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When the legendary investor Warren Buffett bought control of Iscar, the Israeli machine tool manufacturer, in 2006, he told TheMarker that the acquisition was one of the largest import contracts his company Berkshire Hathaway had never concluded. He said it was not just the products of the company but his management team that would bring great things.
It was a historic agreement for everyone involved. It was Buffett's first acquisition outside the United States. He celebrated it at his company's annual meeting of 35,000 fans in Omaha, Nebraska, home of Berkshire Hathaway. It was also Buffett's third largest purchase at the time. For Israel, it was one of the largest acquisitions abroad – about $ 4 billion for 80% of the company, worth $ 5 billion.
The agreement left many people stunned, the mouth open. They wondered how a Galileo metalworking business, which very few people had heard of and whose management was known or interviewed, had become an economic monster as the most famous investor in the world. world was willing to pay as much. for. Later, in 2013, Buffett bought the remaining 20% of Iscar for an additional $ 2 billion, an amount that doubles the value of the company to about $ 10 billion.
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Since then, Iscar has returned to his secret and anonymous ways. It may now belong to the publicly traded Berkshire Hathaway, but Buffett does not provide financial details on his private holdings – unless he chooses to do so in his famous annual letter to shareholders. In recent years, he has not even mentioned Iscar. Company employees keep their numbers zealously, as they have done for decades. Google searches do not do much, except for technical information for the metallurgical industry.
What happened with Iscar seven years between the first sale and the second sale, and six years later? Are Buffett's predictions that Iscar would be one of the most important contracts for Berkshire Hathaway fail? The answer, like everything about Iscar today, is in the hands and mind of one person: the president of the company, Jacob Harpaz. Since the sale and after the founder Stef Wertheimer and his son Eitan ended their engagement in society, the story of Iscar has become a dance between two people only: Harpaz and Buffett.
In 2006 and over the next seven years, during which the company doubled in value, Iscar was an unusual global financial wonder that required further investigation and explanation. When he received Iscar's financial reports, Buffett discovered something incredible: an industrial company specializing in the manufacture of drills and cutting tools for the metalworking industry, with his factory located near of the border not always quiet between Israel and Lebanon. profits similar to those of the best high-tech companies.
As far as possible from Tel Aviv
As Buffett said, management is at the heart of Iscar's story – and it's also Harpaz's, who has been CEO for 27 years, since 1992, until he was named President. Wertheimer and his family founded Iscar and have led the company to sales of several hundred million dollars a year, but it is Harpaz who has made it the second largest company in its sector in the world, with a market share of between 17% and 19%. market estimated at about $ 8 billion. Iscar also seems to be the most profitable company in the world in its business.
How did the management proceed? The answer is complicated. Iscar develops innovative and advanced products for the metal processing plant market. A lot of them have been patented – but they do not have a secret formula as Teva used it with Copaxone, his medicine for multiple sclerosis, or Google with his search algorithms. Iscar operates in an industry that benefits from the knowledge developed by the Israeli military, such as companies in the fields of cybersecurity, weapons and aviation. He has no special know-how developed in universities or hospitals. In fact, Iscar's position in Israel appears to be a weakness compared to its global rivals – from its distance from its customers to the fears of a plant closing in the event of a surge in security – which has been produced many times in the past, including rockets hitting the factory.
But what seems to be an obstacle is in fact one of the main explanations for Iscar's success: it is not a company in Tel Aviv, and Harpaz, who lives in the city of Kfar Vradim, near the border Lebanese, is not part of the North Tel Aviv CEO's Club and surrounding area. Iscar is one of the two largest employers in the north (the second is Rafael Advanced Defense Systems), which is at the heart of its history, both with respect to Buffett's well-respected management and 3,500 other employees. of society in Israel. More than 1,000 of them are Druze or other Arabs, an exceptional figure for the Israeli labor market.
"When a company like Iscar gives the opportunity to a local resident, including a car, refined meals and a professional interest, he is ready to give his soul [in return]. People arrive at 5 in the morning. and leave at 11 o'clock in the evening. They know they will not have this chance elsewhere, "said a close friend of the company. "For non-Jewish employees, who can not work in a defense company such as Rafael, this motivation is even stronger."
A long-time employee said that given the labor market in Galilee, Iscar was what the Israel Electric Corporation was once all over Israel: an employer that gives you job security and will never fire you in difficult times. The company has almost no turnover and its professional knowledge base continues to grow. Almost all executives have been working for Iscar for decades. (The newly hired CFO worked on behalf of the company with his accounting firm for years). Those who retire – even management – are replaced by a person from the company, and not by someone 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. She hires engineers from schools in Galilee. Sometimes he finds new employees among those who have never finished high school but who have exceptional abilities and train them in manufacturing, operations or sales.
Today, the management team includes Harpaz; Ilan Geri, long-time marketing director, who badumed the role of CEO when Harpaz became president of Iscar and president of its parent company, the IMC Group; Haim Cohen, Vice President of Global Manufacturing; Ronen Zisser, Chief Financial Officer; Dov Avraham, Vice President of Sales; and the Vice President of Operations and Personnel, Arie Ravhon.
No interest in the exhibition
Harpaz was born in 1951 in Kiryat Motzkin, a suburb of Haifa. He was wounded in the Yom Kippur War near the Suez Cbad and lost one foot. Despite 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 Courage. He studied mechanical engineering at the Technion – Israel Institute of Technology Haifa, worked in a metal machining laboratory then joined Stef Wertheimer in Iscar. He was put to work in marketing and from there he became CEO in 1992.
Harpaz never planned to work for Iscar full time. He never thought that he would work in manufacturing either. He thought that teaching was a more appropriate career path for himself. He ended up working for Iscar because of the way the company had treated him after being wounded in the war. Wertheimer, who was CEO at the time, came to visit Harpaz at the hospital. While he was recovering from his injuries, Harpaz decided to help a little developing in Iscar, and he never left.
His first job was to lead a development team made up of one person: himself. One day, Wertheimer pbaded by Harpaz and heard him reprimand the sellers of Iscar because they did not know how to sell. Wertheimer had no idea who the young man was, but he called it: "Come here, redhead. What are you doing here? Development? D & # 39; agreement. From now on, you are in sales. "
Following the acquisition of the company by Buffett, Harpaz was appointed president of all IMC companies, Berkshire Hathaway's Metallurgical Division, bringing together a large number of similar companies in Iscar, such as Tungaloy in China. , TaeguTec in India, Ingersoll and Tool-Flo. in the USA. Iscar is perhaps the biggest producer of silver for the group – 40% of the total – but from the top floor of the company's management building in the Migdal Tefen industrial estate, Harpaz controls 160 companies in 65 countries and employs 14,000 people. They have annual revenues of more than $ 3 billion, with a phenomenal profit margin of more than 30% – an astonishing figure for an industrial company.
Harpaz is nice and charismatic. No other Israeli leader can match his commercial achievements. He excels in the areas of marketing, customer relations, understanding market needs and development – even though his English is very "Israeli". The real reason is quite simple: Harpaz is not interested in media coverage at all.
Iscar has handed Buffett between $ 5 billion and $ 6 billion over the last 10 years, according to sources close to the company. This means that Buffett has fully repaid his investment in Iscar, which still has a billion dollars more in the kitty. Its sales grew by hundreds of percent during this period and its business generated a cash flow of $ 1.1 billion a year, more than double what it was at the time the company was sold to Buffett.
These incredible figures explain why Harpaz has earned admiration – some sources call it cult – from the Berkshire Hathaway management in general and Buffett in particular. Harpaz can lead the Iscar group as he sees fit and make any acquisitions he wants. Nobody will dispute his judgment. The Berkshire Hathaway Board of Directors is hardly involved in Harpaz's decisions and still supports him, even when things go wrong.
The Chinese challenge
None of this guarantees that Iscar will not face major problems in the future and that the successes of the past 15 years in terms of growth and profit will continue over the next 15 years. Iscar's core business is the development, manufacture and sale of cutting tools for the metalworking industry. Its main customers are the automakers (35% of sales), aviation (15%) and energy (15%), and any slowdown in these industries can also immediately affect Iscar.
Traditional manufacturers of internal combustion engines are important customers of Iscar. Therefore, a mbadive switch to electric motors – something that many believe should happen, but at a slow pace – could be a problem for society. Moving to the production of badembly lines with 3D printing, at the expense of metalworking, will also be a challenge. Add to all this the question of the age of Buffett and his successors, who could change the management structure of Berkshire Hathaway and Iscar in the future, even if it will not happen in the coming years. The challenges Israel faces, from security issues to labor market problems to lack of engineers, are also part of the equation. And because of its size and large global market share, Iscar would be exposed to almost every major economic crisis in the world.
Iscar has entered the field of information technology in recent years because of its business needs. He now employs more than 300 people as programmers and other computer professionals. But, like high tech companies, the company must also face difficulties in recruiting skilled IT professionals as well as at increasing costs. As Iscar is part of the Berkshire Hathaway group of large companies, it focuses on its traditional industrial sector and does not have its own venture capital service to invest in startups. It's done by Berkshire's senior management in the United States.
Iscar's response to all these trends is the development of innovative and more expensive products, such as cutting tools for faster production or more durable, but no one promises that the Chinese would not buy development capabilities allowing them to compete with Iscar in these areas sooner or later. In addition, Chinese companies have the advantage that tungsten, the main raw material of the industry, comes from China's mines. Sales methods are another challenge: Nowadays, online retailers such as Amazon and Alibaba are selling industrial cutting tools and their market share is expected to grow.
Even the total independence enjoyed by Harpaz is a double-edged sword: he is free to act quickly, but at the same time, no one pushes him to think long-term, to focus on strategy, to free other management leaders day-to-day or prepare the next generation of managers. For the moment, Iscar is doing well. The acquisition of Buffett and the growth of the company over the past decade has made it a global brand. And because of the cybersecurity and Israeli arms industries, the "Made in Israel" label has also become a valuable symbol. But the question is how long Iscar can continue to be the economic wonder discovered by Buffett in 2006.
The answer depends on a different question: who will go first, Harpaz or Buffett, and what will he follow? Neither of them, who are brilliant salespeople, have shown a great effort to invest in a new generation that will take over after they leave.
The post-Buffett era
Buffett said that he was expecting Iscar to become a major acquisition for Berkshire Hathaway, but it seems that this time the guru was a little out of the way. Iscar is perhaps the most profitable company owned by Berkshire Hathaway, but a company even generously estimated at between $ 12 and $ 15 billion represents no more than 2% or 3% of the total value of Berkshire, which is currently $ 505 billion. Iscar is a wonderful and profitable company, but it can never be very important for Berkshire Hathaway, which focuses on insurance, railways and holding stocks in companies such as Coca Cola and Apple. The holding group does not abandon the metallurgical industry. Four years ago, she bought $ 37 billion from Precision Castparts, a manufacturer of parts for the aerospace industry, but her future and the price of her stock will be primarily influenced by her other holdings.
When Buffett or Harpaz goes away, anything can happen to Iscar. At the time of the acquisition, Buffett expressed its total opposition to the sale or issue of publicly-traded shares in any of the private companies owned by Berkshire Hathaway, including Iscar in particular. When he asked TheMarker 10 years ago how long he was considering owning Iscar, he replied, "I do not sell." He promised not to make the company public, which he never done before. No one doubts that Buffett will keep his promises, but no one knows how long he will stay and what will happen to those who follow him.
Many different scenarios are possible for the future of Iscar. Buffett can continue to run Berkshire Hathaway for another five years, Harpaz can stay where he is still, the cutting tools market can remain stable and even grow moderately. Due to its particular organizational culture and faithful management, Iscar could very well continue to operate as before.
In a different scenario, Buffett or Harpaz might retire and the new management might decide to get more involved in the supervision of Iscar and IMC. It could then transfer the management of non-Israeli companies to the United States, making Iscar a more American and less Israeli company – less agile, less daring and less profitable. Today, Iscar spends much more time on compliance processes than in the years preceding the sale in Berkshire Hathaway, and was forced to forgo sales in countries such as Iran and Cuba .
An infinite number of scenarios exist between these two possibilities, but one thing is clear: if Harpaz stays on, it will not be because of the money. It is estimated that Harpaz received a bonus of several tens of millions of dollars at the time of the sale in Buffett in 2006 and again in 2013. Since Berkshire Hathaway bought the entire company, Harpaz has received compensation in accordance with American standards. and in good years his salary reaches seven figures. What may be surprising is that all this money has not changed, motivated or changed his historical decision: that Harpaz and Iscar remain almost an enigma for the Israeli public.
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