October
2013
Shattering the Glass Ceiling
How can leading Israeli high-tech companies
overcome their scale barrier?
by Evgeny Muzychuk and Omer Teper
Copyright  2013 Shaldor Ltd. All rights reserved.
Despite Israel’s prominence as a world leading technology hub, its hightech sector hasn’t been able to turn out large technology companies
ranking among the world’s top 50. At $2-4B revenues or $5-10B market
value, there appears to be a 'glass ceiling' that Israeli high-tech companies
find very difficult to break through. Moreover, most of Israel’s high-tech
veterans exhibit relatively weak performance compared to their
international peer group – they aren’t producing strong and profitable
growth; are exhibiting disappointing returns; and are valued relatively
modestly on the stock markets.
A key reason for such stagnant performance is the difficulty in successfully
engaging in 'business expansion' – a critical phase in the growth of
established mid-size and large companies. While most global tech
companies have implemented significant beyond-the-core 'business
expansion' strategies, their Israeli peers are still largely focused on their
original lines of business, exhibiting limited M&A activity with Israeli
acquisition investments being half of the global tech industry average. An
additional consequence thereof is a failure to effectively exploit their
financial capacity, as these companies typically accumulate large cash
surplus with almost no debt on the balance sheets.
To successfully realize 'business expansion'-driven growth, Israeli hightech companies must rely on a suitable 'support system' of internal
capabilities. To that end, several specific capability build-up efforts should
help them to develop the required 'business expansion muscle': adopting a
more 'corporate' managerial approach; investing in business strategy
innovation; and enhancing non-organic corporate development. Eventually
these efforts should enable them to 'shatter the glass ceiling' and facilitate
their growth into world-class tech giants.
1
Israeli High-Tech Companies’ 'Glass Ceiling'
Israel's high-tech industry is known as one of
However,
the world's leading hubs of technological
prominence, the Israeli high-tech sector
innovation. The so-called Start-Up Nation has
hasn’t been able to spawn large, world-class
been
the
technology companies ranking among the
revolutionary inventions of our age, such as
world’s top 50. CheckPoint is the only Israeli
instant messaging (ICQ), USB flash drives
high-tech company listed in the Forbes Global
(M-Systems), network firewalls (CheckPoint), and
2000 list, but it ranks only 94th among 137
more. Israel is probably the most fertile ground
technology companies thereon (Fig. 1 below).
a
fountainhead
of
some
of
outside the United States for innovation and
despite
over
25
years
of
Being a relatively small and young economy,
entrepreneurship in the technology sector. Its
Israel has general difficulty in producing such
high-tech industry is widely considered the
large
most important sector of the local economy,
companies
across
all
sectors.
Nevertheless, as part of a world leading
accounting for 17% of the business sector GDP
technological hub, one would expect Israeli
and nearly 50% of industrial exports.
high-tech companies to be able to overcome
those
Figure 1: Number of high-tech companies listed n the 'Forbes Global 2000'
list in 2012, by country
(bottom number: ranking of country's leading company)
57
difficulties,
especially given the fact
that other young, small
countries'
#1
companies
indeed do rank among
22
Check Point – Israel’s only company
#11
on the list, ranks 94 out of 136
high-tech companies on the list
12
the
world’s
top
technology companies.
#19
6
6
5
#2 #33 #47
3
3
3
3
3
2
2
2
#5 #29 #37 #45 #99 #21 #34 #52
1
1
1
1
50
1
#18 #31 #88 #94 #123
US JP TW KR FR CN DE CH NL IN UK IE CA SG SE FI ES IL TH
Source: Forbes, Shaldor analysis
High-tech industry categories: communication eqpt., computer hardware, computer services, computer storage devices,
electronics, consumer electronics, e- retail, semiconductors and software, excluding original design manufacturers (ODMs) and
services outsourcing companies. Total of 136 companies.
2
Israel’s high-tech industry lacks the typical
Figure 2: Composition of Israel’s high-tech industry:
High-tech companies’ revenues as % of GDP
balance of small and large companies that
characterizes the global industry (Fig. 2 at
Small & Mid-Size Companies
right). Being a 'Start-up Nation', Israel
Small: Rev > $20M or MCap > $40M
naturally has a relatively high proportion
of small and mid-size companies, but
Mid-Size: Rev > $200M or MCap > $400M
Large & Mega Companies
Large: Rev > $2B or MCap > $4B
Mega: Rev > $20B or MCap > $40B
9.9%
unlike other developed economies, it has
8.2%
almost no large companies (with the
exception of Amdocs & CheckPoint,
4.2%
3.5%
which lie at the bottom of the large
1.3%
1.8%
2.3%
EU13
USA
Dev.
Asia
1.9%
Israel
companies cluster); and not a single mega
Israel
company. At $2-4B revenues or $5-10B
market value, there appears to be a
EU13
USA
Dev.
Asia
Source: Hoovers, Shaldor analysis
'glass ceiling' that Israeli high-tech
In terms of financial performance, many of
companies find very difficult to shatter.
Israel’s leading high-tech companies appear
relatively stagnant. The sector veterans have
been performing poorly (on average)
Figure 3: Performance of NASDAQ/NYSE high-tech companies
– Israeli vs. similar size Non-Israeli
compared
to
their
foreign
comparables (Fig. 3 at left). Aside
from a few strong performers, such as
Return-on-Equity
Revenue Growth
Price-to-Sales
Price-to-Earnings
(5-year average)
(5-year average)
(current)
(current)
CheckPoint and Nice Systems, most
long-standing
7.3%
6.7%
32
2.3
5.4%
high-tech
leaders have not been producing
strong and profitable growth; are
18
1.4
Israeli
exhibiting poor returns; and are
valued relatively modestly on the
1.6%
world stock markets (Fig. 4 below).
IL
Non-IL
IL
Non-IL
IL
Non-IL
IL
Non-IL
Source: Google Finance, Thompson, Shaldor analysis
10 Israeli companies (Amdocs. CheckPoint, Comverse, Gilat, Ness, Nice, Orbotech, Retalix, Tower, Verint);
205 non-Israeli companies
3
Figure 4: Large and mid-size Israeli high-tech companies
No.
Name
Core Business
Market
Cap
Enterprise
Value
Annual Stock
Performance
vs. S&P 500
($M, Jan 13')
($M, Jan 13')
(5 year avg)
HQ
Revenue Revenue
CAGR
($M, 2012)
(5 year avg)
Net
Margin
.(2012)
Established Large and Mid-Size Companies (were large or mid-size during the last five years)
1 Check Point
Softwa re (s ecuri ty)
Tel Avi v, Is ra el
9,828
8,325
11.3%
1,342
10.7%
46.2%
2 Amdocs
Softwa re (enterpri s e s w)
Ches terfl ., MO, USA
5,522
4,761
0.7%
3,246
0.5%
12.0%
3 Nice
Softwa re (enterpri s e s w, s ecuri ty s ys )
Ra a na na , Is ra el
2,327
2,028
0.7%
879
11.2%
7.7%
4 Verint
Softwa re (s ecuri ty s ys , enterpri s e s w)
Mel vi l l e, NY, USA
1,812
2,213
-2.7%
823
9.0%
4.3%
5 Comverse¹
Softwa re (enterpri s e s w)
NYC, NY, USA
590
429
-32.1%
771
-8.5%
-2.0%
6 Tower
IC ma nufa cturi ng
Mi g. Ha emek, Is ra el
188
404
-14.9%
639
22.6%
-11.0%
Tel Avi v, Is ra el
297
321
-14.1%
576
2.7%
-1.8%
7 Ness Technologies² IT Servi ces
8 Orbotech
El ectro-optic s ys tems for el ectroni c mfg Ya vne, Is ra el
370
168
-15.2%
401
2.1%
-11.4%
9 Gilat
Sa tel l i te s ys tems
Petah Ti kva , Is ra el
219
204
-13.8%
348
4.2%
-6.7%
Softwa re (retai l s ol utions )
Ra a na na , Is ra el
515
382
13.8%
271
4.1%
5.2%
22.2%
10 Retalix³
Emerging Mid-Size Companies (grew from being a small company in the last five years)
11 Mellanox
Infi ni ba nd & Ethernet ha rdwa re
Yoknea m, Is ra el
2,048
1,632
30.8%
501
42.9%
12 Ceragon
Wi rel es s ba ckha ul network eqpt
Tel Avi v, Is ra el
160
169
-12.6%
473
23.9%
-3.2%
13 Radware
Integra ted network s ol utions
Tel Avi v, Is ra el
717
629
25.4%
189
16.3%
16.9%
14 Given Imaging
Medi ca l i ma gi ng (ca ps ul e endos copy)
Yoknea m, Is ra el
497
403
-2.6%
181
9.7%
7.7%
¹ Without Verint; Based on CNSI data since Oct 2012 restructuring
² 2011 data, based on latest public reports prior to delisting
³ Stock perf ormance until acquisition by NCR in Nov 2012
The strong performance of recent entrants to the
It goes without saying that continuing growth of
large and mid-size companies 'club', such as
Israel’s leading high-tech companies has great
Mellanox or Radware, is largely the result of
importance both for the companies themselves,
their original innovation success and the
their shareholders, and the local high-tech
competitive edge it gave them. Their ability to
industry as a whole. Therefore, it is critical that
continue growing, after their core business
these companies find an effective growth
exhausts its potential, is yet to be seen.
strategy that will boost them 'to the next level'
and enable at least some of them to join the club
of world-class tech giants.
4
Difficulty in Implementing 'Business Expansion' Growth
In
order
to
understand
large
high-tech
A high-tech company ordinarily originates as a
companies’ ability to grow, a model of three
technology
generic growth phases is proposed (Fig. 5
entrepreneurial idea into a small company
below). Israeli high-tech companies' glass
focused on a single product or solution, after
ceiling
in
successfully accomplishing a technology or
successfully engaging in 'business expansion'
product 'innovation'. If the start-up’s founders
– the third and critical phase, which is key for
do not opt for an 'exit' at that point, the
large companies aspiring to become global-
company must invest in 'building the core' in
scale players (rightmost column in fig. 5).
order to establish a solid and sustainable
stems
from
their
difficulty
start-up
that
transforms
an
business. Normally this involves enhancing the
Figure 5: Three typical growth stages of a global high-tech business
Phase I
Phase II
Phase III
Innovation
Building the Core
Business Expansion
Strategic
Purpose
Enter untapped markets
ahead of the competition
Strengthen marketposition and
competitive advantage
Gain access to additional
business potential
Typical
Growth
Pattern
Singular ‘leapfrogging’ growth –
from start-up to small company
Gradual ongoing improvement –
from small to mid-size company
Significant discrete growth events –
from mid-size to large/mega company
Risk
Level
Extremely high risk –
success being ‘once in a lifetime’
event
Moderate risk,
‘protected’ by the original innovation
High risk in expansion moves
balanced by the risk spreading
of portfolio diversification
Required
Managerial
Competence
Entrepreneurial management
committed to a ‘dream’
Hands-on management
with ‘stamina’ for systemization
and constant improvement
Corporate leadership
with practical business vision
and risk management capacity
 Technological innovation to
address unmet needs
Typical
Moves
 Invention of new market needs,
through innovative business offering
 ‘Bridging the Chasm’ moves to turn
innovation in a sustainable business
 Product line enhancement &
optimization for better market
coverage
 Strengthening quality/brand
differentiation
 Streamlining operations to
gain/ensure cost advantage
 Competitive consolidation
to establish market dominance
 Entry into adjacent markets to
leverage cross-market synergies
 Vertical integration to increase
value added
 Renovating the business model
to enhance offering
5
product portfolio, building solid competitive
companies to achieve leapfrog-type growth.
capabilities, and expanding the company’s
Significant beyond-the-core business expansion
global reach. Turning a small company into an
has been a major growth strategy for the
established mid-size business is a major
majority of tech giants. Google constantly
challenge, especially for Israeli companies,
expands its business scope beyond the original
which
culture
search engine core – entering other web
characterized by creativity, intuition, and
services, adding new advertising platforms,
informality. Nevertheless, it’s the third growth
diversifying to mobile OS and hardware, etc. –
phase – 'business expansion' – that constitutes
while relying on dozens of acquisitions,
the biggest hurdle for Israeli companies. During
including several
this phase, established mid-size companies
DoubleClick, Motorola Mobility, Waze). Cisco
foray beyond their core market in order to beat
has expanded from being a LAN / WAN
their business-as-usual growth trajectory by
equipment
examining adjacent markets and potential new
communication and IT product house, having
business models through a corporate 'lens'.
spent over $32B on acquisitions in the last
often
exhibit
a
business
While advancing along the various growth
phases, companies continue at the same time
to leverage the growth mechanisms of
previous
companies
phases.
All
continue
to
large
high-tech
seek
disruptive
decade,
major deals
producer
including
into
a
mega-deals
(YouTube,
diversified
such
Scientific-Atlanta, WebEx, Starent, Tandberg,
Figure 6: Extent of Acquisitions by Israeli High-Tech
Industry Compared to Global Average
(as % of Companies' Aggregate Value, 2008-2012)
'innovation' and constantly invest in 'building
19.0%
the core' while advancing into the 'business
expansion' phase. Apple, for instance, has
8.8%
become the world largest high-tech company
in
part
as
implementation
a
result
of
a
of
successive
major
product
innovation, with its revolutionary touch-
Israeli
Global
High-Tech High-Tech
screen products (iPhone, iPad, etc.).
However, in most cases it is the 'business
expansion'
agenda
that
enables
large
as
Past 5 years’
acquisition value
Current
market cap
$2.7B
$870B
$30.4B
$4,700B
Source: Ernst & Young, CrunchBase, Company publications, Shaldor analysis
6
and Meraki. Intel relies on both organic and
expansion is their relatively limited M&A
non-organic expansion to achieve growth
activity: acquisition investment is half that of
beyond its core CPU business, entering adjacent
the
hardware markets (wireless communication,
percentage of total value, Fig. 6 above).
storage devices, SoC) and diversifying into
Moreover,
much
of
software
companies’
M&A
activity
(e.g.,
acquisitions).
McAfee,
SAP
has
WindRiver
been
global
tech
industry
average
Israeli
is
(by
high-tech
aimed
at
gradually
strengthening their core business, rather than
expanding its business outside the original core
broadening it. The five largest deals of the last
of ERP to other enterprise software domains
five years (Fig. 7 below) were acquisitions
and other software business models, through a
either of a direct competitor or a provider of
series of major acquisitions, recently including
highly complementary products for essentially
BusinessObjects,
SuccessFactors,
the same market. The last major beyond-core
Ariba, and Hybris. Other prominent examples
acquisition was the Nice-Actimize deal of 2007
of significant business expansion include both
($280M transaction), which stands out as a
US companies like HP, IBM, Microsoft, or
relatively rare event in the history of Israeli
Applied Materials as well as non-US companies
high-tech.
Sybase,
like Samsung, Siemens, Ericsson, or ASML.
Unlike their counterparts in other countries,
established large and mid-size Israeli high-tech
Figure 7: Top 10 Acquisitions by Israeli
High-Tech Companies (2008-2012)
Buyer
Acquisition
Year
Value
expansion'
Orbotech
PDI
2008
$290M
moves, and rather remain, somewhat stuck
Mellanox
Voltaire
2010
$218M
engines idling, in the first two growth phases.
Amdocs
Bridgewater
2011
$215M
As a result, most of Israel’s high-tech leaders
Tower
Jazz Tech.
2008
$170M
Nice
Merced
2011
$170M
Tower
Micron’s Wafer Fab
2011
$140M
CheckPoint
Nokia's Security
Appliance Business
2008
$130M
Gilat
Wavestream
2010
$130M
Amdocs
MX Telecom
2010
$104M
Nice
Fizzback
2011
$80M
companies
have
implementing
not
major
been
successful
'business
in
are still by and large mono-businesses evolving
around their original product lines, which
typically are past providing sufficient growth
thrust.
A strong indication of large Israeli high-tech
companies’
limited
focus
on
business
Source: Company Publications, Shaldor analysis
7
As a result of limited investments in beyond-
become strikingly conservative and risk-averse
the-core business expansion, many leading
when it comes to undertaking major business
Israeli high-tech companies fail to exploit
expansion initiatives. To some extent, the
their
instead
technology-oriented culture and management of
accumulating large cash surplus with almost
these companies place little faith in business
no debt on their balance sheets. CheckPoint’s
expansion, and exhibit limited willingness to
cash balance, for instance, has reached $1.5B in
take the risk and invest the financial and
2012 – 112% of its annual revenues. On
managerial resources, instead opting for the
average, large Israeli high-tech companies’ cash
inertia of further 'building the core'. However,
balances have reached about 40% of revenues,
large and established companies, which have
compared to an average of 20-30% among
exhausted the growth potential of their core
Nasdaq-listed technology companies.
business, must develop and flex strong
financial
capacity,
Ironically, Israeli high-tech companies, most of
which were born out of an enterprising gambit,
'business expansion muscle' in order to spark
further significant growth.
8
Internal Efforts to Support 'Business Expansion'
To successfully realize business expansion-
capabilities supporting each business and
driven growth, high-tech companies have to
realizing cross-business synergies – all guided
rely on a suitable support system of internal
by a transformative corporate vision. This
capabilities. Three major capability-enhancing
management model contrasts with the hands-on
efforts could help Israeli high-tech companies
optimization of each business unit and the
develop their 'business expansion' muscles
ensuing hamster-wheel chase after the next
(Fig. 8 below). All three are different aspects of
quarter that characterizes many of Israeli high-
a general path of embracing a broader,
tech’s top management teams.
longer-term perspective while emphasizing
strategic
(rather
than
technological)
innovation.
The second aspect involves investing in
'business strategy innovation', in addition to
the technological or product innovation natural
The first aspect is adoption of a 'corporate
to high-tech companies, which aims to realize
approach' that focuses on managing a portfolio
the transformative long-term vision mentioned
of
above. It includes inventing new business
businesses,
building
'lateral'
business
Figure 8: Three Capability-Enhancement Efforts to Enable Effective Business Expansion
1
Corporate
Approach
2
Business Strategy
Innovation
• Top mgt focus on managing the business portfolio, building ‘lateral’
business capabilities and realizing cross-SBU synergies
• Directed by a transformative corporate vision
• Relative independence of the SBU’s in day-to-day operation (and potentially
financial structure), strategically guided by corporate management
• Investment in business innovation in addition to ongoing
technological /product innovation…
• …while focusing on new business models, new market definitions,
new operational set-up, etc.
• Developing managerial capacity for implementing major moves
3
Non-Organic
Corporate
Development
• M&A’s of adjacent businesses to expand portfolio
• Strategic JV’s to address new opportunities
• Spin-off of activities outside the strategic scope
9
models,
rethinking
traditional
market
often key for realizing an innovative business
definitions, or adopting unique operational set-
strategy and becoming a member of the large
ups, all of which can generate a breakthrough
and high-growth companies' club.
expansion of the business. All these require a
leadership focused on conceiving and executing
'big moves'.
Investing in these capability build-up efforts
will help Israeli high-tech companies develop
the strong business expansion muscle they
Finally, the third aspect is increasing the
lack today, enabling them to 'shatter their
openness to and enhancing the capabilities
glass ceiling' and potentially grow into world-
for
class tech giants.
non-organic
corporate
development
(e.g., M&A's, JV's). As mentioned above, it is
Evgeny Muzychuk
Team Leader at Shaldor
[email protected]
Omer Teper
VP at Shaldor
[email protected]
10
About Shaldor
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and decisive.
Since the establishment of the firm in 1984, our teams have assisted the top
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conceiving and executing break-through strategies to address the most pressing
issues on their agenda.
Our key areas of expertise include Corporate Strategy, Business-Competitive
Strategy, Business Development, Organizational Design, Operational Excellence
and Public Policy / Sectorial Strategies. We work with companies across all
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facing the challenges of global competition.
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