other side as it's a very, very small market with less than $100 mn traded each day. It would be ideal if they could build up a relationship with Nasdaq.'
Still, the dual listing law is not necessarily too little, too late. Better late than never, is how Gerstenfeld headlined a recent editorial on the subject. 'This is great for the TASE,' he comments. 'Until now the small investor here had no exposure to Israeli high-tech shares, not even indirectly through insurance companies, pension funds and mutual funds because they avoided US-listed stocks because of trading costs and trading hours. Meanwhile - ridiculously - American investors have had access to our most promising companies. Now dual listings will give Israelis a chance to benefit from the fastest growing sector of the economy,' Gerstenfeld concludes.